Re: raw land - Posted by ray@lcorn
Posted by ray@lcorn on April 13, 2000 at 16:07:46:
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.