Smaller Residential Subdivision Development?

Question

I'm curious to hear the stories of anyone who's ever delt with residential development before.

I'm a real estate agent in Central Ohio, and recently got married into a family that seems to center around builders. My wife's uncle is a relatively well respected builder in the area, and has a knack for developing grand floorplan homes.

Anyway , we got to talking, and he said the same thing that i've been thinking about our market place. There are VERY few affordable homes, all the large builders in the area have been building homes in the $140k-$180k range, while many of the new jobs comming into the area pay a rate that doesn't work well with these ranges.

Anyway, we got to talking, and it seems he enjoys building smaller, more affordable homes, rather than the 3k-4k square feet homes he's been doing.

So , the best thing to do would be find lots in an area and build....But there aren't any, in fact in my town there are VERY few lots to build on, and most are splits from already existing, double lots.

So, after talking to him ,it seems the best way to do things would be find an area that's developable and do it.

So, i'm curious to know what pitfalls thoes of you who have done this (Succuessfully) and try to learn.

Wes Fontaine · Answer

Wow...140K isn't affordable in your area?  That's what they're getting for 3-4K sq/ft homes?  Thanks for the perspective.

As for developing:

1) Make sure your money is solid (you don't want to run out midstream or if a delay occurs...and something always delays you)

2) Get to know your local governing body (County Commissioners, Building Dept., etc)

3) Don't overpay for the land.  Figure your development costs and then figure your per-lot development costs.  You'd like your lot cost to be less than or equal to 20-25% of your total sales price (home & lot).

4) Interview a few, and find a good, engineer.  This guy can make life easier for you...or a living hell.

5) Do not assume that you will sell all your houses in the first month!!!  If you finance the project, you likely won't get your money until the final few houses sell...this can take a long time.

That's a brief "top of my head" sketch.  I'll try to come up with some more for you.

Account Closed · Answer

Back when my parents bought thier first house (because it was impossible to rent with kids, all rental ads said: no pets no children), there were small starter houses on good size lots that were designed so that they could be added onto easily. They were small sturdy 2 bed 1 bath houses, and very cheap.

I almost think you couldn't sell a new house like that now. The renters in my area all insist that they deserve better, and they are basically your first time buyers.

Whether or not you can build an inexpensive starter home depends upon land prices and development fees.

In my area, only really expensive homes go in. But you can't pay $100,000 for a lot and $30,000 for systems development fees and building permits and build a house that you sell for $140,000.

Danny Kay · Answer

I had a post in this thread a couple years ago. Check it out, its a bare bones run down of the process (in my experience at least).

http://forums.biggerpockets.com/viewtopic.php?t=3243&highlight=

Bart Pair · Answer

Interesting analysis.  I am guessing you are assuming these are starter homes?  The reason is you aren't accounting for anyone bring equity from a prior home into the deal and being able to pay more for a house.

That is fine, but I would do a check of the demographics in your area and find out how many 18-30 year olds you have in your area and are projected to have over the next few years.  That sounds like your target audience so you want to make sure there are enough of them to warrant building these homes.

Brandon Schlichter · Answer

Ok , Thanks....

I'm in Central Ohio , Median home sales price is $175k which is a 4br 2ba home.

They're putting in a new free trade zone (About 40% of capacity currently) and the jobs there will pay about...$13/hr or so.

So our method of thinking is : $13/hr * 40 Hr week * 52Wks / $2253mo Gross income.

FHA Allows upto a 41% to be used for housing needs. Which brings us to a $923/mo payment for a property via a FHA 30yr/5.75% interest.

The $140k Homes run about $1700 a year in taxes, so that brings the total payment to $958/mo without insurance which kicks them off.

Of course, you could just do a 2 income household and kick it over, and the people could do it that way, but people seem not to like it too much.

Now, having said that , in these areas where a foreclosure comes up for $120k or so, they go like hotcakes. We're hoping to get that same interest over the course of a year or two.

Also , the 3-4ksf homes aren't $140k , the 3-4ksf is what the builder hates building (And which is what his clients always request).

The 140k homes are around 1600 square feet.

Smaller Residential Subdivision Development?

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