Land development - selling lots to builders

[Kam Su]

We are in the process of developing a small land parcel for our first project on the outskirts of DFW metroplex. Our plan is to develop the infrastructure, subdivide into 1 acre lots and sell the lots directly to homeowners. The homeowners can then use their own builders and build on their own time.

Is there a possibility of selling these lots to builders instead of homeowners? If we can sell the lots to the builders, we can exit the project quickly, although with a lower margin. Are there brokers who can help us find builders?

[Barry Ruby]

Hi Kam Su

As Clint Shelley says, checking in the nearby builders will provide you with a valuable comp. 

As you correctly say, lot pricing does depend on location. It also depends on your acquisition cost for the land, site conditions and a number of variables that will ultimately define YOUR cost basis in getting to finished lots. Ideally, the price you sell the lots for should be a figure that reflects your cost basis plus your target profit. Determining your sales price in this manner is a COST driven method of getting to the number you are looking for.

Another (and preferable) method to get to your lot sales price point is doing an income (market) driven analysis, which I think is the way to go. The market doesn't care how about how much it costs a developer to produce its product or how much profit that developer wants/expects to make in profit against project cost. The market dictates value and should be the standard that you apply in figuring out value.

Even though you intend to build and sell finished lots, you need to calculate the price a homebuilder can pay you for that lot and still make a reasonable profit on the house that gets built on that lot. 

The Rule/Formula you asked about is an income/market driven pro forma that works backwards from the projected sales prices of the homes that will be built on those lots. This involves taking the sales price of the finished home and doing a residual analysis which is done by taking the Sales Price of the finished home you envision on one of your lots and deducting everything BUT the lot price. Doing this will produce the value of the lot that can be supported and paid to you by the homebuilder you sell it to.

The factors that are deducted from the Sales Price of the home are: commissions & closing cost, a builder's overhead and profit, on & off site cost and hard cost along with a contingency factor. The number you are left with is the value of the finished lot you want to sell to that homebuilder.

Feel free to PM me and I will send you an Excel worksheet that runs this analysis.