Real Estate Agent · Woodbridge, VA · Member since 2013 · 52 posts · 7 votes
Hi all,
I need help figuring out this process from beginning to end. My mother just inherited a small piece of land. It's 4 - 4.6 acres located right outside of Washington, D.C area. The location of it isn't as important as the process we are about to embark upon.
She was considering selling it to someone else but luckily she spoke to me about the land and I suggested that she be patient and we try to see if we can work with a builder to perhaps create our first ever residential subdivision. The land is already zoned residential. But I have no experience developing a residential subdivision. I know this is a long haul process and I am not afraid of this opportunity. Here are a few questions I had....Please feel free to add more commentary if there are questions I did not ask that I need to know.
So out plan is to work with a well known builder who can come in a help with development.
How do I reach out to a Toll Brothers, M/I Homes D.R Horton, Beazer etc? Will they consider working with us and what are a few of the requirements they will need?
In a top level organization such as the ones listed, for something like this, who would be the point of contact I would need to reach out to?
What are the steps involved in developing a residential subdivision?
Will there be any upfront cost for us, since we own the land outright and we want to work with a builder to to develop the subdivision?
I love to read.......What books, articles, or websites do you recommend?
What steps have I overlooked?
Again I am willing to work. I know this is not something that can happen overnight but I believe in my capabilities I just need a little guidance.
Sorry I really can't answer many of your questions. I will tell you why I can't answer them. Land is complicated. There is not as much competition in land becuase not many people understand it. Therefore it can be very profitable if you do take the time to learn.
I expect none of the major builders will work with you. They will buy from you but don't expect them to partner with you or mentor you in what you need to do.
Zoned "residential" is meaningless. How exactly is it zoned? How it is zoned determines how many homes can be build there. Different zoning has a density factor and this determines how many can be built. Can the zoning be changed? You can add value by changing to a more valuable zoning.
Has it been subdivided and platted? Has sewer and utilities be run? If you do these things you make the land more valuable by bringing it to a ready to build condition.
Land comes with a lot of environmental conditions. These can greatly restrict what you can do with land. Is there a stream on you property? Protected wetlands or woodlands? What is the shape of the property? A property can be zoned for 5 houses per acre but if environmental issues limit that to 3 the value is obviously less.
I know I have asked more question than I have answered. I would suggest you talk to builders large and small. Hopefully you will find someone who can send you in the right direction. Good luck - Ned
Sorry I really can't answer many of your questions. I will tell you why I can't answer them. Land is complicated. There is not as much competition in land becuase not many people understand it. Therefore it can be very profitable if you do take the time to learn.
I expect none of the major builders will work with you. They will buy from you but don't expect them to partner with you or mentor you in what you need to do.
Zoned "residential" is meaningless. How exactly is it zoned? How it is zoned determines how many homes can be build there. Different zoning has a density factor and this determines how many can be built. Can the zoning be changed? You can add value by changing to a more valuable zoning.
Has it been subdivided and platted? Has sewer and utilities be run? If you do these things you make the land more valuable by bringing it to a ready to build condition.
Land comes with a lot of environmental conditions. These can greatly restrict what you can do with land. Is there a stream on you property? Protected wetlands or woodlands? What is the shape of the property? A property can be zoned for 5 houses per acre but if environmental issues limit that to 3 the value is obviously less.
I know I have asked more question than I have answered. I would suggest you talk to builders large and small. Hopefully you will find someone who can send you in the right direction. Good luck - Ned
Sam, I'd be interested to follow your progress so hopefully you'll keep us updated.
Are you planning single family homes only? Some apartment complexes? Green space? Maximum density to increase ROI or larger lots for (imho) increases quality of life?
Good luck Sir!
Like Ned, I can't really answer most of your questions, unfortunately...
That said, I'm in the process of doing my first new construction project on a piece of land where I demolished the existing house (so I'm not dealing with issues like zoning, subdividing, platting, utilities, sidewalks, roads, etc). Nonetheless, I'm finding the new construction challenging, and this is after doing over 100 residential renovations in the past 5 years, some of which have been substantial.
So, my point is -- with significant rehab experience, I'm still finding new construction challenging, and building a subdivision seems even more daunting. I couldn't even imagine jumping into building a subdivision without my current level of experience, and even with my current level of experience, I'm not quite ready for it.
We just started meeting with civil engineers on a couple local projects that might result in building a subdivision, and the more knowledgeable people we meet, the more we realize how little we know.
Long story short, if you're planning to embark on this adventure, I highly recommend you find someone VERY knowledgeable to guide you and ensure that you don't get in over your head...you'll be amazed at how much there is to know. Of course, if you can pull it off, you'll get quite an education, very quickly. My recommendation is to start a blog to track your progress! :)
Thank you Ned Carey Rich Henry, III J Scott You all have presented some additional objectives not covered in my initial research. I would love to work with a mentor that can help guide me through the process. Perhaps I should speak to developers? I do expected this to be a learning experience throughout. I just need knowledgeable people like you guys in my corner giving positive reinforcement. By the way, Happy Fathers Day to you and yours!!
I would suggest you look into hiring a fee developer in your area. Ask around and see who is reputable. For a fee they can help you develop the land and you can hire a builder to build out the houses in stages.
This sort of thing is not really a do-it-yourself project. You'll need a good civil engineer and someone familiar with your local rules. You'll also need good contractors for heavy earth moving, utilities, etc. A good local lender will also be something you'll likely need an they're unlikely to lend to you with no experience.
Keep in mind that if you make mistakes with land development it can cost you FAR more than the cost you'll pay to a good fee developer. The cost of ignorance is quite high. Find someone that has been there and done that and pay them to help you out.
You sound experienced! That should have been the my first thought. Man I love this site!! It allows knowledge to spread quickly and easily. I will start by seeking out credible developers while simultaneously trying to a line myself with a "mentor" or a veteran that's experienced who won't mind hand holding initially. It's very difficult to find someone who is willing to extended time and effort into someone else's life let alone their business. But either way I need to press forward and stay positive. Thank you @bryanhancock for your knowledge.
Another option is to look in your area for smaller builders that have done small subdivisions and see if they want to partner in some way. In Austin this is a 6 month process just to get the subdivision done, so bringing the land to the table without carrying costs might be of value to someone.
I'm currently doing a subdivision, but on a smaller piece of land. Before the builder can build, the subdivision process must happen. Obviously there are additional costs in this, one of the biggest being time because time=holding costs, in most cases.
Your city is probably different than Austin, but some of the things that we deal with in a subdivision here are FEMA work, drainage analysis and plans, engineer's reports/additional surveys, a ton of work and communications with the city, possible new utilities, final plat design and preparation, tree reviews, and a few others.
There are folks that specialize in this and can provide a fairly turn-key service. I say "fairly" because it can require a parallel path with an architect depending on the subdivision.
Overall, I think one of your biggest hurdles if you plan to move forward is going to be to find someone that is good and you can trust. Most of the time, it's likely that you won't know what's going on so it will feel like no progress is being made.
Assuming you can find someone though, maybe you could structure an equity deal that makes it a win-win for both parties. Search the forums for "equity partnership" and you'll see that there are many ways to do this, but usually it's based on some loose formula of money and time invested. In your case, it would likely be money, in the form of the land value.
Sam Eligwe Sorry I'm late to the party! First off, you've been given some great information already. Though at first glance it seems like that's a small project, in some areas that's a goldmine, depending upon the property values of the area, zoning density, etc. Without knowing those things, you cannot begin to determine if the project is feasible.
As for one of the major builders, I doubt they would bother with such a small project. However; a local developer may be interested.
What exactly is your experience in development, construction, real estate? For someone with no experience, developing a subdivision may not be the best move. There's a lot that goes into it.
In some areas it's really easy to work with local Planning and Building Departments, others are a nightmare. Aside from local governmental agencies, some property can have issues where you have to deal with Federal agencies (environmental studies, Army Corp of Engineers, etc.) Plus there's all the utilities that need to go in (Electric, gas, sewer, phone/internet, etc.)
I wrote some blogs sometime back on Real Estate Development, that might help give you a broad overview. (they are under member blogs and a few under the BP Blog - just search my name)
From a logic standpoint, it sounds like what you're really looking to do is more like what Lynn was suggesting in partnering. Your contribution is the land and they need to contribute the money to build out the infrastructure.
What percentage you end up with in that kind of arrangement is probably going to depend on a lot of variables - starting with how much would the lots be worth and including how much would the infrastructure cost the other partner.
Seems like a real risky play as you need a partner that can pull it off and that isn't going to short you in the returns. But the advantage is you will probably getting more money selling that way than selling as one undeveloped parcel - provided your partner can either sell or develop all the lots in a reasonable period of time.
But there are definitely some risks with doing the subdivision that you don't have with outright selling the land. So while you may be ok with taking those risks, the other question to ask is your mom?
What if you end up with nothing for that land because things fall apart and you can't get out of the partnership and can't finish the buildout in order to sell the lots? Or nobody wants the lots when they're ready?
Or the builder/partner is going to build the houses there and he goes under? How would you unwind that mess?
That being said, real estate is definitely trending upward. And what better opportunity to do something like than with found money. Not knowing you mom's financing situation, if it was ok, then I would advise her the same thing. Lets take our shot. Life is short and opportunities like that don't come along often.
And no matter what happens, think of the life experience you're going to gain. But I would do my best to find someone really good to guide me through the process - even if it meant paying a really good real estate attorney that was in the know on these types of deals.
A stitch in time saves NINE!
Good luck. And I say take your shot!
Sam Eligwe There are some very valid points brought up in many of the answers you've received.
Mike H. How you come to the conclusion that he should "take the shot" is beyond reason. What exactly is your experience that he should take your advice, and throw caution to the wind, and do something he has absolutely no experience in doing?
A Joint Venture may be a viable option, however; there are MANY things that need to be considered, many of which Mike H. brought up. There needs to be a value assigned to everything in the deal. Though putting up the land seems like the biggest part of the deal to Mike H, as a developer, I know all that goes into developing a subdivision, and the houses, etc., and believe me, it adds substantial value to a project, and requires a great deal of knowledge, experience and time.
Personally I have never done a Joint Venture project, and were I to want to do that, I would find people that have successfully executed such ventures such as Bryan Hancock, Will Barnard Bill Gulley and others to get the nuts and bolts figured out.
What you want to do has many puzzle pieces, and you need to understand all of them before moving forward.
Mike H. How you come to the conclusion that he should "take the shot" is beyond reason. What exactly is your experience that he should take your advice, and throw caution to the wind, and do something he has absolutely no experience in doing?
Structuring a joint venture can be quite simple or it can be very complicated. A lot depends on the trust factor and how much you need to account for all the corner cases. A developer that is not getting paid a straight fee is likely to want to maintain control of the deal even though you'd presumably be putting up the land in the deal. That increases your risk appreciably if things go either sideways or south.
Partnering certainly has upside, but I still think hiring a fee developer is a superior option if you wish to participate in the upside. The big question is how you'll finance the infrastructure and/or vertical development. If you can't get suitable financing on this part of the project you'd probably be better-served partnering. If you can you'd probably be better-served hiring a fee developer. If you don't have experience it is unlikely you'd get financing for infrastructure, but perhaps you can finance it yourself.
A simple formula we use in our local development deals is to count debt as 70% of equity in a project. So $1 in equity equals 70 cents in debt. We don't take development fees, management fees, etc., but on larger deals if you're asking a fee developer to do a lot of work for a year or so you'll likely have to pay them something in either compensatory shares, a larger split, or straight fees. If you did compensatory shares I would suggest making them subordinate to the equity class shares when distributions are made if you can get away with it.
I would start by asking around for good infill civil engineers. In places with tricky zoning or planning these folks add tons of value. I'm not sure how bad things are where you are.
I would really like "@" everyone because you all have presented amazing options.
I think the idea of doing a Joint Venture with a Developer may be the best opportunity. In terms of experience, I'm not sure what it counts for, but I've been a full time Licensed Realtor 5 years. Top 5 producers of 60 agents in my office 3 years running. That being said I have never developed a subdivision. This is the reason I gave my idea to the BiggerPockets.com World to see what bright ideas could transpire. I'm overly thankful for all of the great suggestions.
PLEASE DON'T STOP COMMENTING. I still want to gain more ideas and more knowledge. Again as of right now this evening, my thinking is leaning towards contacting a Developer. Maybe or maybe not JV, but I will look around and interview until I my feelings are 100% copacetic. This is a huge undergoing and I want to make sure I thoroughly prepared. Preparation I believe will be key.
Some good advice there Sam. The very first thing to do is to identify the highest and best use, I think you are assuming SFDs and that may be. On your propety you're looking at probably 12 houses, 1/4 acre lots as infrustructure and easements will consume the remainer. Also, 12 units may fall under generally accepted environmental restrictions, that adds significant expense.
Could be the best use would be townhouses or apartments/condos.
The market will tell you the best use and from that you begin selecting a developer/builder with experience in those types of developments.
The higher the density the more valuable the land will usually be unless you get into luxury homes. As mentioned saying that zonning is residential doesn't say much. Do you have "spot zonning" where they allow special use or minor deviations? That's a conversation with your zonning office to see what the possibilities are.
So first nail down what can and should go in there and then look for the team experienced in that type of project.
IMO, if you end up splitting land sales you'd probably be better off selling outright. As a Realtor, you can lock in the listing of each lot with restrictive covenants. You could do 10% on the lot and 6% (whatever is customary) on each build. You can negotiate the listing on the listing side with the price of the sale of the land. IMO, this would be better than a partnership. For that commission you could do some leg work for the developer/builder, you could learn with much less risk involved. You'd have no financing issues in the deal as an agent nor would you have any real liability with any phase.
As a partnership with someone you can only pull out what you bring to the table and you will have the issues of financing, being on the hook and liabilities of ownership. I like partnerships where 1. I know the person and 2. there is equal knowledge or at least similar levels of expertise in thier areas as there is a division of responsiblities and 3. each with equal skin in the game. Cost to develop can easily be half the land value and that is a cash outlay, can you belly up with cash or financing? Partnership wise, there isn't much to bring in besides the land value and end sales. If you partner 50/50 you're fighting for 25% more basically of the land costs, I doubt a builder will be splitting any build with you without more skin in the game.
With a developer you get the listings set, he sells to a builder, there is 10% on the lot, the builder sells there could be 3% or more, basically risk free from the development issues. You are probably making just as much had you partnered, depending on what the price of the builds are, you could be better off.
The infrustructure depends on what goes in there, cost will be pretty much fixed in some respects, between sfds to 2/3/4 plex builds, apts will be higher, the market will give you a price range to build and lots probably won't exceed 20% of that price. 15% is probably a better target, a 45K price tag on a 300K home, but you can find what is customary in your area from listings. An engineer or experienced builder can tell you about what the infrustructure will run, depends on the location and lay of the land, from that and the market you can value the land, you can shoot for 70% but more likely it will be half as a sale price and at that you should retain the listings. That really depends on your market too.
I'm not saying to throw caution in the wind. But I am saying that just because he hasn't done it before, doesn't mean he shouldn't do it. And I think he should take his shot because its something that he clearly has the desire to do and the situation is about as good as its going to get in that the land is essentially found money.
I'm trying to figure out why you are you suggesting he can't partner up with someone and develop the subdivision. Its not a huge subdivision at 4 acres. What are we talking about here? 12 lots?
For someone that wants to develop lands, this is the absolute perfect scenario for him to get his start. Its a relatively small parcel of land. He can partner with a developer to help him learn the ropes. And, in a worse case scenario, all he and his mom would be out would be the inherited land (assuming he gets an attorney to ensure that).
I believe if someone wants to do and there is no obvious reason why he shouldn't (i.e. paying 100k for a house thats worth 100k), then why shouldn't I suggest he pursue it?
To suggest that just because he hasn't done it before means he shouldn't do it, to me, is the wrong tack to take.
Its not throwing caution to the wind to take your shot and for someone that wants to do this, he has the absolute perfect scenario to do this right now. In fact, I don't think you could ask for a better scenario to learn that process.
So thats how I can suggest he should go take his shot. Real estate investing is all about taking risks - calculated risks. And i think the advice so far - and from myself - is that he's going to have to do a real good job picking a partner. And that there is a ton of risk, including the possibility of losing the land.
But, to me, investing is about taking the necessary steps to turn those risks into calculated risks where the odds are very much in your favor. With the right choices, he can do that.
Despite your objection to my advice, there are people out there that have actually developed these small parcels of lands into little subdivisions and have done so without any experience at all. And since he's looking to partner with someone anyway, he's already showing his understanding of the complexity of the deal and desire to mitigate his risks.
He's got a great resource in BP to help and he's get the desire to make it happen. I like his odds.
Thank you Bill Gulley you really presented a new faucet I overlooked. This is why I joined this social network. Me being a Realtor and having experience listing homes and working with seller & buyers may be the golden nugget I was in search of. I could search for the right developer, form an LLC profit 10% after developer sells lots to builder, then house the listings. And YES 6% is the norm in my market :). I really love this idea. I believe my residential expertise can go a long way. The only problem is I need to locate the right developer which I know will take time. BUT I am more than up to the task.
Thank you Mike H. for the words of encouragement. I always make time for due diligence. Without that, I would not be the person I am today. I appreciate the positivity.
Sam,
In my former corporate career I worked for a large luxury apartment development company in N VA. I would recommend you reach out to Steve Horne at Elm Street Development and Eliot Powell at Whitehall Development. Both are very experienced in that market, and can give you an honest assessment of your dirt. I would strongly suggest you consider selling the land outright and using the proceeds to invest in more predictable income property. I've seen development pro formas go upside down and it's not fun for anyone involved. Contact me offline anytime if you'd like additional development contacts.
Mike H. Please don't take the comments personally, I'm just offering my point of view on the topic. Even with experienced developers, things can go wrong and get upside down, then rather than making money, you can end up heavily in debt.
As for the size of the development, we don't have enough information to say that it would be X number of lots, etc. I don't know the area. In a high density area there can be zero lot lines, houses of 20' in width, and 3 stories high - the point is we don't know if the density is 1 unit per acre or 18 units per acre or more. It's imperative to know what the density allowed is, the cost of developing the lots, building, marketing, financing, etc. and then after ALL the information is obtained, determine what the finished costs per unit will be, and what the profit margins will actually be. Then, can determine whether or not to take his shot at development.
I didn't say he shouldn't JV with a builder/developer, I merely stated that if he did that, he should seek advice from those that have actually done that before. Hence, Bryan Hancock, Will Barnard, Bill Gulley, etc., and be better positioned to make the best deal for himself and understand how JV's work. There's a variety of ways to structure such things. Having never done one myself, I suggested others that have.
The point is, before making any decisions on something like this, it's necessary to get ALL the information you can, from people that have actual experience, and then make a decision. It's never as simple as it seems.
Sometimes the old saying "A bird in the hand is worth two in the bush" is completely accurate, and wise to follow.
As for the size of the development, we don't have enough information to say that it would be X number of lots, etc. I don't know the area. In a high density area there can be zero lot lines, houses of 20' in width, and 3 stories high - the point is we don't know if the density is 1 unit per acre or 18 units per acre or more. It's imperative to know what the density allowed is, the cost of developing the lots, building, marketing, financing, etc. and then after ALL the information is obtained, determine what the finished costs per unit will be, and what the profit margins will actually be. Then, can determine whether or not to take his shot at development.
Completely agreed with Karen...and that's just the legal/zoning side of things...
Once you determine what you are legally allowed to do, you then need to meet with civil engineers to determine what is practical. While you may be allowed to put X units on that piece of property, an engineer may determine that there is no practical way to get anywhere near X units based on the lot configuration.
Then you have to deal with environmental issues, soil issues, etc., which can impact buildability (is that a word? :) even more. After all that, you can start to evaluate actual building costs and do a financial analysis.
Until you have all that information, there's no way to know if you should expect to make a large profit or expect to lose a lot of money by pursuing this...
J Scott Welcome to our world!! It's never as simple as it seems, and a comprehensive list of everything you need to consider is impossible to list, as every city has their own set of hoops to jump! In Laguna Beach it takes a minimum of 18 months to get through planning!
Hope all is going well J, love reading your progress. All in all it looks like things are balancing out on your project, which is always a relief!
With experience in both land development and subdivisions as well as rehab flips, I can tell you hat you may or may not have some upside in this parcel. As Patrick mentioned, your first step is to hire the civil engineer and complete a feasibility study which should also include an environmental report. This will cost you money but is money well spent. Once you know what you can do and w many lots you can get out of the parcel, step two is to get the lots subdivided. Once completed, you now have a land parcel consisting of several lots which are all worth more money now. You could stop there and sell direct to a developer who finishes the build out or you can hire or partner with a developer.
Getting through step one and two is not that much money $10k-$15k or so based on your 4 acre size compared to the value you add to the land.
Having the property subdivided and recorded is a pretty safe step number two. I only hesitate to say that because there is a chance you are going to sell this property to a developer.
I really depends on so many factors. If you can only get 4 lots and they all have frontage, don't need to build a road, don't need to create open space or afforestation, then yes subdivide and hire a builder to build the houses one at a time.
But if your hoping for higher density, you could be building roads, and most likely creating HOA open spaces and Stormwater Management areas. You really want to have your civil engineer picked out and know that you are going to develop this land if that is the case. It's easier to sell land to a developer (In my opinion, granted I've never purchased land) that has a feasibility study, but is not yet subdivided. That developer is going to have his Civil Engineer look at it, and they will want to develop their own concept plan.
I've done both. You get another firm's concept plan, you look at it and revised it. One time the road would of been in 20 foot of fill. I can shift the alignment and save money. Or I get a job that's already been subdivided and now I have lot lines that I have to work with.
Case in point. (Not really) I'm working on an Elementary School. Parks and recs owned this plot of land. The county envisions an elementary school in the front and soccer and recreation fields in the rear. So they slice off the land and get a corner deeded to School Board, based on some loosey goosey concept sketch. Well that doesn't work in reality and now they have to sub-divide off another piece. It's not a deal breaker, but you see it becomes a bit of hassle.
Any local civil engineering firm in Land Development would be more than happy to sit down with you, look at the property, tell you about the process, and really answer all the questions you need answered. Then you can decide if you want to move forward, or sell it off.