Developing Land & New Construction

[Ricky Brown]

I have a potential deal with a 6 acre lot and wanting to learn more about getting new homes built on the land. There have been several new homes built on that road in the past 5 years. There are some nice homes and duplexes being built back to back and I'm thinking that this 6 acres would be great to do the same with. The houses built in that area are valued from $117k for a 1100sqft home on .8 acre lot up to around $170k for a 1800sqft home on 3.4 acres. 

I was thinking that I could divide the land into 2-5 lots with over an acre each and build homes to match the other built on the street so they would price around the same. I know there is a lot that goes into development and new construction, so I'm looking for any knowledge or advice on the subject before I get started. I'm looking into the construction companies that built the other homes and other local companies to see how they price their new construction projects. I need to learn more about getting the right permits and getting utilities on the land. The land is already zoned residential, but I'm not sure about how to get it divided into different lots. Should I consider building first then dividing the plots or dividing the plots first then building on each one at a time? I was wondering how financing would work best as well, whether the land should be divided up and the other plots used as collateral for the new construction loan. 

I downloaded the Diary of a New Construction Project and going to start reading it tonight. If anyone has any advice and direction to help me education myself on this topic, i would be extremely grateful. I don't have experience in this, but I'm eager to learn and would like to take this opportunity and make a good deal from it. 

[Mario P.]

Hi @Ricky Brown, I can give you advice based on my development experience in Ontario, Canada. Although there may be nuances relating to local laws and practices, the general idea is similar. Since the development process is so complex, the following is meant to be only a general guide on how to get started.

From the information you provided and based on your experience, there are a few approaches you could take to develop this land (beginning with the highest difficulty/highest risk/highest potential return):

1. Develop and service the land, hire a construction manager/general contractor to construct the units, and hire a brokerage to sell the units;

2. Develop and service the land, sell the serviced lots to a third-party builder; or,

3. Partner with a developer and either take either route 1. or 2. presented above.

As a first time developer, my advice would be to partner with a developer (with the help of a capable and experienced real estate lawyer) and sell the serviced lots to a third-party builder because you can: (a) learn the business from an experienced developer (b) take advantage of your partner's relationships within the industry (c) build your reputation and relationships among those in the real estate community (d) obtain financing easier (lenders are more reluctant to lend to first time developers/borrowers) (e) focus on learning the development side before you tackle the house construction side. 

You should start off by booking a preliminary consultation with a planner at your municipality to determine what the City/Town may be willing to approve in terms of your proposed development. The planner will outline the approvals process and timeline to obtaining approvals and permits (it can vary from municipality to municipality), give you an idea of what density you could achieve on the land, outline what reports will need to be submitted, outline what applications will need to be submitted, and detail the $ amount of fees that will need to be paid to the municipality. 

Next, you will need to understand the value of your land in terms of what its worth now (raw land value) and what it will be worth once it has been developed and serviced (serviced land value). These values are important because:

- you can roll the raw land value into a joint venture with your developer partner; this will be considered your equity in the deal (assuming the land is free of any mortgages) and your partner should inject cash equity into the deal (an amount that must be negotiated and must be sufficient to ensure the developer is motivated to perform)

- a lender will provide financing and base their LTV exposure on serviced land value (the higher the value, the more a lender will be willing to provide)

These values can be determined using direct comparables or through a residual analysis. I would suggest getting an appraisal to determine the two values.

Using the above information, you can approach potential developer partners and negotiate your ownership in a joint venture for your development. Once a deal is in place, you will be able to utilize the developers knowledge and expertise in bringing your development to life. You can also begin to reach out to local builders who may be willing to purchase the serviced lots in your development once your subdivision has been registered. 

There is obviously considerably more involved in the development process. If you want more information, feel free to ask.