Teardown And Subdivide - What Are The Gotchas?
Howdy, everyone. I'm looking at a potential opportunity to spec 2 houses on an existing single lot. There is currently a (mighty ugly) duplex on the lot that has no hope of being CFP for a buyer. The lot is very wide, almost 130' at the street and about 80' at the other end of its 170' depth. I talked to the city planners about the requirements for subdivision - 9000 sf per lot, 60' wide at the front of the structure - and we're close on all aspects. The owner is asking $375 K (he's very ambitious) and new houses (4/2.5) in the neighborhood could easily go for $450 or more.
Say I could get the property for $300K and assuming $90/sf for construction of a 2300 sf house, I'd be looking at a built cost of about $207000 per house plus about $150000 for each half of the lot, plus $25000 demolition, lot preparation, and incidentals. Total cost per house comes in at $382000, with a gross profit of $68000 before carring costs and commissions are taken into account.
This seems like it may be a little light on the profit side, but I wanted to get the thoughts of some of the experts out there on what I might be missing here.
Determine what profit margin you are willing to invest/work for. 10%, 20%, 30%? Some investors work on thin margins and make there money on volume. I prefer larger margins, which take patence and work to find.
Once you determine your margin, work your numbers backwords and then make your offer. Stick to your guns. Use your negotiating skills to get the deal you want or walk away.
Good luck!
When you factor in a normal broker's fee of 6%, plus closing costs that might be 3% or so including transfer taxes, pro-rated property taxes, etc..., you are not leaving much wiggle room for profit. On your $450K home, this would be $40,000 in closing costs.
As far as the carrying costs, financing $760K in buy/build costs for 6 months at 10% a year means 5% on the $760K, or $38,000 total ($19,000 per house). Now your closing and carrying costs are up to $59,000 per house. And you said you would expect a gross profit of $68,000 per house? Now you are down to $9,000. Figure you will have some legal fees in there as well. If you have under-estimated your demolish/teardown costs by ust 5%, you have eaten up your $9,000.
How is that for some thoughts on the issue?
joefromphilly
Good point.
It always cost more then you expect.
I have been doing this for along time and I always miss something. Therefore, when I budget a project I always figure for unexpected cost.
That's what I'm talking about. What about handling a deal such as this, where it absolutely depends on the property being sub-divided but variances would almost certainly be required? How should an offer be structured?
Thanks,
Spencer
My experience with P&Z is that they don't give many variances especialy to developers.
Make your offer conditioned on P&Z approval, plat approval and building permits for your intended purpose.
First, I strongly recommend that you have your real estate attorney do the purchase contract. Include contingencies for whatever you need: upfront feasibility period, subdivision approval, variance if necessary, number of lots, etc.
As to the numbers, my thoughts:
What I do is start with a rule of thumb and then finetune with a pro forma. Rule of thumb is this:
aver. sale value of new construction X 25% minus per-lot improvement costs = value of raw lot
Now, using $450K as sale value of n.c., that translates into finished lot of $112,500; back out lot improvement costs (??) and then you have the value of the raw lot. So using this ROT, purchase price of $150K/lot is way too much. If the lots front on an existing street, then maybe your improvement costs would be limited to site prep, util hookups. Have you estimated lot improvement costs?
Your pro forma can list all individual expenses, like closing costs in and closing costs out, transfer tax in/out, marketing, engineering, etc. My experience as a land broker has been that if the numbers work using the ROT, the numbers will work using the pro forma in terms of acceptable bottom line gross profit margin.
Thanks, Nancy. That was exactly the type of information I was looking for. Both lots would front the existing street, so improvement costs wouldn't be too painful, although I need to find out exactly what demo and disposal of a 2000 sf brick structure would cost in my area. I also need to sit down with my realtor and nail down an optimal structure and target price...$450 K was based on older structures with less square footage and a less optimal floor plan. I think I could easily build houses hat would bring $500-550. Still nowhere near what this guy thinks the property is worth, but maybe we'll just have to let it sit for a while and lowball him.
Thanks for all the responses - makes me glad I chunked down the change to become a real member of TCI, not to mention that it was killing me not to be able to search the site.
drspencer,
Yes, sometimes sellers need a dose of reality, particularly if they're "great fishermen" and not sellers. Just throwing the line into the water to see what, if any, fish will bite on asking prices that may bear little relationship to reality. Happens all the time in my area. Unfortunately, sellers don't understand that the passage of time could work against them--zoning changes, subdiv. ordinance changes, sewer moratoria. Good luck with it.