Lot split to new construction: Try to change my mind!

[Steven Foster Wilson]

I live in the dense center of Ohio State Campus where real estate is scarce and expensive. There are of course the regular options of - door knocking - cold calling and so on for finding a good deal. But everyone is doing it in this small stretch of land. So heres an idea!

Call owners with houses on corner lots, ask them to buy half of their lot, perform a lot split and get it zoned for multifamily. Then build a new multifamily unit. I figure a cost of $125/sqft to build new + the cost of half the land. Houses on campus are selling on average for $180-$200 a sqft.

This could be a good way to be a niche investor. Get prime real estate at a discount. Own new rentals. (and yes the area supports such things as there are hundreds of similar cases).

Please try to change my mind before I go head first into this for the next 6 months. Or if you think its a good idea encourage me.

[Nik Moushon]

@Steven Foster Wilson I am doing pretty much this exact thing right now...though I actually bought the entire house and lot and am living here while I finish the entire project. Here are a couple of things you need to consider:

1 - Short platting (splitting the lot) is not a quick or easy thing. This requires a survey to be complete before you put in for permit. Mine cost me $6k on top of the $1k permit fee. The first told me that it would take 4-6 months for this to get approved....its still not approved and its now into month 7. 

2 - My city, and most that I know of, requires that ALL the utilities are stubbed into the property BEFORE the final plat is approved (short plat and final plat are two different things but are tied together). Since I am not selling my lot and am building on they allowed be to put up a bond for utility costs. This is $21k that I have to set aside for an entire year. I can get this back in my loan but I still have to front this cash for several months while everything else gets in order before the first draw in the construction loan.

3 - Since the avg time someone owns a home is only like 7 years or something, odds are the homeowner has a mortgage. This means you have to get the homeowner to work with you and their mortgage company to do a Partial Release of Collateral. Depending on the company this could take a couple of weeks to a couple of months. You have to have the short plat done (or mostly done) to even start this process. There are closing costs and appraisal costs tied in with this also. 

4 -  And of course while you are doing all of this you need to have your architect designing and submitting for the building permit. Some cities will start the review process while you are still finishing up the short plat and some wont. So you could have overlapping time here or you get to tac this on top of everything else. Lets assume that you can overlap and thats easily another six months. You could pay for the architect to do up plans while you are doing the short plat but then you risk something going wrong or the owner pulling out of the deal and you are SOL and still have to pay the architect. Risk assessment is important here. This is a big up front cost for the arch services and permit fees that could be anywhere from $20k to $100k+ depending on how much work is required. My duplex permit fees are $10k and since I am an architect and get that service for free but a duplex design at a firm would easily cost another $10-20k. 

5 - You also have to be talking with your bank for the construction loan which will need architecture plans for a full appraisal. You should count on a 25-30% LTV for an investment property construction loan. So on top of the DP you'll have closing costs too.

So what you are planning on doing can work but you just need to account for all the up front costs. Some you can get back through the loan some you cant. But since you are still having to buy the land you need to make sure all the number work. Since I bought the entire house and lot and am living here until I move into the duplex my margins are much bigger. Plus by the time I sell the orginal house appreciation and appraisal should at least get me to a net zero loss which mean I get the land for free at the end. Again though this is all at the end. There is a lot of up front costs. This can really sneak up on you.