Hello again. Just another question I didnt find in the forums. Can someone explain the process of purchasing land and building a residential development? I just want to know the basics. Where does the investor make their money? Is it in the land or do you make money from the home builders as well? I guess im just asking when you build a development, where you can expect to make your profits.
The first step is to find land that is zoned for development and has water, power, and sewer avaiable to the property line. That’s spmetimes not so easy to do.
There is a long process of dealing with the planning commision to get the subdivision platted. It will involve lawyers to do the dicuments and engineers to do the mapping.
Once the plat is finalized, you install the streets, run the power, water, telephone, cable lines, install the sewer to each lot. This infrastructure part is extemeley expensive, especially if there is any rock in the soil.
Some of the developers sell the lots, ready to build on, with CCRs to protect the value of the neighborhood. Most developers go ahead and put the houses up themselves.
Where does the money come from? Local figures, today’s value: subdividable land about $60,000 an acre. 11 houses per acre, subdivided developed lots selllng for just under $100,000 apiece. But did I menrtion that the legal process and the infrastructure are exptemely expensive? (ad most developers do not make the lots that small, except for right in the center of town)
Also, I’ve seen subdivided land in Texas for $5,000 per lot. Values vary greatlyt by location.
A developer who builds houses is doing his own contracting, so I would guess about 15% profit on the building.
Often the salesmen are on contract for the subdivision, so they are getting a much smaller commission in exchange for getting to be the one to sell all of the houses.
Rory: Real Estate Development is really exclusive to your individual real estate market area. So it is hard for me to help you if you are outside of the market area. However, having said that, I can tell you about how we handle real estate transactions in Washington State.
In all of our real estate transactions the day we enter into a binding purchase and sale agreement we know we have made money. Again developing land will very from state to state. The first thing we do once a potential development site is located is to visit the City or County whose jurisdiction the property falls under. We review the properties zoning, wetlands, step slopes, sewer and water availability. Once we’ve determined the site is suitable we prepare an offer to purchase. Our offers are based on the number of lots that are approved at preliminary plat. This is done by taking the number of acres and multiplying it by the number of units allowed under the existing zoning and then multiplying that by .75. For example if the zoning is R-6 six units/lots per acre and you have a 5 acre site 6 unit Per acre x 5 acres equals 30 units/lots. However, once you have taken into account street widths, storm water detention, minimum lots size and minimum lot frontages that may be imposed by the reviewing jurisdiction you will not be able to achieve the number of units allowed. Our rule of thumb is 75% of the maximum so our initial offer would be based on achieving 22 units/lots.
All of our offers are based on a closing date 30 days after issuance of preliminary plat approval. In Washington State this can take between 18-24 months from the date of your first submittal. We structure our offers such that the first 6 to 9 months is free to purchaser and will include three (3) 90-120 extensions at a cost to purchaser of $5,000.00 to $25,000.00 for each extension payment. The extension payments are non-refundable to purchaser however they are applicable to the purchase price. This way, if for any reason you feel that the project is not progressing in a positive way you can walk and the only money you will be out is your expense and extension payment(s). I can tell you if you have done your up-front due-diligence you will not have to terminate. I can tell you that we have never walked from earnest money or extension payments.
Again, the purchase price is a function of your particular market. The Seattle metropolitan market will very depending on area. The market area we work-in finished lots sell between $175,000.00 and $200,000.00 per finished lot. Based on this we will pay 25% of the finished lot value at issuance of preliminary plat. You will spend between $100,000.00 and $200,000.00 getting through the preliminary plat process (however, this number can very greatly again depending on the area you are working in). We have sold several of our plats at issuance preliminary plat. In our area builders will pay between $75,000.00 and $100,000.00 per lot. In October of 2007 we sold a 57 lot subdivision for $4,500,000.00 or $78,947.00 per lot. After repayment of the A&D loan the LLC received $2,600,000.00 we then repaid equity our partners $750,000.00 and each side received an additional $925,000.00. The investment period for this particular project was 30 months providing an annualized return of 32%. Our projects typical show annualized returns in the 25% to 50% range.
We don’t build home’s we typical sale all of our plat to large builders in our market area.
Wow! That was a very informative answer. I am a rookie when it comes to this. I hav a few house flips under my belt. Anyways even though I am a rookie I have access in Northeast Ohio to investors that would back me if I put together the right deals and the numbers made sense. How did you get into developments? Can you explain your first deal and how you put together the funds to do a deal like this? Im not trying to be to intrusive, I just really would appreciate the advice. How much does a process like this take of money upfront to fund usually? What kind of loans are available to people looking to build developments? What are the usual requirements?
By the way a 1/2 acre in a development where I am from I am pretty sure goes for between 75-120k
I agree… nice post Cory…
Rory: My back ground is in the construction business, everyone I grow up with families were all in the construction business in one form or another. I was working as a commercial real estate broker when my first development deal presented itself in 1991. I was working with a business owner of a small machine shop that was interested in buying a building for his operation. We were unable to find an existing building that met his needs, and he did not have knowledge or time to build a building on his own. Not wanting to loose a deal, I told him that I could assist him in financing, property evaluation, design, permitting and construction. At the time I told him this I had no idea how I was going to get it done. Well I shouldn’t say that, my partner had a listing on the property where I wanted to construct this new building. I knew a general contractor that was thinking about shutting the doors on his business, who I convinced to build the building (a 13,000 sqft concrete tilt-up) I knew of an architect that could do the design. What I did not know is the permitting process or the financing for this type of project. I didn’t think the permit process was a big deal as I could deal with it as we went. The real issue was financing I did not know anyone that could help with that. However, as luck would have it about week after putting the property under contract the firm I worked for had its weekly brokerage meeting and at this meeting was a banker representing the SBA new 7-A 10% down SBA loan program for Owner Users and they would also provide construction financing for new projects. I introduted the banker to my business owner he qualified for the loan and we built our first building. Subsequently my partner, general contractor and I went on to build and sale 6 more buildings ranging in size from 21,000 to 50,000 from 1992 through 1997.
The structure a commercial development deal is similar to a residential transaction. However, in our area you buy commercial/industrial property on a per sqft basis. This can be a bit tricky as some seller want to base the sales price on total square footage of a site. This is fine as long as usable/buildable square footage is defined as those area used for building pad/foot print, parking, landscaping, and storm water detention. Those areas of a site that are part of a wetlands, steep slope, utility easements etc. we consider unusable and are not apart of the purchase square footage.
A quick discussion on what we consider a developed commercial/industrial building lot. I know this may seem a little armature but in our area you would be surprised what people consider a buildable lot. “Developed Building Lot: is a site that is flat less than 3 percent slope from end to the other, site is at street grade with all utilities stubbed inside the property line”. I point this out for comparison so if you find a developed building lot and some else has a lot that needs fill or utilities extended to the site you have a bench mark for comparison (example if a developed 2 acre lot is selling for $6.00 per square foot or $522,720.00 and an undeveloped site is $4.00 per square foot or $348,480.00 and it costs you an additional $150,000.00 to make site comparable $498,480.00). Make sure you consider onsite and offsite storm water detention requirements this can affect your site coverage as much as 25%.
Once you have picked your site you want to make your offer contingent on your reviewing jurisdiction issuing an (MDNS) Mitigated Determination of Nonsignificance (an MDNS is conditions upon which the County or City will allow you to develop your project). Once an MDNS or similar document is issued and is acceptable to you the buyer, you would then make a non-refundable earnest money deposit and closing would take place upon issuance of a building permit (it has been our experience that most lenders will not close a construction loan prior to issuance of a building permit for your project.
The costs depend on your local County or City’s preliminary design requirements and your ability to find an architect that you can talk into doing some upfront design work in hopes of getting a full project down the road. In our area we can usually get a preliminary design done for about $1,000.00 and a predevelopment meeting with the County of City at a cost of $250.00 to $500.00. Remember the more information and detailed your drawings are the better the County or City can respond to your potential project. Once you have decided to move forward through the (SEPA) State Environmental Policy Act process (if required in your area) the cost will range from $4,000.00 and $40,000.00 this could include detailed site plan design drawings, soils report, wetland report, animal habitat report, phase I environmental report, traffic report, tree plan, geotechnical report. In our area the cost to get final design drawings and building permits will costs between $50,000.00 and 110,000.00 this would include architectural, structural, civil design drawings along with County and City permit fees.
In our first development deal we were able to get the business owner to upfront all the costs. The other building we fronted about $5,000.00 to $15.000.00 and we were able to get buyers for the finished buildings to fund the balance of the costs through issuance of building permit.
I hope this is helpful?
Yeah that was very informative as well. The prices you were throwing at me for the differnt things… were those the prices for each individual step? The 50-110k… Was that the overall total for everything of just for that final phase of planning? What would you say for that deal you just described to me would be the overall upfront costs? Also how many acres would this pricing develop in your area? What would be the expected return on it as well? I know u cant get down to the penny just throw me some ballparks
Rory: The costs noted were for each phase. Your upfront costs again can very if you are able get to an architect to upfront some design costs that’s a big help. You may not have all of those steps in your area. We have 135 acres in Rock Springs Wyoming. We were able to plat our 19 acres of Commercial/Industrial land for about $25,000.00 and took about 6 months to get approved. In Washington the same project would have cost us $150,000.00 and 2 years. The balance of our 135 acres is zoned residential, we designed a 600 unit mobile home park, the design work and permitting for phase I & II of the project (176 units) is estimated to cost $40,000.00 including permits and take about 90 days to get approved. So you really need to understand the requirement of your particular jurisdiction. Projects that were sold we made between $200,000.00 and $750,000.00. Today M-1 Light Industrial land will run you $8.00 to $10.00 per square foot. Shell building costs run in the $45.00 to $55.00 range with rental rates for large bulk warehouse 100,000 + sqft in the $0.35 to $0.42 per square foot on the shell and an additional $0.70 on office all on a NNN basis. We have not participated in the office/warehouse market in the last 5 years in Washington.
On our leased buildings we try to maintain a 10% to 15% annual return. Now this is not always possible, however, I think that over the last 6 years e have manage to maintain an annual average of about 11%.
First off great answers Cory.
Rory, I have been fortunate to be involved with land development projects in California, Colorado, Wyoming, Georgia, South Carolina, and Florida.
The best thing I can tell you is the process, and the costs are slightly different everywhere you go (even between cities next door to each other.)
If you know what jurisdiction (city/county) you are looking to do a project in, than you owe it to yourself to get in the car and drive down to their offices. Go the Land Development Dept. or Planning and Zoning and if they have those departments than just ask someone where to start.
Don’t be afraid to flat out say “I have never done a land development project before” when you are talking to them. Remember these people work for you. It is there job to explain to you what is involved in getting a development through the process, so make them do it.
Ask them what permits will they require for the type of project you want to do. Then ask them what permits from other agencies are generally required as well. Ask them how long the process normally takes - then ignore their answer and ask to see some recent projects similar to yours. Find out the dates when those projects first submitted for permits and the dates when they actually received their permits. This is a much better gauge of the time it takes to permit than what they will tell you.
The time it takes is very important to your cash flow. Most new developers tend to be more off on how long it takes than on how much it costs.
Next, Cory gives some good advice on what really is “buildable”, but if you are new to due diligence/site evaluation I would advise getting your civil engineer involved very early in the process. You will spend a little more money, but you will get a qualified opinion that could save you lots more money in the long run.
So if you guys can give me a rough estimate… How much money should I look to have or get from an investor to before I start a 10 acre give or take development? I want to make sure I have enough money upfront before I start a project so I dont run into financial trouble if things fall behind schedule. Pretty much I am asking how much should I ask my investor for to get started?
That depends on your projected cash flow stream which is determined by a lot of factors.
Are you doing a residential subdivision, commercial condos, commercial lease project? Maybe its a hotel project, or industrial?
The type of project will affect the cash flow stream. Even if it is a simple single family subdivision there are options. Are you building the homes, or is a developer going to take down your lots? If so, when and at what rate will they be taking them down?
Exactly how long is the permitting process, the construction process and then the final closing process for your project? When will your draws from your investor/bank occur during the process?
What is the appraised value of the land? What is the total cost of the land plus improvements? And finally what would the appraised value of your project be when you are complete?
Your investor or bank will probably want there to be enough cash for a % of one of the 3 values I just described. Then you need to figure out if that number matches with your cash flow analysis I described above.
thank you for the reply. I do not have a deal going on right now. I really dont know too much about developments actually that is why I was asking. I basically have access to investors who are interested in real estate so I am asking questions while I determine on which road to take them down. I would like to start with a residential development. I just wanted to know what kind of money I should tell my investors to be prepared to come up with to do our first deal. I would want to start out with around 10-20 acres and put single family homes on it. Like i said i dont know too much but I figure everyone has their first deal.
There is a lot of work that must be done by a licensed surveyor: mapping, elevations, environmental surveys, etc.
If you look around, you will see what firms are doing the surveying and plat maps in the neighborhood where you want to place your subdivision.
Contact a few of those surveyors and you can find out an awful lot of information about what it takes to get the subdivision approved and how long it takes.
One of my tenants manages a engineering firm and he told me that they sub out the work to a surveyor and I could save a lot of money by hiring the surveyor directly.
All the land use applications are on line in my county, and I can just pull those up on the computer and see what engineering firms/ surveyors are listed for any of the land divisions or lot line adjustments.
As for the cost of sewer lines and utilities, you contact the utilitiy companies and also the heavy equipment operators. For dirt moving and ditching, they can only give you ball park estimates, because they don’t know what they will find until they start digging. Last estimate I got for sewer was $700 a running foot. There are some heavy expenses involved in subdividing and it is a long time before you get any money back