New Construction 101- What Every Seattle Homeowner & Investor Needs to Know

Christian: [0:00] Hello, hello, and welcome to another episode of the Awesome in Seattle podcast. This is your host, Christian Awesome, of the Awesome Nossum Group at Wilson Realty Exchange, Inc. And today, I am joined by…

Varun: [0:09] Hi. I'm Varun. Uh, I am an, uh, agent with the Awesome Nossum Group as well. And today, we're diving into one of the topic that's come up a ton lately, both with investors and, uh, homeowners, how to build new construction.

Christian: [0:23] Yes. So today, whether you're an investor trying to stretch your ROI, or a homeowner who's thought, "Can I build a DADU in my backyard?" We're gonna give you the playbook of how to build that new construction, like, from start to finish. We're gonna walk you through what new construction actually means, why you should consider it, and how to actually build it, from idea to financing it, which was huge, to an actual finished building. Yeah. So before we get into the nitty-gritty, let's talk about what we're actually… or why we're actually qualified to guide people through building new construction. Why don't you kinda give a little of your background?

Varun: [1:03] Yeah. So I've been an investor for a while now. But, uh, on the new construction side specifically, I've finished constructing one DADU. I am about to finish construction on a second one, and then I'm planning to build anywhere from 8 to 12 units in the next two years on my project. So yeah, I- I'm gonna get a lot deep into this particular topic myself.

Christian: [1:24] Yep. And I have already built- Four or five DADUs. I'm trying to count them all. I don't totally remember And we've helped numerous clients build them as well, um, as well as sold properties that have been torn down with new construction built on there. So kinda done a lot of it and helped people with this- Yeah … throughout the process. So let's, let's kinda talk about what exactly is new construction.

Varun: [1:51] Yeah, so let's, uh, start by defining what we mean when we say new construction, right? It's not just building one of these massive 6,000 square foot custom homes. It can mean a bunch of different things, like building a DADU. DADU is a detached accessory dwelling unit. It could be building your own primary home, which could be the 4-5,000 square foot home. Mm-hmm. It could be building an attached accessory dwelling unit, AADU. Or it could be building things like townhomes or rowhouses. So all of this is new construction. It doesn't always have to be that large home. It can c- come in a lot of different shapes and sizes.

Christian: [2:27] Yeah, exactly. And depending on your lot size, the zoning in that area, and your budget, any or all of those might be viable for you. Yeah. We've seen homeowners turn underused yards into income-generating rentals. I've seen investors create entire rows of townhomes that used to be on a single lot. I've seen them build three units on a specific lot, or I've seen them just build one big giant house- Yeah … like we talked about as well.

Varun: [2:54] Yeah, so let's jump into our second segment. Uh, why should we care? Why should we care

Christian: [2:59] about new construction? Why should we care? Well, if you're an investor, it opens up a lot more deal types for you. You're not just limited to flips or the existing property that's on the site. You could pick up some vacant land. You could tear down what's on the site, if it's old enough, I mean, in worse enough shape. You can even take an old house with a big yard and create a product that the market actually wants, like a DADU, a detached accessory dwelling unit. For me- New construction, in my opinion, is actually easier than flipping a house. I agree. Because everything that you're going to do with new construction is known ahead of time. You have blueprints, you follow those blueprints. That is how you build a house when it's new. Unlike a flip, where every time you open up a wall, you're crossing your fingers, hoping that you don't find- some hidden surprise- Yeah … that you now, n- now you now have to problem solve for. Yeah. So that's why flips are actually, in my opinion, a little bit harder than new construction. I prefer new construction myself.

Varun: [4:03] Yeah. Fl- flips are higher risk, higher reward. New construction is risk, but it's a lower risk as well. So yeah, i- i- it depends on your personal preference whether you like flips or you like new construction. We've seen investors go one or the e- both ways as well. So, uh, yeah, take your pick, I say.

Christian: [4:22] Yeah. And the other thing to consider too is timeline. Generally, with a flip, you can get it done much faster. With new construction, it often takes longer, depending on what it is you're gonna build. A DADU might take about as long as a giant flip. It might even be shorter than a big flip, depending on what exactly you're doing to the flip. So- That's right … um, it really just depends on the specifics that you are hoping to do.

Varun: [4:44] Yeah. And for the homeowner, the reason new construction matters is a lot of homeowners might have ability to build another unit in their backyard, and they might not be aware about it, or might be scared to build it. Yeah. And that one unit could be additional rental income, or it could be a multi-generational living situation where you could have either your kids or your parents or grandparents living in your backyard so you have easy access to them.

Christian: [5:09] Mm-hmm.

Varun: [5:09] So yeah, it, it matters a lot for homeowners as well.

Christian: [5:11] Plus, in a competitive market like Seattle, being able to build the product that sells instead of settling for what exists makes you more agile and often more profitable as well.

Varun: [5:22] Yeah. Agreed. Uh, let's, let's jump into our next segment, which is what we are here for, is to talk about step-by-step guidelines on how to build new construction. So Christian, can you walk us through our step one, which is underwriting the deal?

Christian: [5:36] Yeah. First up, underwriting is huge, and this is where you figure out if the project even makes sense. So big picture, you'll wanna start by asking a few different people. So first you wanna talk to an architect. What can I actually build on this lot? And that it depends on so many different factors. So lean on them to help you understand what you can actually build. Yeah. 'Cause it's gonna depend on zoning, lot size, setbacks- ECA, all these different things are gonna pop up. The next, talk to your real estate agent because you need to know, depending on what the architect says you can build, what will that sell for once it's actually completed? What is the ARV, the after repaired value? Next is a surveyor. They're gonna help you determine the property lines, utilities. They're gonna notate any spec- specific features on the property like trees, retaining walls, other structures like a garage or a storage unit. In addition to those, which you're gonna need those every single time, some other, uh, specialties that you might need to add in are, uh, I mean, if they're, if you're in an ECA, which is an environmentally critical area, you might need to order a soil report. You might need to add an arborist if there's trees on site. Yeah. You might need to have a structural engineer if you are having a really big span, like a big open room, so they can tell you what exactly beam you need to add in to open that span So there's a lot of different people that you might need depending on what exactly you're gonna build.

Varun: [7:11] Yeah. And again, it's, uh, all of these people who can help you answer the question of what can I build in that- Mm … particular space or that lot. And if the zoning allows for, uh, one unit and it won't cash flow, or if trees can't be removed, those are the kind of answers you wanna get early on. And those could be deal breakers, right? Or you can decide to change your approach, whether you build two units, three units, one unit. That will kinda des- determine how the deal eventually pencils in.

Christian: [7:41] Yeah. And again, work with your agent to help determine what makes the most sense.

Varun: [7:46] Yeah.

Christian: [7:46] Because just because you can build something doesn't mean you should. And I- That

Varun: [7:50] is very important,

Christian: [7:51] yes … last week I said that, I guarantee, no joke, probably 30 different times to different people. Just because you can, doesn't mean you should. You

Varun: [8:01] should, yes.

Christian: [8:01] So it's… That's a big, big deal.

Varun: [8:03] Yeah. Let's talk about the next part, which is very critical, is funding, right?

Christian: [8:09] Uh- Yes. This is where everyone gets tripped up. Yeah. 'Cause it is confusing, and there are so many different options that it seems a bit overwhelming.

Varun: [8:15] And new construction is not cheap. Like I- No … I'll put it out there. It's not cheap. But again, it should not be the reason stopping you from building because there are so many different ways you can fund this. Yep. So just to kinda give you some examples, right? There are land and construction loans that a traditional bank or a credit union or even hard money lenders give out.

Christian: [8:34] Mm-hmm.

Varun: [8:34] Then you could do, if you're a, if you already have a primary with equity in it, you can create a HELOC, which is a home equity line of credit.

Christian: [8:42] Yep.

Varun: [8:42] Or you can do a cash-out refi. You might not wanna do a cash-out refi if you have a very good interest rate on your- Yeah … primary mortgage.

Christian: [8:49] If you have a low interest rate already, keep that thing. It probably makes more sense to keep it than to do

Varun: [8:54] a cash-out refi And then do a HELOC as a second- Yeah kinda lien on the property. If you are in the tech space or you've built up a sizable portfolio of stocks, one other a- uh, line of credit that I like to use is a stock-based line of credit. Yeah. Which is great, especially in the Seattle area where you have so many tech earners with a high W-2 earners. They can take use of this product, which gives you a lower interest rate sometimes even than your HELOC.

Christian: [9:20] Mm-hmm.

Varun: [9:20] And it works exactly the same way. Instead of creating a line of credit on a home, the asset is now your stock portfolio.

Christian: [9:29] Yeah.

Varun: [9:29] Another kind of avenue for s- people who have access to a bigger stock portfolio.

Christian: [9:34] Yep. That's huge, 'cause you don't have to sell your stocks in order to access-

Varun: [9:38] Right, yeah … the

Christian: [9:38] equity you have in it. That's huge.

Varun: [9:40] It is huge. It's been a game changer for me on deploying that te- Line of credit and just making a higher gain than what I'm paying in interest.

Christian: [9:49] Yeah. And you've helped, I don't know, eight to 10 people- Yes already get that set up.

Varun: [9:54] In the last few months, yes. Yeah. Yes.

Christian: [9:55] Yeah.

Varun: [9:56] And then there are private money partners. Th- that could be someone in your family, your friend who has cash sitting around, and you borrow from them and give them a rate of return in exchange. Mm-hmm. That's a great way to kind of build and fund new construction. Uh, then there are also DADU-specific funding programs available. Yep. Here is kinda what some hard money lenders will offer: a 12-month term, 11.5% interest-only loans, two points up front, zero down payment given you meet a certain conditions, uh, like having the lot condo'd off. And then there are DADU-specific funding programs as well. There are programs available now starting to come up from traditional lenders where they help you purchase your primary, and if you have a bigger backyard, they will fund the construction of the DADU as well. Those are few right now. Hopefully, that space will grow so that you're not kind of jumping from one lender to the other. There are also, uh, DADU or new construction-specific, uh, loan programs available from hard money lenders. Here are sample terms that we got from a hard money lender: loan term of 12 months, 11.5% interest-only loan, two points up front, zero down payment, no prepayment penalty, and it funds 100% of the DADU, which is a great tool, I think especially for homeowners who might not have enough, uh, equity in the home or access to S Block. This is a great way to kind of just, uh, fund your new construction without having to bring any money to the table.

Christian: [11:28] And big picture, just stepping way back really quick, if it costs $350,000 to build a DADU, which sounds like a lot of money, and it is- But you can turn around and if you wanted to sell it, you could potentially sell that for probably a minimum, depending on the area, 700,000, maybe $800,000. So it costs 350, you can sell it for seven. You're doubling your money. Yeah. So it does make a lot of sense, even if the interest rate is ugly and ugly, I'm air quoting here, at 11 and a half percent with two points up front. Yes, that sounds expensive, and it is expensive, but it can make a lot- Yeah … of sense still.

Varun: [12:09] I, I agree. Like, just putting big numbers around it, right? 350,000 construction. Considering 11 and a half percent interest, two points, you're spending close to 40 grand for that loan. You're not spending the $350,000. Mm-hmm. That's where the lender pays that.

Christian: [12:22] Yeah.

Varun: [12:23] And once you sell it, the only out-of-pocket cash, uh, for you was, like, 40 to 45 grand. That's it. Yep. To pocket what? Two, 300 grand of profit.

Christian: [12:32] Exactly.

Varun: [12:33] So just- Exactly … the return on your investment is very high.

Christian: [12:36] Very, very high. So before you start building, you do want to have a pretty clear idea of what it is you're gonna do with it at the end. So are you gonna keep it as a rental? Are you gonna condo it? Are you going to move into it? Are you gonna sell them off? Are you gonna do a combination of these, where you move into one and you sell the other, or you flip the front house and you build the DADU and you sell that off- Mm-hmm … or you keep it as a rental? Whatever your combination or, or choice is, you need to figure that out before, because that's gonna help you understand how you want to fund the construction. If you're gonna sell, getting that short-term, expensive hard money loan, construction loan might make a lot of sense. Yeah. If you're going to keep it, you might want to structure that a different way and do a different type of loan, which again, there's so many different types of loans. New products are being introduced almost on a weekly basis at this point with The state and cities now, state of Washington now, um, really emphasizing more density and more units per lot there's gonna be more and more funding options out there for you. That's right. Because everyone's gonna have the ability to potentially do this. Yeah. And the banks see that as a way to potentially make some more money.

Varun: [13:50] Right. So

Christian: [13:50] they wanna help us make some money as well. So yeah, House Bills 1110, 1337, and the Seattle… or/ and the One Seattle plan are really kinda making that option a very viable one- Yeah for, for all of us.

Varun: [14:04] Yeah. And it, it does open up a lot of doors for homeowners and investors on building new construction.

Christian: [14:11] Yep. All right, so we're moving on. So now you've figured out what it is you wanna build and how you're gonna build it, now you wanna go under contract. So if this isn't in your backyard and you're actually buying something, you need to get that property under contract. So you need to make an offer, get it accepted. Hopefully, you're doing that with a longer term closing. Yes. So why would you wanna close on it longer? What does that mean exactly? So if you're buying a property that you're going to most likely tear down what's currently there, you are going to be sitting around for 6 to 12 to possibly 18 months waiting for permits-

Varun: [14:48] That's right

Christian: [14:49] to build the property, the new p- construction that you wanna build. So if you're waiting that long, you would have to start paying some of that construction financing right away.

Varun: [15:01] Yeah.

Christian: [15:02] That can really eat into your bottom line at the end of the day, the profit that you can potentially make. So try to get a long closing on these properties, 6, 12 plus months or so if you can. Sometimes it's such a good deal that you can't do it and the seller just… that that's why they're selling is 'cause they have to sell and they need to sell right away. And maybe you get a good enough deal up front and it's okay to not close that long.

Varun: [15:27] Right. Right.

Christian: [15:27] Um, but that is something that you definitely need to keep in mind, and if you can, extend that closing

Varun: [15:32] a bit. And, and if you get a long close, that gives you a lot of time to work with the architect and all the other parties that, uh, we had mentioned earlier in the episode, and get your permit set completely ready for submission. So when you close, you can either submit for permits at closing, or you, best case scenario, have permits issued at closing. You can hit the ground running day one.

Christian: [15:53] Yeah, exactly. All right, so next step is permit prep and submission. So once you're moving forward, you will need a full set of architectural plans, a civil engineer for drainage and site planning, a structural engineer if you're doing anything custom or complex, and sometimes you're gonna need a geo tech report depending on the land and if it's in an ECA or if there's weird stuff going on.

Varun: [16:17] Yeah. Uh, and then, uh, you submit for permit, and in Seattle, um, it could take- um, several months. It could be as early as four months, but it could be well over a year. Depending on what you're trying to build and how complex it is, you'll g- have to go through the permit cycle with the city. And so you have to plan accordingly. Underwrite that timeline into your plan. And this is where involving the architects upfront, they can give you an idea of what that timeline looks like, and you can prepare for that for your loan and underwriting.

Christian: [16:51] Yep. All right, so now you've got your plans, you've got your permits, now you need to have a builder actually do the construction for you. Right. So how do you find a builder? So if you're building a DADU, you're generally looking… And how much are these gonna cost too? Like, i- in Seattle, generally for a DADU, that cost is gonna be around 325 to $350 a square foot for a DADU. Um, now if you're gonna build something larger, like a townhouse row, like a row of townhomes or four townhomes or six townhomes, or maybe you're gonna build that larger single family home- Right that 4 to 6,000 square foot house, that price per square foot is gonna drop. Because the larger the square footage, the lower the, the price per square foot. And that's because the kitchen and bathrooms are the more expensive things to build in a house. E- everything else that you're building is mostly just flooring and drywall. So that price per square foot actually goes down with the more square footage that you're building. Now, this can all change depending on what finishes you're going with. Now, if you're using some crazy custom tile from Italy- Yeah … and, you know, some super high-end, very expensive appliances, obviously these numbers are going to change. But if you're just building the standard thing that always is built in your neighborhood, again, lean on your agent to figure out what that is. Yeah. What do that… What is the standard in the neighborhood? What do the comps say? What are they showing you?

Varun: [18:21] Don't pick hardwood flooring when everyone else is selling LVP or carpet. Exactly. Like, make the choices that are determined based on the comp. If you're selling it, right? Yep. And even if you're keeping it, then the choices will also change depending on kind of whether you're, it's a rental or not. Exactly. So again, lean on your partners, specifically your agents, that can help you determine what are the finishes you should be picking and where you can- Maybe spend more and where you shouldn't be spending more.

Christian: [18:47] Yeah, exactly. All right, so the next tip we wanna give you is design strategically. Now, one of the biggest mistakes that we are seeing some people do is they design in a vacuum. And what I mean by that- Yes … is they're, if they're planning to sell, you wanna bring in your agent and whoever else you'd rely on for design choices early in the process to advise on layout and finishes, and make sure you're building something that the market actually wants to buy.

Varun: [19:16] Yeah, yeah. It's, it's okay to crowdsource.

Christian: [19:19] Yes.

Varun: [19:19] A- and it's, it's totally fine to have multiple opinions. That way you can form a, a more informed opinion and build something that a few other different people have given you a point of view on. The other reason why you wanna also get opinions is if you're building for, let's say, rent, then your agent will tell you, "Hey, do not put, for example, carpet in it because carpet goes bad. You'll have to change it every time- Mm-hmm … and that creates downtime in your rental. Put LVP flooring, super durable, lasts a long time- Yeah … and you don't switch it around." Uh, so depending on your exit strategy, if it's a rental, pick durable materials. If it is for sale, lean on your agent or do your research on what are the finishes that are selling in the like properties that are selling in that neighborhood.

Christian: [20:06] Mm-hmm. Yeah, that's a, that's a huge, huge thing to pay attention to. Yeah. I think we can go over some final thoughts. So whether you're thinking about building a DADU, townhomes, single-family home, or you just wanna learn how to spot better deals, knowing how new construction works will give you options and some leverage

Varun: [20:26] Yeah, and don't be afraid just because it's new, right? We've had plenty of people go through the new construction process. We've done it ourselves. Yep. And you don't need to know everything up front. It is a learning process, but have the right team in place so that you can make a very informed decision and make an investment that actually gives you a phenomenal return at the end.

Christian: [20:46] Yep, exactly. That's it for today's episode of the Awesome in Seattle podcast. If you are someone that's thinking about new, doing some new construction, and you kind of wanna bounce your ideas off someone that knows what they're doing, we are happy to chat with you. That is what we do. Yeah. We are real estate brokers in the state of Washington, so… And we're investors, and we're doing new construction. So reach out to us. You can email us, you can call us, you can text us. All of our info is right on AwesomeNossumGroup.com. That is AwesomeNossumGroup.com. That's it for today's episode. Hope you got a ton out of it. Feel free to ask us questions if you want. You can also find us on Instagram.

Varun: [21:24] Yeah.

Christian: [21:25] Or we're often at a lot of the investor meetups in the local Seattle area. Yeah.

Varun: [21:29] So happy to chat with you. And we do beers and home buying too. Yes. You can find us there.

Christian: [21:32] Yeah.

Varun: [21:32] Beersandhomebuying.com (opens in a new tab).

Christian: [21:34] Yep, exactly.

Varun: [21:35] Yeah. Thanks a lot for listening, and please listen to the other episodes on Awesome in Seattle podcast. We've a lot, we've done a lot of cool episodes i- in the recent past. Yeah. A lot of good information that we've shared on.

Christian: [21:47] Yep. And we'll be doing even more investor-focused podcasts in the future, including an update on the One Seattle plan- Mm-hmm … which is gonna change everything here, whenever that is finalized, whether that's June, July, or October. Yeah,

Varun: [22:01] yeah. Yes.

Christian: [22:03] All right, thanks so much for listening. We'll see you next time. Bye.

Varun: [22:06] Bye.