Dan's Advice on a For Profit Business:

My organization is a for-profit activity. I don't need bathtubs of profit, but I do need to come out ahead. I follow the steps below in making appropriate decisions for each project's profit.

1. Land procurement. Some city lots are simply donated to me. Others are given to me with the proviso that the owners will be paid when the house sells. Other city lots I must buy. In all cases, a quick look at the neighborhood, and a trip to the tax office to get a feeling for market values, will give you an idea of how big, and at what price, a house will eventually be. Since I prefer to acquire lots in the sections of town that need the most help, lot values typically are low.

2. Meeting needs: an example. Since I know who the eventual occupants will be for each house, I try to match the scale of the project with the needs of the family. If it is a family with three children, and they are now paying $500 per month rent, for instance, I am bound to try to build a four bedroom house where the mortgage payment will be no more than $500 per month, taxes and insurance included. If I can beat that figure, all the better. If I carry the note, I charge 10% interest, amortized for as long as it takes to get the monthly payment at or below $500. I look up in my Loan and Mortgage Payment Table, by Dome, and see that I can amortize $50,000 over thirty years at 10%, and achieve a monthly payment of $438.79. After adding taxes and insurance, I will hit approximately $500 per month. If I build a four- bedroom house for $50,000, then I will simply break even. I must include a profit for myself. A builder's profit is typically 8-15%. If I decide that I need a 10% profit, that is $5000. So the budget for this example is $45,000.

3. Targeting an appraisal. Given the neighborhood, and the values that prevail for similar scale houses in the area, it is extremely important to achieve a higher appraisal than what you will actually sell the property for. But keep in mind that the neighborhood will only support appraisals up to a certain point. Since my agreement with each family is that the price of the house is what a certified appraiser says it's worth, it is to everyone's advantage to achieve a higher appraisal than similar houses in the neighborhood. Continuing the example above, I simply make the assumption that the house will appraise for at least $50,000. If it doesn't, then I will lose money somewhere. If it looks like I could build a house that would appraise for $60,000, I could sell the house for $60,000, as per the agreement with the family. But if the family can't afford the monthly payment, the whole strategy collapses. If I sell it for $50,000, having appraised for $60,000, I am assured that the bank will loan me the money I need on the property for the next project. I know that a lending institution will lend money to the family when it exercises its option to buy (see section on financing), since the family will have a down payment packed into the value of the property as appraised.

4. Juggling resources. Now that I have a target magnitude that will serve everyone, I keep all spending activity as low as possible, and take steps for efficiency at every turn. I add up major expenditures that must be made-land procurement, soil tests, foundation, new plumbing, wiring, and HVAC-and that yields what I am allowed to spend on labor and materials. The majority of materials are free or salvage price, so I can add up what the labor charge will be for the number of months I need to complete the project, to yield the right bottom line. Experience in these matters makes life easier, but I still make some whopping mistakes. Vigilance is paramount.

5. Avoid the pitfalls, when possible. It is an easy mistake to make that, since materials are laughably low in cost, one can go about the house in an undisciplined fashion. Many things will eat into your profit. I know that I am dealing with a minimum-wage crew that needs training. They aren't as efficient as a seasoned crew. I know that I must fix some materials before I can use them. That must be planned into the concept. The longer I leave materials on a job site, the more likely it is that they will degrade beyond use. Protect them. A quick overview of the process will point to ways of protecting your profit. If I don't come out ahead, I can't continue.