New construction on an acre lot. How do I do this?!

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New construction on an acre lot. How do I do this?!

Marc Estepa
Washington State · Member since 2020 · 133 posts · 36 votes

Hello BP fam!  Question for you.  I live in the Tacoma, Washington area and looking primarily for buy and hold properties.  Anyhoo...as I’ve been looking, a coworker of mine mentioned a one acre plot of land for sale in his subdivision for $100,000.  It was subdivided in 2008 with plans to build a home that never came to fruition.

This peaked my interest, so I simply decided to contact the listing agent to ask about the history on this property and why it’s being sold.  

The owner apparently had plans to build a custom built home on this land, but after the housing market crash of 2008 he lost interest.  His kids are all grown and he has no use for the land.  He has the blueprints for the home still.  Additionally, it is a challenge to build on that lot because of the slope of the terrain.

I asked the listening Argentina to see the blueprints and was given a copy.  I know that the median price of homes in that particular neighborhood are going for about $500,000, with some of the higher end homes selling in the high $600,000 range.

Running some rough numbers, I see that the price of the land is $100,000.  If I am able to find a builder to build a home for $300,000, I’d be all in at $400K.  If I sell it on the backend of the project for $500,000 conservatively, I estimate that I could get my money back for the purchase of the land ($100K), pay back the building costs on a construction loan ($300k) and potentially profit $100K.  

This is uncharted territory for me and I have no idea what I’m doing. But does this sound feasible?  I know I am probably oversimplifying this, but what other costs do I need to account for?  Am I off base or am I on the right track?  My coworker is willing to partner with me on the price of the lot.  

Our other coworker did something similar and bought land for approximately $40K.  He went to Lexar homes, picked out a floorplan he liked for about $240K, got a construction loan and is literally doing this right now.  All in, he is at about $280K and the house is apparently worth $430K in the area it is being built.  

What are your collective thoughts?  

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  • Daniel Haberkost
    Rental Property Investor · Colorado Springs, CO · Member since 2018 · 682 posts · 729 votes
    5y
    Originally posted by @Marc Estepa:

    Hello BP fam!  Question for you.  I live in the Tacoma, Washington area and looking primarily for buy and hold properties.  Anyhoo...as I’ve been looking, a coworker of mine mentioned a one acre plot of land for sale in his subdivision for $100,000.  It was subdivided in 2008 with plans to build a home that never came to fruition.

    This peaked my interest, so I simply decided to contact the listing agent to ask about the history on this property and why it’s being sold.  

    The owner apparently had plans to build a custom built home on this land, but after the housing market crash of 2008 he lost interest.  His kids are all grown and he has no use for the land.  He has the blueprints for the home still.  Additionally, it is a challenge to build on that lot because of the slope of the terrain.

    I asked the listening Argentina to see the blueprints and was given a copy.  I know that the median price of homes in that particular neighborhood are going for about $500,000, with some of the higher end homes selling in the high $600,000 range.

    Running some rough numbers, I see that the price of the land is $100,000.  If I am able to find a builder to build a home for $300,000, I’d be all in at $400K.  If I sell it on the backend of the project for $500,000 conservatively, I estimate that I could get my money back for the purchase of the land ($100K), pay back the building costs on a construction loan ($300k) and potentially profit $100K.  

    This is uncharted territory for me and I have no idea what I’m doing. But does this sound feasible?  I know I am probably oversimplifying this, but what other costs do I need to account for?  Am I off base or am I on the right track?  My coworker is willing to partner with me on the price of the lot.  

    Our other coworker did something similar and bought land for approximately $40K.  He went to Lexar homes, picked out a floorplan he liked for about $240K, got a construction loan and is literally doing this right now.  All in, he is at about $280K and the house is apparently worth $430K in the area it is being built.  

    What are your collective thoughts?  

    My immediate thought is that the cost of the lot is far too high relative to the expected value of the build (nearly 17% assuming a $600k sale price). The new builds I'm doing here in Pueblo West, Colorado work very well because our land cost has been 2%-3% of the build price helping increase the spread. In the last 6 months it's gone up a bit (4%-5%) but it still works. 

    I don't know Tacoma well but I do know WA is expensive in general and I doubt you're going to be able to have a home built for $300 in a market where lots are selling at $100. Plus, if the lot is not flat that's only going to increase the cost of the build. 

    I would find a GC you can trust through your network and ask what the approx all in cost to build per Sq Ft is which will quickly give you an idea if it's feasible. Then of course factor in the costs of the construction loan, realtor commissions and remember it's going to be higher than average per Sq Ft because you're dealing with a sloped lot. 

    I think a quick conversation with an experienced GC will show this is not a profitable venture but I could be wrong and your market may be much cheaper than I'm assuming so it's worth a call or two. 
     

    Dan

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  • Marc Estepa
    OP
    Washington State · Member since 2020 · 133 posts · 36 votes
    5y

    Thanks for the response Dan.  You’re right, it is expensive here!  I spoke to my realtor about the listing for the land, and he is saying that it sounds too good to be true.  That subdivision is a nice area and homes are pretty expensive.  He’s speculating that the land may be too difficult to build on due to its slope, therefore the cheap price.

    I have a coworker in the middle of building a new home.  He is building a 1500 sq ft home through Lexar Homes for $247K.  That comes out to about $165 per square foot.  He had to come out of pocket $22K to excavate the land he is building on, add septic, water and power.  I dug around and heard that a home builder such as Adair homes estimates that the buyer needs to budget as high as $70K for excavation, water, power and sewer!  

    With those revised numbers, here’s what I’m looking at now:

    1. Land - $100K

    2. Excavation, power, water, sewer - $70K

    3. 3000 sq ft home x $165 per sq ft - $495K

    All in = $665K

    If we are able to sell this home at $700K, profit is $35K.  

    I know there’s other costs such as realtor commission fees, closing costs, etc.  but overall, am I thinking in the right direction?

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  • Melissa Uppelschoten
    Atlanta, GA · Member since 2016 · 53 posts · 78 votes
    5y

    Hi Marc - I was recently eyeing a piece of raw land seemed perfect, except like yours, it too had a significant elevation drop. I shared it with my architect. He said the elevation drop would make it extremely expensive to build on. I would get the opinion of a builder in your area before you jump. It may be turn out to me a non-issue, and I hope that is the case. But you want to know before you make an offer. Wishing you success! ...Melissa

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  • Marc Estepa
    OP
    Washington State · Member since 2020 · 133 posts · 36 votes
    5y

    Thanks @Melissa Uppelschoten!  I’m going to look for builders and see what they think.  You’re right, I think the slope of the land may truly have something to do with that price.  My realtor thinks so too.  I’ve never even considered doing something like this, but before I move forward I wanted to make sure I was looking at the financials first.  I just have no frame of reference or experience with this!

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  • Morris Vanderhost
    Flipper/Rehabber · Philadelphia · Member since 2019 · 3 posts · 7 votes
    5y

    @Marc Estepa The Coworker Is Investing For A Profit Of $190k .You ,Not So Much !This Deal Is Close To A Half A Million !!! Way To Pricey To Snub 100k 👈🏾 in My Humble Opinion . Find Something More Profitable Like The Coworker And Keep The Same Inner-G.

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  • Marc Estepa
    OP
    Washington State · Member since 2020 · 133 posts · 36 votes
    5y

    @Morris Vanderhost, thanks for the encouragement!  At work I keep talking about real estate (partially cause I’m trying to buy our primary residence), but also cause I found BP about 7 months ago and talk their ears out about investing daily!  

    Anyway, they brought it to me since I nerd out on this stuff and they get lost in the numbers whenever I explain it. It's not a buy and hold or a flip/BRRRR so I had no idea how to really assess it!

    I just did it roughly off the top of my head with what seems to make sense, but I don’t know how to properly run numbers.  Anyway, this is how I ran them:

    I started analyzing what I think is a reasonable price for that type of home in that subdivision. It’s in a culdesac, in the back with a view and sounds of the creek below it. The owner wanted to build a 3000 sq ft home for his family. I figured this kind of home would sell for at least $650K.

    Then I set our desired profit at $275K in order to recoup our initial investment in the purchase of the land ($100k), excavation and land prep costs ($70K), closing costs ($13K), realtor commission ($40K) and our own profit ($52K).

    650k (cost of the house) - $275K (desired profit) = $375K. This is the upper limit to what the house can be built for in order to make $275K profit.

    If we estimate the cost to build this home is $165 per square foot, and our upper limit is $375K to spend on the construction loan, $375K divided by $165 per sq foot = 2275 sq ft home.

    Are you saying that it’s NOT a good deal or it is?  I just don’t know what I don’t know.  If there are other costs I’m missing, please help me find them!!!

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  • Scott KronePro Member
    Investor · Northbrook, IL · Member since 2017 · 352 posts · 295 votes
    5y

    @Marc Estepa When considering a new construction or any construction, we break the expenses into three categories:  land, hard and soft costs.  It appears you have the first two covered.  Soft costs are:  architectural, engineering (structural, mechanical, plumbing, electrical and civil), real estate taxes, appraisal, survey, insurance, permit fees, miscellaneous, title, legal, and construction interest.  It does not appear you have factored these into your expenses. 

    If the site is as challenging as you suggest, it would seem a civil engineer and site work are required.  $165/sf for a standard home is not unreasonable (basement, two story, stacked floor plan design), but water mitigation and control are also significant code issues in the Pacific NW.  A civil engineer would assist you with that as well as water and sewer.

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  • Marc Estepa
    OP
    Washington State · Member since 2020 · 133 posts · 36 votes
    5y

    @Scott Krone, THANK YOU!  This is exactly what I was looking for!  Where is a good place to start with these soft costs?  If I go directly to a home builder or developer with this, is it a one stop shop or do I need to seek these other people individually - ie. architect, civil engineer, structural engineer, plumbing etc.?  What is the best way to do this?  I’m assuming if I take pictures I can possibly email them out to each of these people Individually.  Aside from that, getting them altogether to come out with me individually or as a group to assess the land?  I wish I had a team established for this kind of thing.  I feel like that would be a significant muscle move to hunt these people down to take a field trip over to assess and gather numbers so I can crunch my numbers and put an offer on this land.  Do you have a suggestion on how to streamline this assessment until I have a team built to do this regularly?

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  • Scott KronePro Member
    Investor · Northbrook, IL · Member since 2017 · 352 posts · 295 votes
    5y

    @Marc Estepa That is the role of the developer is to cast the vision and assemble the team.  The team can be as simple as the architect and GC.  The architect can advise on all engineering and permit fees.  Taxes, insurance, carrying costs are things you can research (pull property taxes, tax with insurance broker, talk with lenders on debt service and title, etc)

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  • Marc Estepa
    OP
    Washington State · Member since 2020 · 133 posts · 36 votes
    5y

    Thanks Scott!  Shot you a DM.  I’ve never estimated costs on something like this before.  On top of that, when I have looked into something like this, it seemed so overwhelming I never even considered doing it.  I would limit myself to what cookie cutter homes were available.  It doesn’t help that I have a bunch of naysayers in my office who simply tell me why I CAN’T do something instead of how I CAN.  Thanks!

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