Construction and Home Rehabilitation
Company

Pedro's Construction

41312 46th St.
Indianapolis, IN 46201

Michael G. Erker and

John B. Trautmann

Pedro's Construction is in the business of restoring outdated, under–repaired homes, as well as completing some general contracting jobs.

EXECUTIVE SUMMARY

Pedro's Construction is in the business of restoring outdated, under–repaired homes to their original beauty. The method in which they do this will be calculated and precise to ensure quality work and quick turnover. The founders, Gary Briker and Bob Redding, emphasize hard work and attention to detail to ensure the end customer of a truly quality product. They are young and without distractions so they can concentrate all of their creative energy to the success of Pedro's Construction.

In addition to the founders, Pedro's Construction advisors play an essential role in the success of the company. All advisors have experience in real estate and finance and will be available to Gary and Bob throughout the life of the business. They have aligned themselves with a realtor who has extensive experience in the area of focus, Broad Ripple. In addition to geographic familiarity she also has experience working for rehabbers. Pedro's Construction possesses the necessary network and skills to make their business a survivor and a success.

Broad Ripple lies north of Indianapolis. It consists of neighborhoods in which most the homes were built before the 1950's. It is a place that recently experienced substantial growth and now is in need of residential restoration. Homes are priced low, but with work can be sold for very promising returns. Cheaper homes double in value with more ease and they carry a much lower barrier to entry. Broad Ripple is absolutely prime for sound investments and hard work.

Pedro's Construction will also be involved in general contracting for friends and family. They have a list of customers who are anxious to get them working in their homes. These extra jobs will provide additional income while they become accustomed to the ins and outs of rehabbing, after which customers will become another grape on the vine to spread the good word.

Vision

Reach perfection in the rehabilitation of family residences.

Mission

Pedro's Construction is determined to be a successful leader in home rehabilitation through ethical and socially responsible business practices. We vow to maintain a vested interest in the well being of our business and the neighborhoods in which we work.

Tagline

We help you get the home you've been dreaming of.

Company Name

The legal name of Pedro's Construction is: Pedro's Construction, LLC.

Legal Form of Business

Pedro's Construction is incorporated as an LLC at a temporary residence:

41312 46th St.

Indianapolis, IN 46201

MANAGEMENT SUMMARY

Pedro's Construction is owned and operated by Gary Briker and Bob Redding. They will act as COO and CEO, respectively. Garrett McGrath will be construction manager overseeing all on–site activity. He has extensive experience in carpentry and has worked for the past seven years on various properties in Fort Wayne. He has many repeat customers because his work is solid and he is of impeccable character. Gary Briker Sr. will be an advisor to the both Gary and Bob. Mr. Briker is an experienced and successful realtor with the necessary knowledge to help direct Pedro's Construction in the right direction.

Management Background

Gary Briker, Co–President and COO

BSBA, Purdue University—Graduate 2005: emphasis in entrepreneurial studies; Bachelors Degree in the area of psychology.

Gary Briker has three years experience in carpentry and rehabbing. He has served as an integral team member with Briker Realty tending to the care of properties. He reported directly to the CEO of Fedmann Carpentry, accumulating clientele, assisting with appraisals, and billing.

His family background includes experience with land development, real estate buying and selling, and residential restoration. His father owns and operates the real estate company, Briker Realty, in addition to owning several apartment buildings and restaurants. Gary has worked closely with his father gathering experience buying and selling homes, as well as renovating homes. Also, the Briker family owned and operated a prominent land development company in Bloomington, Indiana.

Gary Briker was a consultant to a start up business, The Bar and Tavern. He dealt with market analysis, financing, cost assessment and talent accumulation. This experience has facilitated with this business plan in the areas of finance and market analysis. The owner, Matthew, was very pleased with the completed project and presentation.

Bob Redding, Co–President and CEO

BSBA, Ball State University—Graduate 2005: emphasis on management and entrepreneurial studies.

Bob Redding's family background is in residential, commercial real estate and speculative land development. His grandfather owns Redding Realty and Building Co. located in Fort Wayne, IN. His uncle owns Redding Realty in Madison, Wisconsin. Bob has earned a business degree with a focus in Entrepreneurship. His passion for entrepreneurship stems directly from his family history of starting and successfully running small businesses.

Bob Redding acted as a consultant for AnalysisNet, a business process–reengineering firm. He dealt directly with finances, product growth and development, and competitive analysis. Specifically he developed a new application of their software that will allow them to reach a previously untapped market. President, Albert Steffet, and Chief Software Architect, Wendy Barry, were happy with his performance and have offered their services if and when it is needed.

Other job experience includes managing a band for 3 years. He secured consistent paying jobs and acquired the necessary equipment to accommodate the bands growth. Since the bands break up he has successfully promoted himself as a solo artist. He created a website where you can listen to music and buy his home–recorded ten song EP. He is both manager and musician.

Pedro's Construction's biggest asset will be their owners sweat equity. Both are physically competent and intelligent men who can afford to commit all of their resources to this endeavor. Throughout the first phase of operations Gary and Bob will live in and work on their first investment. By accepting harsh living conditions for their first investment, they not only will show the extent of their dedication, but they also recognize a substantial cost savings.

Advisors

Real Estate and Finance:

Gary Briker Sr. has over 50 years experience in real estate. He has owned and operated his own brokerage firm for the last 35 years. He managed his own finances and accounting as well most other aspects of the business. He has a very impressive feel for the market. He has been involved in speculative land development for many years and continues to invest in properties that maximize his return on investment. He has never suffered a negative return.

Banking and Finance:

Gary Briker Sr. worked as the Director of Marketing for First National Bank for five years. In 1999 Mr. Briker became a financial analyst for Merrill Lynch. Mr. Briker will act as a financial analyst, weighing potential returns for our possible investments.

General Contracting:

Brett Newton started Newton Construction and has been the sole owner for twenty–five years. He allowed the company to grow a little over the years and has hired two additional employees, but has focused on maintaining a small functional business. Mr. McGrath will give us advice on the "best" way to make repairs. He will be our expertise in the field.

Architect:

Katie Weaver is a friend and associate of Jane and Ted Roth of Roth Construction. She has designed blue prints for many of Gary's jobs. They range from simple remodeling plans to more complex architectural designs for an entire home. She has the necessary experience that Pedro' Construction requires in an architect and she comes very highly recommended so trust issues will not be a problem. She was awarded first place for the residential section of International Excellence in Masonry through the MCAA Masonry showcase 2002 Review.

Real Estate:

Robyn Hill will work as our real estate agent. She has been working in Broad Ripple for the last twenty years. We believe Broad Ripple to be a sound neighborhood for investment purposes (details in market analysis). Robyn will provide us with listings and help us to identify properties that will make a good investment. She also has contacts with lenders that have dealt with other rehabbers in the area. By becoming acquainted with a good lender securing loans will become easier as we go. Because Robyn has worked with other rehabbers, she will also be able to share with us their experiences and what they have learned from them.

Staff

Garrett McGrath

Garrett has worked for the last seven years in construction with his father, Patrick McGrath. He has the skill and access to resources to become an invaluable asset. Garrett will be an independent contractor offering assistance when needed, but he will primarily be giving us direction for the first two years. We will pay Garrett 10% of repair costs for each home. In the case that a crew would need to be hired, Garrett will act as the Forman and will receive pay of $20 an hour.

Crews:

Workers will be paid $10–$15 an hour depending on experience. Specific workers will be determined by Garrett, allowing Gary and Bob to begin focusing on an increasing number of future investments and finances.

PRODUCTS

Pedro's Construction is not selling just a product but a necessity. Specifically, quality rehabilitated homes in markets that show strong growth potential. They will be focusing on homes in the Broad Ripple area that are selling "as is" for $20,000—$45,000. They have done research and found other rehabilitated homes in the area that sell for $60,000—$100,000. The homes are old and need general improvements. Pedro's Construction will be continuously receiving listings for homes in their desired market. Once an appropriate home is located the appropriate preliminary checks will be made. If there are no obvious flaws earnest money will be put down. Earnest Money is a payment of $1,000 or 3% of the selling price; whichever is higher. Ten days will then be allowed to perform any professional inspections and appraisals needed. Pedro's Construction will avoid homes that do not meet their criteria:

1. Significant structural damage
2. Outdated Electrical
3. Any EPA regulation violations
4. Replacement of Sewer Lines And Septic system
5. Lead Piping

Home one will be financed with a rehabber's loan from First National Bank. This loan uses the current value of the house plus cost of repairs. It requires 10% down payment. Owners–equity in the home, after repairs, must be at least 20%. This means that if we sell a home for $100,000 we would have had to put in at least $20,000 equity (repairs) in. After year one we will sell the property for an expected increase of $35,000–$45,000. In year one we will also be heavily involved in general remodeling and repairs. This will be essential to the business in its first year. Pedro's Construction has signed letters of intent from family and friends for these future jobs. Home one will be completed by month six.

In year two they will rehabilitate two to three homes depending on sale and acquisition times. There will be no change on how the company deals with their realtor and purchases homes. From year three and on they hope to rehabilitate four to six homes per year in the same fashion. This figure is based on close competitors' performance.

Beginning in year four, rental properties will be put in place. This will provide consistent rental income. Being close to Indiana University (IU) will help ensure the constancy of renters.

COMPETITION

Currently, there are 2,146 local firms that deal in residential construction and home improvement. Based on numbers from the Indianapolis Rehabbers Club, roughly 40% of these firms deal directly with home acquisition and rehabilitation. In the 317 area code there are only 21 residential construction companies. The buyers market is very competitive. The most difficult challenge we face is securing and acquiring the appropriate property. In our marketing strategies section we address how we will tackle this issue.

When beginning a new business it is as important to choose a profitable area, as it is to choose a profitable product. Pedro's Construction has chosen to enter in the area of Broad Ripple, IN because the majority of the homes in the area are those we most want to work with. However, other similar type companies feel the same way about the area. These companies make up the core of Pedro's Constructions competition.

Though Pedro's Construction deals primarily in the area of home renovation, we will also be directly and indirectly involved with real estate, property management and sub–contracting. This makes it difficult to really know where your competition comes from, and how to capture a percentage of the market in each of those areas.

First, it is appropriate to look at typical businesses that would be competing against us:

1. Family Construction—A rehab company that has been in the Broad Ripple area for two and a half years. The process in which they renovate houses will be similar to our operations. Instead of getting a line of credit to do multiple homes at once, they opted to take out a loan, and only do one or two homes at a time while doing side–contracting work to help sustain the business. The two owners of this company do all demo and construction but sub–contract out any work that requires a license. After their second year they make around $80,000 a year using this method.
2. Equity Line Co.—A rehab company that has been in operation for roughly four years. They utilize a half million dollar line of credit to put a down payment on homes in which they are interested. The line of credit then pays for all rehabbing cost. They work with a larger crew because of the workload. Their profit margins are slightly higher at around $120,000 a year.

Examining the inner workings of these two companies has given us an idea of, not only what we are up against in the industry, but also what to expect from our own company.

Overall we believe that there are enough sellers to warrant entry into the industry. End sales will always be possible. Focusing on creative and effective ways to win motivated buyers as well as cultivating a lasting relationship with our realtor will be our road to success.

Competitive Advantages

Now that Pedro's Construction knows the industry both nationally and regionally, we can find ways to set our self apart from the other contractors. Our competitive advantages are:

1. Sweat Equity
2. Realtor: Robyn Hill
3. Forman: Garrett McGrath

The most important competitive advantage Pedro's Construction boasts is their sweat equity. Gary and Bob have the advantage of being young and without personal ties allowing them to focus all their energy on this start–up. The first house will be able to be completed through our sweat and legwork. They will live in home one while completing the repairs, allowing them to cut costs. In addition, they will have work doing sub–contracting for family and friends.

Robyn has had many years of experience in the Broad Ripple area and will be able to provide numerous homes within their price range quickly and effectively. She has access to the MLS so houses entering the market will be available as timely as possible. As previously noted, she also has experience with other rehabbers and will be able to share her knowledge and experience with them. If Pedro's Construction does well, Robyn does well. Because of Robyn's years in the Broad Ripple market she has a trusted reputation within the neighborhood. This will cut down on turnover time. Additionally, even though they may not be faster than some competitors, effective marketing will get homes sold before completion. Robyn offers this extra exposure.

Garrett McGrath has worked for a general contractor since 1998. Over the years he has formed relationships with sub–contractors and architects he knows to be reliable. In speaking with other rehabbers it was discovered that reliable and trustworthy sub–contractors play a vital role in success. Reliable team members allow for efficient and accurate time schedules. Garrett enables Pedro's Construction to avoid the costly hassle of finding trustworthy contractors. Additionally, Garrett will be able to offer the customers a level of quality that is on par or above competitors. Attention to detail is important in everything that you do, but when it comes to houses, attention to the small things can mean the difference between selling and being stuck with loan payments for longer then you can afford. Before the house is sold Pedro's Construction will leave no stone unturned, both in cosmetics and in carpentry work. A final inspection will ensure the house will be repaired with full functionality and restored to original beauty.

MARKET ANALYSIS

Demographics

Total population is 29,172 for the 46220 zip code. The Median age is 28 years. This represents a market this is primed for both buying and renting. Approximately 22% of Broad Ripple are college graduates and/or enrolled in college. As students graduate and get jobs many will upgrade their living arrangements. When they move out an opportunity to buy their newly vacated homes presents itself.

The median household income is $32,422. Below is a list of home values from 1999. These are the most prevalent home prices in the 317 area code:

1. $35,000 to $39,999: 488
2. $40,000 to $49,999: 1451
3. $50,000 to $59,999: 1284
4. $60,000 to $69,999: 953
5. $70,000 to $79,999: 582
6. $80,000 to $89,999: 337
7. $90,000 to $99,999: 292

The majority of these homes were built before 1950 so many need to be rehabbed.

Market Opportunities

In the 1990's the 46220 zip code began to go through a period of growth. Broad Ripple had seen a 15% increase in population by the turn of the century. Over the last few years, Broad Ripple has had approximately a 1% annual population loss. There are available property investments to be had because of these recent trends. One factor in the recent population decrease is that the majority of the homes, as stated before, are valued lower than average because of their dilapidated condition. By physically increasing the value of the homes, and consequentially the surrounding neighborhoods, there will be little problems selling the rehabilitated homes.

Industry analysis

Currently, the industry average for start–up companies in residential construction within mid size cities is approaching 1500 firms. Based on this information one can conclude that creating a business in this industry is very feasible. However, to know if another rehabbing company can thrive in this market it is imperative to analyze further. In the next section Pedro's Construction will analyze the areas of failure rates, industry market volume, average sales, average staffing, and emerging vitality trends.

Industry analysis

Failure rates are based on the average number of start–up companies in year one divided by the number of survivor companies (companies still in existence in year three). Currently, in the industry of residential construction, the failure rate is slightly below forty percent. Compared to the national average of 20%–30%, it is a bit high, but still reasonable. With dedication, a strong work ethic and careful planning success in this industry, based on failure rate percentages, is more then possible. The failure rate is higher than average because new comers jump into the business with little to no preparation. In recent years "rehabbing" has developed the misconception that anyone can do it, all you need is a home. Failures don't have enough cash flow to sustain slow periods, they don't know the markets well enough, they lacked the expertise (hired or personal) to finish a job, and they make poorly researched investments. Pedro's Construction has performed the proper market research and aligned themselves with knowledgeable and experienced associates to effectively and efficiently complete jobs.

To date, the industry creates forty–four billion dollars. This industry carries more value then any other, and is always appreciating. Obviously, start–up companies only capture a small portion of the local market, average sales in year one being three hundred and fifty–five thousand. However, the average sales growth trend from year to year is nearly a nineteen percent increase. Sales from year one to year three increase over fifty percent. After year three a survivor is projected to reach average sales of greater then five hundred thousand dollars.

According to the national average, start up companies in the residential renovation industry can sustain their business with three employees. After this point the extra cost associated with hiring an extra employee can be detrimental to the profit margin, the lifeblood of the company. Thus, even after year three most companies in this area of work choose to only keep three employees.

Industry analysis

Extra cost associated with extra workers include tools, pay roll, and most notably, insurance. These extra costs alone can make or break the very delicate first years of business. However there are disadvantages to low number of employees. Because of the limited work force, growth might be slow for the first years of business or until you have more working capital.

Current and future vitality is indicated by area entrepreneurial activity, new branch development and concentrations of high growth firms measured by sales and employment. Industry indices above one surpass economy–wide patterns by the margin indicated, while indices below one fall behind overall trends. These numbers speak well for start up residential contractors, whose vitality numbers are well above one. In other words, those in this area of business have a higher entrepreneurial value, thus having a greater chance of success in the market place.

End Customer

The Real Estate Investment industry is extremely varied. Basically we are looking for potential home-owners who do not want to be seller financed and have the equity to purchase $60,000–$100,000 homes. Efforts will be focused on the IU student population.

Marketing Strategy

The primary strategy for Pedro's Construction is to find motivated sellers. Through communications with many in the industry we have discovered that the buyers market, as a whole, is fairly competitive. What does this mean? It means that houses are easy to find, easy to sell, but difficult to buy. However, in the Broad Ripple area competition is not as fierce. Many acceptable homes have been on the market for 100+ days. By working closely with an experienced realtor who is acquainted with the market homes will be able to be purchased without much problem. Though there are and will continue to be those with deeper pockets and the ability to offer a more appealing "best or highest offer," the market is volatile enough to sustain all.

Pedro's Construction will piggyback off of Robyn Hill's current reputation as a respected and successful realtor in the area. Robyn and her brokerage firm will primarily handle the sale and acquisition of all properties. By continuing to build ties through family, contracting work, and dealings with area sub– contractors and architects: Pedro's Construction will develop a reputation as reliable and skilful rehabbers.

Rentals, to begin in year four, will utilize a similar strategy. All rental properties will be listed on the MLS. Pedro's Construction will also take advantage of their proximity to IU by distributing fliers on campus and by purchasing space in their student newspaper. The cost of a color advertisement, an eighth of a page, is $174.50. 56% of the properties in this area are rentals so a newly renovated property will be easy to rent out.

Sales Strategy

Pedro's Construction is approaching this from a Realtor's perspective. People need homes and they are in the business of rebuilding and selling them. By looking at the current market value of comparables and census reports of population trends, an accurate idea will be had of what constitutes a safe investment. A rehabilitated home in the Broad Ripple area sells from $60,000–$100,000. These numbers have been confirmed by their realtor and through MLS listings. A key component in this is the understanding that the market is perfectly competitive. Pedro's Construction has little to no power to set prices. The way to value a home is to look at comparables and appraise it appropriately. In order estimate a home's future value, one must add the value of amenities that will be added.

Possible investment properties require a 100+% increase in sale price from the acquisition cost. It must be noted that this impressive increase in value is not the standard. The homes Pedro's Construction will be buying cost only $20,000–$45,000. Typically, $15,000 are sunk in repairs making a 100+% return expected and necessary. Estimating repair costs involves hiring contractors to come to the property and give a bid. Details to be explored in the financials, specifically cash flow analysis and income statements.

Again, Sales will be handled through Robyn Hill and Associates real estate services.

FINANCIAL ANALYSIS

Base Home

Financials begin with the analysis of a prospective home. An amortization schedule has been created based on an interest rate of 6.75%. 41558 Sunshine Dr. is a single–family 2–bedroom 1–bath home that will be acquired for $35,000. A bid has been made for repairs that total $14,401. Repair costs include labor, which will be absorbed over the course of the rehab. The value after repairs is $49,401. The final loan amount will be $44,461 after the 10% down payment of $4,940.

Repairs will be completed and the home will be sold within six months. During those six months Gary and Bob will be staying at the property in order to cut costs. Rehabilitated comparables to 41558 Sunshine Dr. are selling for $75,000–$80,000. Selling price of our property is $77,500. The profit after taxes will be $17,642.06. This includes $12,000 earned doing outside contracting work. Sunk costs, which will be avoided hereafter, include legal fees of $1,000 and tool costs of $5,000. This gives a return of $11,642.06 profit on the house alone.

Projections and forecasts

In order to create accurate forecasts a ratio had to be developed to find net sales. First, stripping down the after tax net income by:

1. Adding sunk costs
2. Subtracting supplementary contracting income
3. Adding in loan payments for unnecessary additional months

This gives an estimated profit per home of $11,112.28. Take that number and double it for the two homes sold in year one to get $22,224.56. By taking year one's profit estimation and dividing it by year one's total net sales the divider 0.17 is attained. Assume four homes are completed in year two, and six homes are completed in years three and on. Multiply those respective numbers of average home profit and divide that number by 0.17 to calculate net sales for each year. Making most other costs a percentage of net sales, allows for accurate projections.

In years two, three, four and five earnings will be $56.330.37, $75,250.97, $66,695.96, and $67,856.38 profit respectively. Lower profits in years four and five reflect holding on to one property each year for renting. All costs associated with holding onto a home have been changed accordingly. Net sales are $50,000 less. Repair costs have been reduced as well, because the rental properties will not require as much work.

Rental cash flows came from an example home that was purchased for $25,000. It is assumed that rent will be $460 a month, including an allowance for one month of vacancy each year. After all expenses are taken out $1,234.88 will be earned per year. In year five this number doubles because of another rental property added. In year six, after tax income will total $77,720.73. This is $38,860.36 each, a respectable income after six years.

Financing

Pedro's Construction will be utilizing a Rehab Loan through First National Bank. It is a 90% LTV loan that includes the cost of repairs. Owners–equity in the home, after repairs, must be at least 20%. This means that if a home is sold for $100,000, at least $20,000 would have to be in equity (repairs). This Rehabbers loan will continue to be used until year five.

Amortization schedule home 1a

Amortization schedule home 2a

Year 1 income statement

Cash flow statement of rentals

5 year income statement