Miami Waterfront Land. Take a loss and sell or gamble and build?

Question

Looking for some input...I purchased a home on a 9000 square foot lot in unincorporated Miami-Dade for 725k. Property has 50ft of canal frontage. I proceeded to tear the house down and 'got stuck'... never building a home. I listed the land for 850k but never got any offers. Fast forward another year I have realtor friend who wants to list the land at 750-775, which would end up as a loss to me after demo costs, taxes and commisions. My plan is to build a 3500 sf 4/4 home on the property. I've heard the the permitting process in unincorporated Dade is easier however I have another 'snag'. I would require a variance to place a septic tank on the property (no sewer), which could allow the county to dictate what I build.I'm looking for some advice on whether to sell now, take the loss and move on or take a risk and build the new home. Comps:A developer recently purchased a property down the street, assuming they will tear the house down. 27000 sf of land with 150' frontage for 1.5M. Old, but renovated, canal home 2700 sf on 7500 of land recently sold for 999,500 2,600 sf home located down the street on Biscayne Bay recently sold for 2.2M

Scott Choppin · Answer

@Patrick ReganSo there's some additional info needed to complete an assessment of sell vs. build.Questions:A. You say you got stuck, what does that mean? Ran out of money, permitting issues, real estate issues? Do you have experience in this domain, of designing and building large spec house? Do you have a team in place, architect, civil engineer, soils engineer, general contractor?B. Did your realtor friend give you an assessment of your original 850k land price? How does he arrive at his 775k price?Depending on your answers to question "A" above, my advice is to sell if you can minimize your loss. Try asking your realtor friend to give you a discount on his brokerage fee. The risk is certainly less. You may chalk this up to a "learning" opportunity. If you decide to build, here are some assessments to ground:1. What's the cost to design and build the 3,500 house? 2. Is 3,500 the right amount of SF given comps? 3. Are there other comps in the market besides the ones you list? The comps you list don't quite feel right, #1 assumes they will tear house down, but for sure?, #2 is it nearby?, #3 on Biscayne Bay, is this a much better location than your site? Can your realtor friend give you his opinion of value for a completed spec house?4. What finish levels do you need to deliver to make your house most marketable?5. Do you have the financing in place to build?6. How is the market generally and what phase of the real estate cycle is your region/city/local neighborhood in presently? You don't want to build spec then sell into a down market.Last, selling the land as is, and taking a loss will avoid all the issues in Questions 1-6 above. We have sold a number of land opportunities, where we put the land into escrow, completed the entitlements, design, and subdivision mapping process, then sold to another "builder" who took on the risk of the actual financing, construction, marketing, and sale of the project. By doing this, we skipped the entire build process and avoided the market entirely, plus we went FAST. In the real estate development business, I say "slow kills". These type of land sale projects have been some of the most profitable projects in our company's history. I am an offer of help, feel free to ask questions if it can be of further help.Thanks.

Patrick Regan · Answer

@Alex R. Thanks for the suggestion. I will admit I have a tendency to want to do everything as a one man operation. Working towards overcoming this hurdle in order to expand and grow. @Scott Choppin I purchased this property as my first build endeavor (maybe a bit too ambitious). By 'got stuck' it was more fear of the unknown; I ended up buying more rehabs and went back to what I knew and was comfortable with. I have a team for my rehabs that I believe I could expand for the build. The realtor agreed that 850 was high but reasonable at the time given the hot market. Probably too high given I didn't receive any offers. The neighborhood borders very upscale Miami Shores and rapidly gentrifying Little Haiti. The realtor is pricing out nearby sales to gauge the price. Biscayne Bay facing typically commands higher prices for the views but limits your ability to dock a boat. There are three other canal front ~3k SF homes in fair condition listed on MLS in the 1.2-1.3M range but havent moved. I'm hesitant to spend any more money on plans & permitting but will research this option further. Gain or loss this whole process has definitely been a learning opportunity. Really appreciate your comments. @Josue Vargas A vacant land appraisal never crossed my mind, thanks for the tip. Why would new construction or old home stock scare investors?

Alex R. · Answer

Why not team up with a builder/contractor ? Could help with the permitting and with construction costs.

Jonathan Alfonso · Answer

@Patrick Regan check out GC3 Development amongst others. My "advantage" is that I have a family member that does high end kitchens, so my kitchen was not in the budget. We never worked on concrete numbers because I was informed I would need to upgrade the water pipe leading to my property which would add another $30-50K to my budget. Honestly, I realized I was totally in over my head and not ready to tackle a new home build. It's only me and my wife, so we figured rehabbing just made sense. We can do a new build in ten years when it makes more sense to go down that road and our needs (translation kids) will be more known. I'm a firm believer that you stick to what you do well and outsource everything else. At $175 a foot, made no sense for me plus unknowns like $50k cost over runs.

Patrick Regan · Answer

@Malgorzata Sadowska thanks for the reply. I've considered the opportunity cost. I've yet to do a new construction project so I'd probably go back to rehabs.@Josh Malenfant Thanks for the reply. If I could get new construction for $90/SF I'd be building for days and days and days.@Jonathan Alfonso great to see real costs here. I was projecting/been quoted $225/SF 'all-in'. If I may ask, what level of construction/finishes are you building for $175/SF?

Jonathan Alfonso · Answer

@Josh Malenfant A $1.5 Million dollar home with a $90.00 psf cost is a unicorn. I don't know anyone in South Florida building at that cost except for a builder for himself. Not to mention at the price point this home is being built, you will have to construct better upgrades. The realistic cost is somewhere around $150.00 a home. I am building out my personal residence in South Florida, and $90.00 a sf is a dream. In fact, when I started I thought with all my connections/contacts/etc I though I would end up around $125 psf. The reality is I will end up around $175.00. @Patrick Regan The $1.0 to $2.0 Million market is really slow in South Florida right now. I would just break even and move forward. If your strength is fix and flips, you could probably make 2X on that money in the time you build that one spec home. I am very active down here. I represented fix and flippers through 2013, then institutional groups through 2016 and have just ridden the wave of the market trying to stay ahead of it. Most of my client's at that price point who bought parcels for $700-$800k to build $2m Spec homes have delayed their projects.

Josh Malenfant · Answer

Hello @Patrick ReganWith the information you provided it looks like the best bet would to be liquidate. Recently spoke with a spec. builder who is making a 2,500 Square Ft. home at 225,000. This is running him $90 Sq. Ft. Taking the same metrics for your property, This would end up being $270,000 on top of the 725K initially invested putting you in around a 1Million. If you have a good builder theres a chance you can liquidate at break even or so but is it worth all the capital and time invested to do so? Thats only a question you can answer, as you know luxury homes have a small buyer pool and can end up sitting there for who knows how long. I have had a million dollar listing in my neighborhood sit for over 6 months and still hasn't sold. With the luxury market seeing a significant decline according to my Realtor, it may be best to cut your losses now, as the capital you currently have tied up in that deal can be used to generate income from other deals. Feel free to reach out. Always looking to bring on cash investors for our deals.

Malgorzata Sadowska · Answer

Really good advice here already. As a realtor, for clients like you, I analyze the market for the segment of the product my seller is thinking of building. Also, have you run the cost, including opportunity cost of potentially winning other opportunities of holding, building and selling a spec home? Those are just a couple considerations that come to mind. If Want to discuss further, feel free to reach out.

Josue Vargas · Answer

@Patrick ReganI would consider @Scott Choppin great questions. I might be wrong, but to me the comps you are listing are not near your 3500 sf new house on a 9K sf lot. Still, I see your point on the old or renovated houses with less to offer and selling for an astronomic 1-2.2M. Still, these are huge difference between them. Maybe you should consider spend some $ in an appraisal for your land "as is". Also, from your comments, looks like some other owners (assuming same subdivision/comps) are revitalizing their properties by demo and new construction, and some other are just very old/tear down properties. This might be a factor for comps as well and scare a lot of investors.