Affordable housing as a business.

For many years (thirty years actually) I have thought that houses could be built well and still be affordable. By affordable I mean houses that could be sold for under $750 a month and still be three bedrooms and two baths.

I have not taken on the project of affordable housing because of my other business interest would not allow me to devote the time and resources needed. This article is intended to spark your interest and hopefully motivate someone to tackle this important subject. I will cover my ideas on starting a housing company that could build the houses at a profit anywhere in the country. This company could be a for profit company or a non-profit company.

Let us look at the problem with housing today. I will start with governmental regulations.

Cites charge fees of all types builders of homes. Permit fees, inspection fees. Storm water fees, water fees, environmental fees and so on, a long list that boggles the mind. The fees can add from 3% to 10% to the cost of a small home. The same fees add only .5% to 3% to a more expensive home. The fees are called user fess and allow a government agency to raise money without raising taxes. The problem is the fees are out of hand and when added to the price and financed they help make the house unfordable.

Banks are another problem. Before they bank will make a loan they charge the builder a loan origination fee, they request a property appraisal, then charge a appraisal review fee, they require a new survey, they charge interim interest on the construction loan and on the list goes. These are all legitimate fees but some are added only as an additional profit center for the bank. Banks also will not allow any buyer participation in finishing the home to help keep the price down. They have good and valid reasons for requiring all construction to be 100% completed by the builder. Non the less it stifles innovation.

Appraisals and the market place method of setting prices. Ever wonder why there is little innovation in home construction. There are lots of ideas and product that would make a home better but the method we use in the USA to value a home for loan purposes is the comparable method. One home is compared to similar homes in the area and the price is determined after a few adjustments are made. So if all the houses on your block have kitchens your house will be priced the same as the others. If you home's kitchen has custom cabinets with all the deluxe cabinet features, you will not be given credit for most of the higher cost because the other homes have set the price. This is also true of energy efficiency, better central air, better design, safety features and so on. The result is, the builder builds as cheap as he can get by with, because no one will allow the extra payment for building a better home.

The truth is a home can be built today that is independent of all the city services, for water, electric and sewer. No burden on the city utilities at all. You just wont get it approved or financed because of the system for permitting and financing that we have. Back to the problem at hand.

The experts are a problem. Keep in mind we need experts and they make for a better product but they are also part of the problem. You have to have builder or you can get financing. You have to have building plans or you can't get a permit. You have to have a banker of one type or another to get a loan to build the house and to sell the house. Your buyer will most likely have to have private mortgage insurance. You have to have a real estate agent some of the time. You need a lawyer to protect you, and you will pay for the lenders lawyer because they have the power of the purse. You will need a title company to provide the protection very one wants. All of these experts will add about 30% to the price of the house.

Now the solution: In order to build good houses for less we must ring out the cost. We have to get rid of as many people with their hand out as we can. The one word that will do the most to lower the cost is CASH, yes cash will get rid of a lot of cost. The other side of this is that everything is done in house if it possibly can be. You are the builder, the mortgage company and sales agent. Let me break this down for you.

The building lot: You only build on infill lots in older neighborhoods. These lots already have all the amenity in place, water, sewer and the like are at the curb. You buy the lots for cash, have them surveyed and title searched. That is the cheapest way to secure a building lot and with cash you can cut a deal on the lot. For a non profit or in communities where they want affordable housing try to get free lots from the city.

The neighborhood? Yes I know, older neighborhoods are hard to get value out of but you are a cash builder, you are not getting an appraisal. Your new home will be the best one on the block and no, the bank will not appraise it fairly. That is why builders don't build infill housing. They can not get them apprised or financed. You Can as a cash builder. You will build the house paying cash, finance the buyer yourself, then borrow using the mortgage note as collateral. Or sell the note to free up the cash to build another.

You are not getting an appraisal, so not appraisal fee, you are the builder so not builder fee, you are the sales agent, so no sales commission, you are the mortgage company so no fees there either. You paid the bills, so no title policy beyond the original one you obtained on the lot. You cut out all the fees and make money on the home.

Can you sell it? Absolutely, someone wants to live in that neighborhood. That is true everywhere in the world. Their mother, brother, cousin, babysitter someone they care for or need lives there. If you are the mortgage company you get to decide who gets approved for a loan with whatever terms you dictate.

I would build a well designed home with all the modern amenities and energy efficiencies, as well as maintenance free as I could make the home with cost kept in mind. I would do this so that if I have to reposes the house it will be easier to resell it again. I would charge a 5% down payment and sell to anyone with good credit and a good job of at least one year duration or steady provable income. I would be more interested in who they are as people, and how they pay their bills rather then their ability to meet a bankers scrutiny.

Pricing the homes:

I would take my cost of building, add 30% and that would be the homes price.

If it cost me $75,000 to build and $10,000 for the lot, the total cost is $85,000 and the sells price is $110,500.00 at 5% down the amount financed is 105,000 at 9% the payments are $844.00 a month.

If it cost me $70,000 to build and $8,000 for the lot, the total cost is $78,000 and the sells price is $101,400.00 at 5% down the amount financed is $96,330 at 9% the payments are $775.00 a month.

Getting the money to build the next one. This plan assumes you have the money to build the first house. Once the first lien note is filed at the county court house you will get people wanting to buy the note. At any interest rate above 8% you can get the face value of the note. You could also borrow against the note at the bank to free up cash for the next house.

I would borrow against the note myself to free up cash. I would borrow 90% of the face value of the 1^st lien mortgage and I would charge 9% or 10% interest to the home buyer. The banks rate is 8.5% so I will need a higher rate then they charge me. If they buyer defaults I re-po the house, spruce it up, then resell it, getting another down payment and hopefully a even higher price.

There are a lot of things one can do to reduce the building cost, such as buy cheaper lots, acquire lots at auction, get the city to donate lots to you so that you build where the city wants. Reduce the size of the house you build, build on lots already owned by the buyers or their relatives, let the buyers participate in finish out. And so on.

Non-Profit Builder:

You could set up a non-profit company with you as director. Following is a how I envision the non profit set up and operation.

Besides yourself you will need a construction foreman, an office manger, a lot buyer and fund raiser.

In the beginning there is just you, but as the need arise you would add the other staff members. The other people involved relate to the board of directors. I will skip here the issues involved with running a non profit so do some research on the subject.

Your non profit would be the builder, the finance company the sales agent and everything would be in house. You have to get everyones hand out of the cookie jar. Your only construction person is the site foreman, all other construction is by sub-contractors. Everything other then the actual closing of the sale (completed by the title company) is done by you or your staff. Any other outside help is volunteered and non-paid. Your goal is to build quality at a low cost, that is paramount.

You will be building houses for sale in existing neighborhoods as outlined above. The only difference is you are doing so inside a non-profit with the social goal of providing affordable housing in your community. The goal is to build a house a week. And to eventually become a self-funding perpetual home builder non-profit.

The hard part: first you need to raise funds to build a demo house to prove your system. You will need about $100,000. You will need to write a proposal and then shop that proposal everywhere until you get the funds.

The Gaol: To build affordable in-fill housing in existing neighborhoods. To provide new or re-built homes in areas where they would not normally get built. To provide housing for people who might not other wise qualify for a traditional home loan. To build and sell a home a week.

The Numbers:

Each home will cost between $70,000 and $80,000 to build

The payments on the house will be about $750 a month

For every 100 homes built and sold, the monthly payments will allow the building of one more home each month. ($750 x 100 = $75,000)

For $7,125,000 you can build 100 homes. There after the revenue generated from the payments will allow you to build one home a month forever.

For about $29,000,000 you will be able to build a home a week for-ever.

At that point you are self funding.

The Numbers for one house.

Cost of lot $8,000

cost to build $68,000

Total cost $76,000

sales price $96,000

Down payment from buyer $4,800

payments 30 year at 9.3% $753.00

Operational Cost:

The profit on each home is to be $20,000 (cost of building plus cost of lot)

$10,000 of which is to be used to run the non-profit (overhead and salaries, etc.) At a house aweek you ahve $40,000 a month to operate on. It would take some time to get to that level.

The other $10,000 is to be set aside as in a fund for, research, expansion and other non-operational needs

A Vision:

Operating as a non profit has challenges and opportunities that a for profit enterprise does not have. I'm sure you have thought of some yourself, not the least of which is raising $28,000,000. Raised a little at a time, show some success and expertize and the money will come. It would not be easy and will take a big commitment but it could be done.

I have laid out the basics of an affordable housing plan, maybe this could be your new career.

Afforadable housing non-profit link http://www.enterprisecommunity.org/