Re: Total newbie: Need info about large land deals - Posted by Killer Joe
Posted by Killer Joe on July 27, 2005 at 08:58:51:
Hi Jennifer,
Just some thoughts on the 40 acre parcel…
If you buy the land for $860K as your introduction to REI you need to understand the reality of the purchase will be considerable debt with NO cash flow. That means your staying power will have to be substantial in order for you to realize any gains.
The numbers you have ‘ceated’ that make this look like a real winner can come back to haunt you if you can not maintain the project through it’s final phases. Some primary considerations you need to address in your projections go beyond just the cost of the land.
In a typical situation where you are converting a larger parcel into smaller buildable lots the first consideration will be the property tax concequences of converting from an Argricultural or Recreational tax structure to a Residential tax structure. You need to find out how the county will reassess the lots, if at all.
To give you an example, one of the counties I have bought land in will change the status from Agricultural to Residential, thereby increasing the tax dramatically, and penalize you with an additional 5 years retroactive tax due at the residential rate. This is a windfall for the county and quite a burden on developers. If you were to buy a property to subdivide and didn’t include this burden in your projections, it would have a dramatic impact on the profits you thought you would realize. Be sure you know how this will be handled.
If you do indeed subdivide the parcel, you will want to create lots that do not completely compete with one another. For example, if the given terrain is equal across the entire parcel such that all the lots could be theoretical clones of one another, you would not necessarily want to make them all equal. This could work against you for the simple reason of supply and demand.
In this scenario you would be creating a ‘supply’ of 7 similar lots, yet the ‘demand’ side, ie 7 people that would all want the same lot may not be supported. In addition, you would be creating a ‘comp farm’ that could have an overwhelming effect on the prices those lots could be sold for. A better scenario is to create different lots that will attract a wider variety of different needs and/or wants on the part of the buyers. This will help insure the value of the lots so that if one of your buyers needs to bail after taking possession they won’t bring down the potential value of your unsold lots by selling out at a discount.
You will want to maximize the features of the land, and the shapes of the lots, so that some of the lots will be premium pieces and can fetch top dollar. This is especially true if the topography varies throughout the parcel. The notion that all the lots will be equal and all fetch the same sales price may prove to be unrealistic.
Find out how long other properties in that local, of similar size and charactoristics, take to sell (DOM) so you can anticipate how long it may take to sell your lots. Don’t forget that you are increasing the inventory in that local thus effectively diluting the ‘buyers/sellers’ ratio to some degree. This can effect the overall time it takes to sell all the properties unless you are in a red-hot market. Remember, your profit will come at the end of the selling phase, and that could be the last one or two properties you actually sell. So if your holding time projections are too optimistic, you could end up doing this for practice instead of profit.
All in all, if you have done your homework, and have the staying power to pull this off, the rewards will be well worth the effort. Don’t forget to include the taxes due on the sale of the individual lots relative to your income tax bracket. That figure should be included in your original projections and will be affected by the time it takes to sell the individual lots relative to the capital gains tax due on the individual sales. HTH
KJ