Multiple lots development in San Jose: anticipated 30% return in 1.5 years. Your gut feeling?

[Nhi Nguyen]

Greetings everyone.

As some of you know, I'm building a new house in San Jose, documented here: http://www.biggerpockets.com/forums/522/topics/154... , which scheduled to be finished in a couple of months.  So I'm itching to look for a similar project.

I'm really passionate about spec homes and major addition projects in better neighborhoods in the Bay Area ($300+/sqft).  That's why on my hunt for projects to line up after I finish the current, my cousin (broker) introduced me to the following.  

I've been reading on this sub-forum that some of you been suggesting to keep the return at least 20% to make sure it's worth the time & effort.  Please give inputs/advice on this deal.

+ High overview numbers:

- Land acquisition: ~$2M

- Soft cost: $600k

- Construction cost: $2M-$2.25M

- Sale price: $7.2M

- Closing costs: $850K

- Net return: $6.35M - ($4.6M-$4.85M) = $1.75M-$1.5M

==> %of return: ~30-35%

His office wants to structure as follow, roughly:

+ Partnership structure:

- Broker firm (owner of project): up to 50%

- Max 6 partners, preferably less

- Min to enter: $500K

- Min for project to start: $1.5M from partners other than the broker firm.

I would be both investing and building the project to have my skin in the game.  It's a 6 units subdivision that has all plans approved waiting for permits to be pulled (I'll verify with the building department this week).

So, those who have a better sense of market condition in the next year or so for Bay Area - Silicon Valley: what's your gut feeling about this project?

Anything I should check/know in term of paperwork, legal documents, structure of the partnership, etc...  ?  

I'm talking to some of my clients to see if they're interested in joining.  So I'd like to arm myself with as much knowledge as possible before asking.

Thank you.

[Account Closed]

Nhi,

Sounds like a good and fun project.  You shouldn't have any issues selling new construction at $500/sq.ft. in Evergreen or some other decent parts of San Jose.  

@J. Martin mentioned above, I'm a vivid student of economic and history.  What's the point of building a real estate empire only to lose it all?  Knowing when to hold and when to fold will help you win half of the battle.  

As I posted on here before, at the top of the market in 1989, the housing affordability index (HAI) hit 13% for our Santa Clara County.

At the bottom in 1994, the HAI reached 45%.

At the top in 2007, the HAI hit 11%. (Note:  Loose lending drove it this high)

At the bottom in 2011, the HAI reached 56%.

We are currently at 19% HAI.  We are definitely closer to the top than the bottom.  The good thing is that the housing inventory is only about 1.5 months, and we have some good wage inflation in the Tech Industry.  I have to agree with @Johnson H. that there's a high probability that the market will stay relatively flat to single digit movement in the near future.  

Looks like things are still humming in the SFBA so the market should stay healthy in the next few years.  However, it's much more fun to sell in 2005 then 2007.  When the market tanks, be sure you have staying power if you don't get out in time.

Here is a summary of Bruce Norris' 3rd quarter newsletter.  Many CA investors consider Bruce is the Oracle of Real Estate.  Here is the recap of what Bruce learned in 2014.

1. 2014 was unlike any year California has ever had.

2. We can have declining sales in the same year that we have affordability over 30%, declining interest rates, improving employment, a decline in foreclosures, a decline in short sales, a decline in delinquencies, and a decline in negative equity.

3. He has to re-examine his future expectations about what's about to happen in 2015 and get to the bottom of what happened in 2014.

We can't ignore what happened in 2014. It happened despite some very positive forces and defied history! IT'S A BIG DEAL. His question is if we can have a lousy 2014 after a great 2013, what guarantee do we have that 2015 will be any different?

There are a few very bright people who expect 2015 to range from bad to awful. Bruce is going to take a serious look at all of this in the next 90 days and report his finding in the January 2015 newsletter. The title will be: 2015 Proceed With Caution! We may well be in uncharted territory so be careful!