Building my own ocean view rental as my first MF deal? Challenges

[Jack Zhuang]

I've been looking for my first commercial MF investment deals for a few months now. I've always thought I would buy an outdated class C 8+ units MF then pursue the value add route. Other people has done it, so could I... 

I stopped by my agent's office this Sunday, after went through all the not so great value add deals, he pitched me unique opportunity that is not yet on the market. I didn't know what to do with it and hope to get some advice here.

What it is:

Well, a lot located in one of the more low key beach towns in SoCal is being sold and there is currently an auto body shop tenant on the lot. During the past decade, there has been a significant shortage of apartment rentals in the city due to improper zoning laws which favors low density residential buildings. Just a few years ago, the city passed a waterfront revitalization plan and try to turn this historical beach city into a new tourist attraction destination. As a result, the city opens up re-zoning for medium and high density MF residential. The owner of this lot has successfully acquired R-3 zoning which allows to build up to a 6-unit MF building with appropriate number of parking on this 6000 sq. ft lot. But now he wants to sell it. Not clear of the motivation but I was told by my agent the seller is motivated.

Where it is: 

The lot itself couldn't be situated at better a location. It is the 2nd building on an ocean front hill that oversees the entire waterfront revitalization project and it is less than 5 min walk to downtown and waterfront. If I would build a multi story building, starting on the 2nd floor, there would be unobstructed ocean view from 3 sides of the building. The town's population is a mix of local blue collar workers and commuters who want to stretch their dollar. The avg. SFH price is still recovering from the 08 crash. The city is one of the last beach towns that is still affordable before the revitalization project brings in tourism and push home prices up.

The opportunity:

After running some rough estimates with my agent, we've determined the land and construction would cost roughly 50 : 50 for the project. Once finished, the construction and land cost per unit would be about 70% of the market value which I would gain instant acuity. The local avg. rent is suspected to go up with increased tourism.

The concerns:

Well, where do I start? First of there was a gas station before the auto shop on the lot. Although my agent claimed it has been naturalized which I don't know what that means, are there any environmental and regulation concerns? What proof or certificate should I request from the seller?  

How to estimate demolishing, design and construction costs? Where can I find a general guide line for new construction budging? How am I suppose to estimate monthly operating cost on a brand new building with no history? 

Finally, how do I calculate the appropriate buying price for the lot? Since its unique location and lack of past deals to study, it is hard for me to tell if the seller's asking price is reasonable.