Should we partner with a Builder or divide the land & sell lots?

Question

My partners and I just secured 20 acres and are wanting to build single family new construction. We want to look at all options before moving forward. I would like to get some thoughts on clearing the land and selling lots vs partnering with a builder/general contractor and completing the project ourselves. All help is much appreciated!!

Matt Devincenzo · Answer

Where are you located? In my area that would be easily a 5+ year entitlement...or if 4 lots or less maybe 3. It would also cost several hundred thousand dollars in fees and consultants. Other parts of the country maybe that's alot less and more feasible to take on by yourself.

I will say probably the biggest value is if you can entitle and sell to a large builder for sale. They have efficiencies to manage these much better than you will, but they also want ready to build projects that don't have the unknown timelines associated with entitlements.

Barry Ruby · Answer

Hi Casey, The answer to your question is "It depends".

If "secured" means you have contract to buy rather than you actually own the property it also means you have a clock running that stops at the closing date you've contracted for. If you have purchased the property, time is nowhere near as much "of the essence" in making the decision about the best course of action for you and your partners.

I always structure closing "subject to" being able to fully entitle whatever I plan to build on a property. This practice makes it more challenging to get a site under proper control, but it is doable. As a first step, Creating a robust critical path that shows all of the key due diligence activities required to secure permits and breaking the process into Milestones allows you and the seller to understand and appreciate the time, cost and risks associated with the process. It also forms the basis of the closing date of the Purchase & Sale Agreement and the amounts and timing of the release of earnest money and becomes an Exhibit to the P&S contract.

Unless the 20 acres is zoned and approved as "Lots" you have land that needs to be entitled before any lots exist that can be sold as such. If the site is not zoned (at all or as lots), you have land that needs work that can include, annexation, zoning and preliminary and final plat approvals to meet the permitting authorities definition of lots and shovel ready.

In any event (whether or not you own or hold the right to purchase the property), the only way to answer your question about the best choice for your partnership on an informed basis is to run pro forma analysis on your alternatives. If you partner with a builder and or GC, you will need to know the projected value of the JV project and compare it to the current "As Is" value since this is the "Chip" you'd have to play with in a JV structure. It will also provide clarity on who's doing "what" and how values should be set and profits split.

If you are unable to run this type of analysis on your own, your best bet is to find someone to assist you in doing so or, figure out a reasonable markup/profit and sell the deal to a 3rd party that can run with it.

I'd be happy to do my best to answer any questions you may have or help you with figuring this out.

Alvin Taveras · Answer

@Casey Briscoe First, congrats on being in a great position.

Selling is easy but you forgo all of the learning and wealth-building. Personally, I would choose to develop in phases (maybe 3). This reduces your risk as you are not trying to develop everything at once. Once phase one is complete and stabilized, you can refinance and use the new cash to start developing phase 2.

Additionally, once you own the land and have a plan, you can begin to raise funds.  You can pay off investors with the refi.

Congrats again!

Don Gouge · Answer

I would be concerned with the time frame of the project whether just the land development or the turnkey house. How long would it take from today to get to have a fully buildable and permitted lot? How long until you get to the closing table with your first house in this new development? What will the economy and demand look like at that time? Depending upon where this development is and its regulations you can easily be looking at 2+ years.

Jay Hinrichs · Answer

@Barry Ruby  Excellent detailed advice.

We also try to close once entitlements are secured and appeal time lines have passed. IN our Oregon market this tends to be SOP so sellers and agents dont push back.

Out in Charleston SC I have had a very hard time getting sellers to do this.. they want to close in a short amount of time.. I was also trying to tie my closings to building permits in hand for in fill lots as those time lines have gone way long ..

This would be good to know in the OP market what others do and expect so your relevant.

Taylor L. · Answer

I'd see it as a question of appetite for risk. With the clear & sell strategy being lower risk & shorter timeframe. The partner & develop strategy being higher risk and longer timeframe.

This is just me - but I'd go for the lower risk, shorter timeframe strategy, assuming the projected return is within a decent range that would fit my criteria.

They always say developers are the ones left holding the bag at the end of the cycle. Not that I think we're at the end of the cycle, but I do accept that I also can't predict the macroeconomic future. The Fed is talking about raising rates, which would put upward pressure on mortgage rates and, theoretically, could reduce the amount of demand for new homes in the short run. If that happens it doesn't have to last for very long to kill a development project.

Henry Clark · Answer

@Casey Briscoe

1..Texas.  City or county.  No zoning in county. Pink trailer or hog confinement can be built next to you

2.  County or city what is your minimum division you can do?

3.   Subdivision with covenants  or individual lots?  Again can I put a pink trailer on a lot and there goes your value. Or can builders put any type of house on a lot?  $200,000; $500,000 or $1mm house.  The lowest denominator will determine the lot value

4.  Affordable housing do duplexes or apartments. 5.  Affordable housing because of where the land is?  This may curtail high dollar lot prices

6.  Check the following: storm pond, storm drain, road surface and specs, sewer, water, electric, internet, road access, fire hydrant, soil compaction, setbacks.  Example if your on caprice and you have to do septic the drain field will be bigger and you have to be xxx feet away from water wells this lots are bigger.

7.  Develop all the way thru building houses your profit won’t be realized till the last 30% of sales

8.  Carrying interest can eat up a lot of profits

9.  Check out Journeys End Subdivision in Glenwood, Iowa.  Ask for covenants. Took us about 18 months to develop, but sold in 12 months.  This was what I call country lots. Low cost input. This is just an estimate but we probably made 1/2 the potential profit in 12 months on market at just 2% of the potential max cost. We already owned the ground so we didn’t have to sell.  We listed far above any comps by a factor of 3. Location location.  Not including land which was bought in 93 and 01; we probably put in $70,000.  If we went for the max development we could have put in $2mm in concrete roads, $300,000 electric, let’s say 50 homes at $300,000 cost, not sales price.  I have great long term relationships with 3 different banks. None of them would have financed this project as a single phase deal. Thus our project would have been over the next 6 years if lucky.  I can guarantee you the housing market and the economy won’t be the same. Even if I’m wrong it’s outside my risk tolerance.

Recommend you take the profits. Then start developing duplexes and 4plexs.  Get the developing concepts down. Keep growing in size from there.   Your exposure window will be narrower.  You risk level will match your experience level as you grow.  Your bankers will love you for taking that growth path.

Have a fun ride.  Sounds like a great growth path away from fix flip.  In this case you will be fix flipping a piece of land.

Jay Hinrichs · Answer

NP

keep in mind the realities of being a developer/builder if you have never done this before or your partners have no experience at it. You may find financing basically impossible.  And this is where fake lenders really troll  Just google ingrid Robinson and American greed.  Developers with zero experince trying to find financing and having to put up 10 to 50k non refundable due diligence only to get turned down.. its very very common. so do be realistic on your abilities in that realm.. if you have cash then thats fine..

For us we had to build 20 homes in Charleston SC with cash or private closely held partners before I could get a bank to loan me a dime even with our long track record and financials.

This is why flipping plats is a great gig.. you just tie up the dirt I suspect in that market your cost to create a pre lim plat is not HUGE like other markets could be. and when its ready to go a builder will pay a nice price as it saves them time and they like to buy inventory that can be built on quickly.

Casey Briscoe · Answer

@Alvin Taveras, Let me thank you for taking some time to provide some great and valuable advice. I agree with you on breaking it down into phases. Being new to the new build process is a bit overwhelming for me and my partners so controlling risk is so important. We plan to raise funds to once we finish our strategy.

Thanks again!

Should we partner with a Builder or divide the land & sell lots?

Most Popular Reply