Pricing of Subdivision

[Peter Wentworth]

I'm looking at purchasing an existing 5 Lot subdivision in Maine and then selling the lots off.  The market value of the unimproved lots is $150K each.   What kind of price should I be looking at to purchase the entire subdivision assuming I will make no improvements.  I will only be taking on the risk & cost of reselling them.

[Scott Choppin]

@Peter Wentworth

In your formula, you need to deduct the following additional costs:

1. Cost of lot/site improvements

2. Development impact fees

Normal formula for land development is called a "Residual Land Value" or RLV:

Market price per lot

Less site improvements (streets, curb/gutter/sidewalk, underground utilities, drainage, etc)

Less impact fees

Less soft costs (to design the site improvements)

Less other cost (brokerage fees, etc).

Developer profit may or may not be deducted from land, just depends on the builder, but if someone did that to me, I'd tell them their profit is in the homebuilding, but regional market differences drive this. All builders will look at it this way, at least the professionals will. 

Possibly you find a "greater fool" the pay you what you want/need to make your deal work, but you don't want to depend on that for your numbers to work. This is where "buy to make money" or "you make your money on the purchase" comes into play. You must buy this right, or risk holding the bag, when the lots don't sell for 150k. Also, check those lot sale prices for yourself, ask around for land brokers in the areas, that have knowledge of this site, or about lot sales generally. 

In some cases, you may do some of the upfront work yourself (say the site improvement plans), and deliver to the lot buyers the already completed site improvements plans, or do the site improvements yourself. In which case you would deduct those costs from the RLV but ADD to your profit calc: Your sale price to others - Your purchase price - your soft costs - less your site improvement costs = your profit. 

BUT... the profit you do want to generate is for you. Either in the form of cash profits or a free lot for your personal use. Don't do this ONLY to get the lot you want, you are taking risk, you should get paid profits to do that. I'm not saying you will, but you could lose on this deal. Buy it at a certain price but don't sell for 150k per lot, and you'll lose money.

Last thing, you have to ask yourself, what's the real reason the seller doesn't want to sell the lots individually. Oh I know what they TOLD you, but look at the deeper picture: Is there something they know that you don't, some problem, some government regulation or zoning that precludes the lot development from working, some environmental issue, anything that they could pass onto you as the new owner, that they don't want to deal with or risk they are trying to shift to a "greater fool" - don't be that guy. 

"Make your money on the buy" - Scott Choppin

~ Scott