Ground Up Construction

Last updated: May 2, 2024

Ground Up Construction ("GUC") is the process of building one or more homes from the ground up -- starting with a vacant lot of land. Ground Up Construction is receiving an increasing share of attention from the real estate investing community given the current housing shortage and lack of profitability of traditional home flipping. The goal of this article is to share insights to help you better understand this real estate development strategy and help you build wealth through your own ground up construction projects.

Ground Up Construction Loans

A Ground Up Construction loan is financing for the land, soft costs, and construction of 1-4 unit residential properties. These loans are generally provided by private lenders who also specialize in Fix and Flip loans and DSCR loans.

Ground Up Construction Guidelines

Ground Up Construction Process

1. Identify target market: focus on a market that you know inside and out, where you have an "edge" and understand market dynamics and prime location better than most anyone else. You want to have a tremendous amount of conviction in your location selection and development strategy, and collecting and analyzing data will help keep this effort objective. Research development trends, speak with zoning officials, understand what's important to your target buyer or target renter. To avoid financing concerns, your market should not be too rural.
2. Acquire land: you can either purchase an individual lot in a developed area ("infill"), or you can purchase a larger parcel that can be sub-divided. The easiest way to start is with infill, particularly in a market where you have access to existing water and sewer. Ground Up Construction loan programs from private lenders have a strong preference for infill projects.
3. Obtain plans: work with an architect or professional engineer to finalize site plans and blueprints and ensure that your plans meet zoning requirements and building code. Carefully and conservatively estimate your budget across labor, materials, soft costs (plans, permits), and carrying costs (financing) in a comprehensive scope of work.
4. Obtain permits: this can generally be done once you own the land and your architect, general contractor, or professional engineer will be responsible for this step.
5. Implement financing: your GUC lender will order an appraisal -- the appraiser will review your land parcel, scope of work and plans to determine your project's ARV. Your lender will also review the track record (GUC, heavy rehab experience) and creditworthiness of the member(s) in the borrowing entity that will be serving as personal guarantor(s).
6. Build: execute your scope of work, carefully manage the process to avoid expensive mistakes and cost overruns. As you make progress against your scope of work, you will submit draw requests for reimbursement based on the percentage of the project you have completed and any materials that have been delivered on site but not yet installed.
7. Exit: either via sale or rent and refinance into DSCR loan ("Build-to-Rent").

The Ground Up Construction process is not easy but it is both rewarding and undeniably valued by your local community.

Ground Up Construction Loans No Experience

Ground Up Construction loans are track record loans. GUC involves the highest degree of risk for borrowers and lenders, so you should expect your GUC lender to require a minimum of 2 verifiable ground up construction experiences among the members of the borrowing entity. If 2 verifiable GUC experience is not feasible, an exception can be made in the following scenarios:

• Extensive, verifiable, heavy rehab experience: preferably 10+ projects where the rehab scope was a full gut ("to the studs") and the budget was similar to the GUC budget.
• Experienced GC with verifiable GUC and heavy rehab experience: ideally your general contractor has verifiable experience where their name or borrowing entity was on title. If their experience was solely client work, we will want to see evidence that they were the primary contractor for 5+ GUC or extensive rehab projects.
• Partner with an experienced GUC developer: if all else is not possible, you will need to partner with an experienced GUC developer who will be a member of the borrowing entity (preferably 20%+ ownership) and a personal guarantor.

Pros and Cons vs. Fix and Flip

Ground Up Construction Lenders

The best ground up construction lenders are able to provide you with the following:

• Clear guidelines and expectations: you invest a lot of time and money in each ground up construction transaction before you even close your loan and start your build -- there should be no surprises. Guidelines should be consistent, month-in, month-out so each subsequent deal is familiar and even easier than the one before.
• Competitive terms: GUC has a high degree of difficulty and high execution risk relative to other real estate investing strategies. Your terms should ensure you have a margin of safety to generate strong risk-adjusted returns.
• Reliable capital: your GUC lender should be ready willing and able to fund every qualified deal, even when the broader market and economy is uncertain. As long as your numbers work, your experience is solid, and your liquidity is strong, you should be confident that your deal will be funded without delay or surprises.