Scrape and Build... How do we do this?

[Julie Hill]

We own two homes in Denver in an urban neighborhood, close to downtown. The neighborhood is up and coming and many of the homes (built in the early 20th century) are being scraped to build 3 story duplexes, townhomes etc. due to the zoning. Right now, our properties are SFR's but we would definitely make more $ if we were able to scrape and build and either rent or sell the units. However we don't know how we could possibly fund this AND have no idea where to start. At this point, we just want to put them on the market so we could pay down some of our other properties or do a 1031 exchange. I just thought I would put this here in case there is a strategy to developing that we don't know about. We are completely tapped out as far as cash goes to be able to put down a ton of $ upfront to be able to do this. Here is the zoning of the properties: "U-RH-3A is a multi unit district that allows up to a two and a half story rowhouse building form.
Apartments are allowed up to three stories, on certain corner lots. It also allows the urban
house, detached accessory dwelling unit, duplex, and tandem house building forms."

[Rafael Castro]

Quote from @Julie Hill:

We own two homes in Denver in an urban neighborhood, close to downtown. The neighborhood is up and coming and many of the homes (built in the early 20th century) are being scraped to build 3 story duplexes, townhomes etc. due to the zoning. Right now, our properties are SFR's but we would definitely make more $ if we were able to scrape and build and either rent or sell the units. However we don't know how we could possibly fund this AND have no idea where to start. At this point, we just want to put them on the market so we could pay down some of our other properties or do a 1031 exchange. I just thought I would put this here in case there is a strategy to developing that we don't know about. We are completely tapped out as far as cash goes to be able to put down a ton of $ upfront to be able to do this. Here is the zoning of the properties: "U-RH-3A is a multi unit district that allows up to a two and a half story rowhouse building form.
Apartments are allowed up to three stories, on certain corner lots. It also allows the urban
house, detached accessory dwelling unit, duplex, and tandem house building forms."

I’ve done a few of these scrape and build deals in Seattle WA where the multi family zoning laws allow for town homes /apartments. 

If you list it here’s what will happen (if your props are buildable) - you’ll get offers from developers. Some will want a discounted price to close on the property quickly. Other developers will ask you to do a year long escrow so they can work on permits and then close on the deal when they can start building. 

maybe partner with a developer? Tell them you’ll let them build on your lots and then split the $ when they sell units. 

let me know if you have other questions, I’m quite familiar with these kinds of deals. 

[Rafael Castro]

Quote from @Julie Hill:

We own two homes in Denver in an urban neighborhood, close to downtown. The neighborhood is up and coming and many of the homes (built in the early 20th century) are being scraped to build 3 story duplexes, townhomes etc. due to the zoning. Right now, our properties are SFR's but we would definitely make more $ if we were able to scrape and build and either rent or sell the units. However we don't know how we could possibly fund this AND have no idea where to start. At this point, we just want to put them on the market so we could pay down some of our other properties or do a 1031 exchange. I just thought I would put this here in case there is a strategy to developing that we don't know about. We are completely tapped out as far as cash goes to be able to put down a ton of $ upfront to be able to do this. Here is the zoning of the properties: "U-RH-3A is a multi unit district that allows up to a two and a half story rowhouse building form.
Apartments are allowed up to three stories, on certain corner lots. It also allows the urban
house, detached accessory dwelling unit, duplex, and tandem house building forms."

I’ve done a few of these scrape and build deals in Seattle WA where the multi family zoning laws allow for town homes /apartments. 

If you list it here’s what will happen (if your props are buildable) - you’ll get offers from developers. Some will want a discounted price to close on the property quickly. Other developers will ask you to do a year long escrow so they can work on permits and then close on the deal when they can start building. 

maybe partner with a developer? Tell them you’ll let them build on your lots and then split the $ when they sell units. 

let me know if you have other questions, I’m quite familiar with these kinds of deals. 

[Matt M.]

Do you have 18+ months to deal with the City and get them built? Permitting time with Denver is atrocious. How would you build if you are cash poor at the moment? A developer MAY partner with you, but I don't think it's worth the headache. Building into this market carries risk right now. 

I'd identify something to 1031 into first if you have enough gain, and maybe put a developer on a longer contract to close to give you more time. 

[Ben Rhodin]

Hey @Julie Hill! This is a great question and not one that I see asked that much. But it is a pretty easy question to answer, and I am more than happy to take a look at it with you. A couple of points that @Matt M. already pointed out...

It will be a long and painful process, as the city is currently very backed up in the permit department. So it will be a couple of years until the property is complete. So is it worth shifting your equity into an already completed project, that will create cash flow and appreciation from day one, instead of having to front the costs and negative cash flow on this one until it is complete? Building and new construction are also expensive as far as financing and is a completely new niche in REI. Is it worth your time and effort to try and figure it out?

Personally, I would say that the juice isn't worth the squeeze on this one, but it does sound like you have some great properties for a developer or home buyer in general. I would analyze them from a current perspective and see what can be done with them. You may find that selling them all together isn't the best option, maybe pulling your equity out in other ways makes more sense. I do this type of analysis with clients all the time, so feel free to reach out if you want a second pair of eyes.