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 your target market: Focus on a market that you know inside and out, where you have an “edge” and understand market dynamics and prime locations better than most anyone else. When it comes to ground up construction, you want to have a tremendous amount of conviction in your location selection and development strategy. Collecting and analyzing data will help keep this effort objective. Research development trends, speak with zoning officials, and understand what’s important to your target buyer or renter. To avoid financing concerns, your market should not be too rural, as ground up construction in remote areas can present additional challenges.
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. In ground up construction, ensuring that all the necessary permits are in place is critical before moving forward.
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 (After Repair Value). Your lender will also review the track record (specifically in ground up construction or 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, managing the ground up construction process to avoid expensive mistakes and cost overruns. As you make progress, submit draw requests for reimbursement based on the percentage of the project 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: Ideally, you have 10+ projects where the rehab scope was a full gut ("to the studs") and the budget was similar to the GUC budget. This experience will show that you're capable of managing a ground up construction project with a similar level of complexity and cost.
• 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. Their background in ground up construction will ensure they understand the unique challenges of such projects.
• Partner with an experienced GUC developer: If you don’t have the necessary experience, 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. This partnership is essential for ensuring your ground up construction project has the expertise needed for successful completion.

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: Ground up construction (GUC) projects come with a high degree of difficulty and high execution risk compared to other real estate investing strategies. Your terms should ensure you have a margin of safety to generate strong risk-adjusted returns, especially given the complexities of ground up construction.
• Reliable capital: Your GUC lender should be ready, willing, and able to fund every qualified deal, even when the broader market and economy are uncertain. As long as your numbers work, your experience is solid, and your liquidity is strong, you should be confident that your ground up construction deal will be funded without delay or surprises.