raw land - Posted by Mark-GA

Real Estate Investing Retail
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Posted by ray@lcorn on April 14, 2000 at 10:47:17:

Brad,

So far the scenario you mention seems to be limited to you left coasters, but as with all things bureaucratic, it tends to spread eastward with the jet stream. Can’t say as I would agree with the practicality of your friend’s suggestion, but I understand the sentiment. There are easier ways though to protect your position on land held for later development.

My advice is to do whatever you can to vest rights in the land and its development potential. There is case law that exists (I can’t cite it, but trust me) that addresses the rights vested in a development plan. Usually at the point the plan meets the applicable codes, rights are vested. This means getting a survey, subdivision plat, and zoning approvals NOW. Be sure to record the plat. Many jurisdictions have a sunset provision in approved subdivisions that retract approval if they are not recorded within so many days. Here it is 90 days, but that can differ from one county to the next, and of course every state has its own twist.

In theory, if any NEW environmental requirements were then used to stop or curtail the development, the landowner would have to be compensated under the takings clause of the Constitution. That’s a very tricky area of the law however, and involves a determination of whether the regulation removes ALL use from the owner. As the theory goes, if you can still have a picnic on the property, you still have SOME use. Even though you couldn’t build so much as a picnic shelter, you would be prevented from receiving compensation. And people think the DEA is out of control with property seizures…

Bottom line, protect your assets. If you’re holding property for later development be sure you know the character and practice of the jurisdiction and act accordingly.

ray

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raw land - Posted by Mark-GA

Posted by Mark-GA on April 13, 2000 at 15:10:14:

I am looking for opinions and suggestions. I have never dealt with raw land, but think I might have something worth jumping up.

A local lender has started calling me with all his foreclosures (how nice of him). He is offering the following:

–Almost 8 acres of undeveloped land, 10 minutes from Downtown Atlanta.
–Surrounding the land is a well-established subdivision of $150k homes.
–The area is very stable and the houses are well-kept.
–Zoning the land for 14 single family lots would be approved with no problem.
–I think high density zoning would be a good possibility, with 30-40 lots being the top-side (I think).
–The surrounding residents, I am sure, would welcome any sort of single family development.
–The price is $117,000, and he will finance for me with 10-15k down, terms TBD (but he has always been more then fair).
–I have one partner who will go in with me, with the HOPE of a third who has done rezoning work like this before (in an adjacent city).
–The area would support new homes in the $200-230K price range.

Our plan would be to buy it, get the plots created and the site plan approved. At that point, we would sell to a builder/developer and let them build the roads and houses.

I don’t have good comps for intown lots and land, because there is nothing like this readily available. I would guess that a ready-to-build lot would go for 20-25k. I am sure multiple lots, with no roads, would sell for less.

Any thoughts out there?

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Re: raw land - Posted by ray@lcorn

Posted by ray@lcorn on April 13, 2000 at 16:07:46:

Mark,

I love this play… it’s one of my favorite techniques. After serving on my local planning commission for a number of years I am well aware of how much opportunity there is in knowing what will and what won’t fly in rezonings.

A few thoughts:

Make sure the highest and best use of the land is in fact residential. You didn’t say what it is currently zoned, so I have to wonder. The reason I raise the question is because commercial land is still at a premium in most markets. If this is on a heavily traveled street or highway and has decent access, it may be worth more commercially than residentially. I’m not talking shopping centers, it’s too small for that, just neighborhood commercial type activity. Just a thought…

I always check what the community’s Comprehensive Plan has to say about the area around any land I am considering doing a deal on. This serves two purposes: One, it tells me what zoning changes are likely to be approved, and two, it lets me know what to expect on the neighboring properties. Nothing like building a subdivision and finding out later the county’s next industrial park is going in next door.

If in fact the land is best suited for residential, then be sure when you read the Comp Plan to note what maximum density would be allowed. The feasibility of the project will hinge on it. For example, at $117T and 14 lots, that’s ~$8400 per lot raw land cost. From there all other calculations will flow. Let me show you what I mean… this takes some explaining.

There is an old rule of thumb in the development business that says you have to pencil a deal to double your money, because you won’t. Another rule of thumb in the building business is that the ratio of lot cost to house cost should not exceed 5:1, and preferably run 6:1. That means that on a $200T house that the builder wants to make a 10% net profit on,(which believe it or not most builders will settle for… I did for years) then he can’t pay over $28T- $33T for the lot. How did I do that?

(This is a simplified example)

$200,000 retail price

  • 12,000 6% realtor commission
  • 20,000 builder profit
    = $168,000 total cost/6 = $28,000
    or $168T/5 = $33,600

If you follow it through, this type of analysis can also guide you to proper covenants for the subdivision.
Using the above example, a house that costs $168T with $28T lot cost, leaves $140T to build the house. If residential construction for medium grade housing (which is where I think $200T falls nowadays) is costing from $75-$100 per sq. ft, then the builder can build between 1400 and 1866 sq.ft. Keep that in mind before you draw up covenants that require 2000 sq.ft. houses.

Back to your deal, if then the builder can’t pay over $28T for the lot, and the developer you want to sell to has to pencil the deal to double his money, then he can’t have over $14T per lot in the deal after all costs of development. Say you sell him the approved development at $10T per lot, $140,000. Then the development costs should total no more than $4T per lot, or a total of $56T. That’s pretty cheap, and would probably be unrealistic unless you can divide the lots off of an existing street.

On your side of the deal, you need to know what the engineering costs are going to be to get the zoning approved. Say those costs run $1T per lot ($14,000), then you have $131,000 in the deal, and would make $9,000 gross. That’s a lot of trouble for a good bit of work. My guess is that the 14 lots are “by-right” under the present zoning, meaning no zoning change is needed, and your banker buddy has priced the property accordingly. You can see now where the density becomes very important as to what the raw land price should be. Run through this same exercise with 28 lots (remember the development costs will increase on a per lot basis as well) and you can see the considerable difference that a zoning change can make.

If after reading the Comp Plan, talking to the folks in the planning department about the maximum density that is likely to be approved, and some preliminary market work you find that the high density subdivision is still a possiblity, then I would try to contract for the land subject to the rezoning. This is a pretty common method of dealing with this scenario.

Hope this helps, and feel free to post more info as you find it out.

ray

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Re: raw land - Posted by JD

Posted by JD on April 13, 2000 at 22:33:04:

Is there any literature on the topic of subdividing land that you would recommend?

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Re: raw land - Posted by Mark-GA

Posted by Mark-GA on April 13, 2000 at 20:29:25:

Thanks so much for your post!! Seems like a simple way to do the analysis.

The land is not currently zoned, but it is completely surrounded by a long-ago developed subdivision, so commercial would seem to be out of the question.

Your suggestion of checking on the Comprehensive Plan is a good one. In my small town near Atlanta, we have NEVER strayed from the Comprehensive Plan. In Atlanta, though, that is another matter. Who knows what they are likely to do.

I know they have Neighborhood Planning Units that initially hear all rezoning requests. That group would more or less decide our fate.

Seems like we are at a “break-even” worst case and “holy smokes” best case.

What a difference the zoning makes.

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Re: raw land - Posted by DougO(NM)

Posted by DougO(NM) on April 13, 2000 at 17:42:37:

As usual, I get something on my desk and by golly wouldn’t ya’ know, Ray @lcorn posts some good and timely advice on the very subject on my mind ! I’m going to check on 200 acres tommorrow, offered at $10K per acre. Some very preliminary comps show a .5 acre lot selling at $35K and a 1.9ac lot at $55K. From what I’ve found out so far it looks like I might could get ~150-160 1 ac lots, assuming the rest for roads, utilities, drainage, “open space”, etc. It would probably have to be well and septics, but then I guess thats the price folks must pay to have the horse where the neighbors won’t fuss! Natural gas and electric are there, soo…onward to the County for to read the comprehensive plan. It’ll be an exciting weekend around the Ottersberg home what with all that high falutin’ learnin’ going on :wink:

Thanks Ray

Doug

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Re: raw land - Posted by ray@lcorn

Posted by ray@lcorn on April 14, 2000 at 24:02:26:

JD,

I assume you mean the process of (re)zoning and subdividing. The actual subdivision process itself is very cut and dried. Draw this line here, this one there, and put this text here, and you’re done. Any surveyor can do that. Zoning on the other hand, as it is practiced in some places, is an art form.

I have a few books in my office that I have used over the years that I will post tomorrow. What is hard to find is a text about the inside of zoning written from a dealmaker’s perspective. I’ve been toying with the idea of making that my next book.

As an FYI, most often developers and investors hire engineering firms (they do okay) or lawyers (bad move in our town) to represent them and steer them through the process. Engineers know the process and nothing of the politics. Lawyers play the politics and think themselves above the process. I much prefer to represent my own projects. Also, as a planning commissioner I am more apt to give the benefit of any doubt to someone who represents their own property, regardless of how unpolished it may be.

ray

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Re: raw land - Posted by ray@lcorn

Posted by ray@lcorn on April 13, 2000 at 23:47:06:

Doug,

Go to it dude! Like Trump says “If you’re going to be thinking anyway, you might as well think big!”

On a deal that size you’re going to have to project some absorption rates out several years. Don’t forget to get all the population data you can get, plus building permit numbers and existing home sales.

Good luck!

ray

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Re: well and septic - Posted by JD

Posted by JD on April 13, 2000 at 22:31:20:

Where I live, new subdivison lots which are to utilize well and septic systems are to be a minimum of 5 acres. Older, previously subdivided, lots must be at least 2.5 acres for well/septic for development to be allowed. Health reasons.

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It seems that developers are branded as criminals - Posted by JohnG

Posted by JohnG on April 13, 2000 at 19:00:49:

We just looked at some raw land just outside a fast growing residential commmunity on the outskirts of a large city.

We were all excited - the town just added 100 new homes and there is a new commercial centre being developed and 160 acres of new residential.

We went to the local planning office and we were met with the most incredible resistance from the point of view that they wanted to preserve the land for agriculture and what we were proposing (subdivision) was almost a crime. It seems that local planning authorities are adamantly opposed to development and the subdivision process is fraught with obstacles.

We did not feel the slightest bit of encouragement from the planning people and I wonder if this is a common occurance out there in the real world.And what does a person do to overcome such resistance.

I still feel there is an opportunity here. My feeling is that there is such a pent up demand for building lots in this area that the powers that be will eventually have to loosen their grip and bend a little.

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That is a typical experience - Posted by ray@lcorn

Posted by ray@lcorn on April 13, 2000 at 22:55:10:

John,

That is the precise reason I got involved in community planning. Back when I was in the building business, it seemed that every time I got into a project with tons of potential, the local planners would throw up one road block after another. There was a planner in my home town that actually made a joke out of it. I walked in one afternoon and he looked up and said, “Hmmm, there’s Ray Alcorn. Let me see if I can find my jerk-off list.” ! True story. He meant to make a joke out of pulling technicalities out of the ordinance, but it was too close to true to be funny at the time.

When I got into the development business I quickly realized that if I was waiting on the planners to tell me whether I could do what I wanted to, then I was not in control of my deal. As the stakes get higher in the development game, that becomes not acceptable. So I decided to get copies of all the ordinances and codes and plans that they kept quoting to me and learning how to determine what should be allowable before I went to the planning office. That way, when I came in they had to concentrate on reacting to my proposal rather than me reacting to their dissuasion. As I did this over and over in different jurisdictions I found that many localities have similar ordinances, and once I learned my way around a localities system in general, I could operate anywhere. The trick is in being able to study and apply the Comp Plan, the Zoning Ordinance, and the Subdivision Ordinance. Those are the three major documents that will apply in every community that has zoning. Even communities with no zoning have a subdivision ordiance. There may be overlay districts, or special councils or committees, but it will boil down to the application of those three documents in the end.

If you can read them and then start applying them, however imperfectly at first, then you can begin to make the system work for you rather than against you. That’s when you can make some serious money in doing what Mark proposed doing above. Not too many people even know what they don’t know about this process, much less how to learn it. Most folks have the same reaction you did in hearing all the reasons the planners don’t want that project. They get frustrated and give up. The planners like to keep it that way too, they talk in some of the best mumbo-jumbo you have ever heard. But you have to remember that in the end a rezoning is a political decision, not a technical one. So it stands to reason that if you do learn the rules and the politics, and how to play by them, then you’re light years ahead of the competition.

I’ve seen many a development approved over the objections of planning staff and neighbors because it complied with the Comp Plan and the zoning ordinance. That is one of the reasons developers get a bad name. People just don’t understand what is involved in regulating land use. It is not rocket science. We had a case in front of our planning commission last night for the approval of putting doublewides in a previously platted (10 years ago) subdivision. The neighboring residents came in and spoke not against manufactured housing, but against any more lots in that part of the development, even though they had moved in within the past two or three years and this subdivision has been of record for over ten years. We approved the request.

It may well be that the planners you talked to are right. If the property you looked at has a conservation type designation in the Comp Plan or the zoning district, then you best look for different property. But that’s the beauty of then using the Plan. It will also show areas where growth is allowed and even encouraged. Go look for land there. Look for land that is presently just outside the band of current development for the best opportunities, If you want to know where development is going to take place, follow the utilities. Rats aren’t the only ones that follow the sewer!

There are some purely anti-growth communities, and if you are in one, enjoy the atmosphere there and do business elsewhere!

Hope this helps.

ray

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Delayed development plans - Posted by Brad Crouch

Posted by Brad Crouch on April 14, 2000 at 04:51:16:

Ray,

A friend of mine is occasionally a consultant for various California State governmental agencies (mostly Fish & Game), and he told me that unless it was planned for immediate development, raw land should be cleared and plowed under, every six months or each year at the least.

The reason is because an environmental impact study is necessary before development could start, and this study could have serious consequences if some “endangered species” had taken up residence. Like a strange type of bird or even mosquito.

Apparently, the state could declare part of the property (up to 50%) a “sanctuary” for these creatures.

So his advice was to make the property uninhabitable to them, so that ALL the property in question could remain YOURS.

Is this just a California thing, or have you come accross this before?

Thanks,

Brad