How do you decide if a large lot is worth putting an offer on?

Question

I was starting to do some basic numbers on a large parcel that came up for sale (326 acres @ $700k). When I mean basic, I mean basic. I had only gotten to the point of doing a quick sketch layout and code research of the acreage to see what kind of development could go on it and how many lots I could fit. Giving rough purchase prices for the lots and such things like that. But before I could any further, 2 days after it was posted, it went under contract. I didnt even have enough time to really consider the build potential let alone try to fine potential partners/money lenders.

To be honest I was pretty bummed. I'm still new to this but I know enough from my daily profession (architect) to know a good deal/area when I see it. I might not be able to get the fine number down but enough that I can figure out if its worth pursuing. Part of me is saying that I dont have the money to afford that kind of purchase & development costs so why am I even looking at something like that but the other part of me sees the mass potential and how good of a deal it could be.

So questions to the veteran developers here:1) How do you do your numbers so quickly as to decide if a parcel/lot is worth putting an offer on in such a short amount of time? i.e two days

2)Is it enough to just know that you could make money even if you dont know how much exactly?

3)Do you only go after large parcels/lots if you have the cash for at least the down payment (if not more) or do you just make the offer and hope to come up with the capital after? (Be that through lending or partnerships)

4)What do I need to do/learn to be able to get to the point of being able to make quick offers like this even if I don't have the money on hand?

Thanks in advance for what ever insite and advice you can give. I might have missed out on this one but I want to be prepared for the when the next one shows up that I WONT miss out on it.

*I can post me details about the specific property if anyone wants that kind of detail but I'll save that much info until someone ask for it. *

Jason Hsiao · Answer

Might not be the answer you're looking to hear @Nik Moushon, but really just comes with practice, familiarity with the code, and the build costs. If it's above a certain % of return or whatever criteria you use make the offer. There's only one thing I can guarantee your pro forma number and that is they will be wrong. It's suppose to be an estimate anyway so don't stress getting it right down to the penny. Also if it's a really hot parcel, send in an offer with higher price tag and proper contingencies to back out or renegotiate later. I use a sensitivity analysis as well in my pro forma so I can tell how aggressive I can get or how bad can things get before I consider it a bad deal or lose money.

Can't say I haven't lost out on deals just bc of speed... one time I couldn't get a hold of my partner for an hour to decide what entity to submit the offer or hold title in and when I call back the listing agent they had literally just taken another offer.

Jay Hinrichs · Answer

Nik  couple things.  there is NO financing for land deals like these unless your very experienced developer and at that you need 50% down.  when I say you lose money its all the money you pay 3rd party professionals to do proper due diligence you get your EM Back.

in the case of my situation right now were I have just under 400k in cash out on my Oregon deal.. if I don't close I lose it all..

but this project also will make us almost 10 million over 3 years.. so like I said RISK/REWARD... and when you step up to big land deals your competing against big players.. like my deal I just beat Lennar and Horton to it.. I could turn around and flip it to them right now.

Jay Hinrichs · Answer

Nik

first and foremost you should know the zoning codes  and what is allowed in the base zone without conditional use permits IE permitted uses.. this should take you all of 5 minutes to figure out.

as developers we know the base ... we then make the offer with Due Diligence.. no one has it worked out before they make an offer.. unless its off market and they been hunting it for a while..

all land or development deals come with due diligence time.

most sellers these days though want POF and a brief description of your ability to execute.

and depending on the size of the deal you will need 25 to 100k in cash for EM and prelim work.

its common to lose money on due diligence.  like on my latest purchase 90 lot deal in Oregon i am in it almost 400k in cash before i close..

the bigger the deals it weeds out those that cant execute but make no mistake there is a lot of money out there and many many folks who can execute.. they just are probably not on BP  LOL..

so in your area 320 acres could be one or two lots or it can be a subdivision.. and if it has subdivision potential i am sure most of the bigger players there know about it and what can be done with it..

now you maybe able to do some of the due diligence that i have to hire and pay folks for .. IE land planners and engineers.. but lets say i came to Wenantchee and made an offer on that land.. I would know its max potential within a few hours.. quick call to a engineer or land planner.. I would put up the 50 to 100k in EM so i got into contract then i would budget 10 to 20k for the land use guys to tell me if i had a deal.  I would have a brief bio of who we are and our POF to accompany our initial offer..  ( I have a nice one right now copy of Portland business journals top 30 builders) which I made number 24 in my market.. so lead with strength..

Jay Hinrichs · Answer

Nic construction loans on resi ground up development for me go like this.

A and D loan or just D if i pay cash.. put in all the streets and roads and record final plat.

A an D loan is a blanket loan as you put it.. with lot releases  when i get a vertical loan i can a land advance onb the vertical loan and that pays off the lot release for the A and D  if i pay cash of course there is no pay off and they are just individual loans on each lot.. since each build is different they are not blankets and they are all stand alone.

what i do get though is my bank as long as the lots are basically same configuration and size they only appraise a floor plan once.. so like on my last 25 lot deal we built 4 floor plans so instead of doing 25 apprasials for the construction loans i only did 4.. that saves me 10k.. right there.

Jay Hinrichs · Answer

you can get hardmoney loans with 50% cash down most of the time for bare dirt.. but larger development projects with no esxperince financing while I would say is almost impossible but  there might be a lender out there..  go talk to a local bank and see what they say

Jay Hinrichs · Answer

usually you dont list out contingencies in a land deal .  there are too many unknowns to list them all..   you just say Due Diligence thats its.  and the seller will know it includes land use  utls  market study any number of things that go into developing property for resale.

and if there is an agent involved they will know.

once you do your due diligence then you come back with your findings and tighter terms  .. in our state you must have a pre app meeting which are very useful... these usually cost 1 to 3k per pre app.. and you need to have your mock up of what your proposing.. good to have your civil with you.. He or she may or may not charge..  etc etc.. in the land development game you wont know what your going to end up with months to a year or more later and you will never quantify your costs etc until you have all approvals and your conditionals of approval from the planning department..

Like one little lot split i was doing in Lake Oswego.. we do the pre app and all the other things to get to a land use decisions ( probably 15 to 20k)  and no mention of this through the whole thing. .but one of the land use conditions was to replace the old water line in the street with a 200 ft run of 8 inch ductile iron.. all for hooking up two houses.. total BS this is a major road.. the cost to do this will be significant .. so we are appealing that condition..  and on and on and on it goes..

this business has far more up front risk than buying a standing building were it does not move... LOL...  but of course we make far more money than folks buying a rental that cash flows 200 a month.. :)

Armando Payano · Answer

Nik -

Heres whats worked for me.

1. Practice makes experience. I have analyzed so many developments that I can 'see' the numbers on the deal in my head. Mostly that 'seeing' of the deal is knowing how much a product type (SFR, town house, mulitfamily. A,B,or C area) will cost me to build.

2. Dont sweat the small stuff. I have noticed from my mentor and other accomplished developers (Lucky enough I have a mentor who developed 100s of projects worth 100s of millions) that once they know a deal makes money they dont talk very about EXACTLY what everything will cost and RARELY how much they will make. I think they know that there are so many variables with construction that the contingency will cover any of those variables and they will hit the profit target. More important is adhering to the time schedule and budget. In that order also. TIME is  a major daily discussion point. Many of the national home builders build a break neck speeds. I get developer envy.

3. For me if I analyze the deal and I am VERY CONSERVATIVE  and if it makes sense I move to the "if the S!*t hits the fan" back up plan. If I cant sell them, can I rent them and break even. Also if the lender goes under and pulls funding will I be able to get the funds to finish.  If all these check out I will make an offer ON THE SPOT and get it under contract ASAP. Trying to get myself as much time on the contract as possible.   Ive done contracts that do not have to close for 6-12 months. Depending on the deal that may not be an option. The objective is to secure the property.  However the more time the better for you to line up your affairs.

4. Know the market. Know the product type options for that market. Have an idea of what it will cost to build. In my market, for the product types that have broad appeal, I know I can build anything for 80-130/SF.

Hope that helps. Good luck.

Michele B. · Answer

You can easily put it under contract and back out for whatever reason. If you are shaky on your numbers there are some tools here to use on BP.  You can also find several of the people here willing to look at your numbers for the property.  I can usually look at numbers in about 2 hours. You will need to know that for location that you are in what it is for building cost per square foot.  Then you need to know zoning, that should be a map you can get for the area you are looking into.  (Zoning can be changed but it does take some money and some time).

SO, for example I find out about a sale of XXX acres in the county next to mine.  I find that it is zoned residential not multi.  Then I look and see that it is at AAAA a sq foot for houses for construction.  I find the average home in the area is a 3 bedroom and is CCC square feet and sell for BBBB k . I use my calculator to figure out that the cost of building YYYYY homes on this acreage is a little under  X million.  The cost for roads, electric and gas lines come to around Y million Just a rough estimate.  So then I would figure out what I can afford to buy the property for.  DO NOT FORGET: to figure out holding costs and selling costs.  Then if those numbers all come out for what they want for the property and gives you a nice profit on the whole deal then offer them some cash.

You can set up a table for the areas near your investment area, This would give you a quick go to chart.

I hope this helps.

Tag me if I didn't explain correctly or if you have questions.

Scott Krone · Answer

@Nik Moushon The template is a great tool we utilize throughout the process.  We have made offers through brokers.  They may have a relationship with the owner, but not always.  Most recently, they did have a previous relationship.  That being said, we get cold calls all the time.  It's real estate, anything is for sale for the right terms.  Zoning, financing, environmental Phase I and Phase II, you may want to include geo for raw land.

Scott Krone · Answer

@Nik Moushon  I will try to answer your four questions with 2 responses.

First, being prepared by knowing the market and keeping an eye out for potential deals.  Many times we make offers on properties that are NOT on the market because we know the market and what we can afford.  Part of the preparation is knowing the zoning, and what processes will be necessary to move the project forward.  Another part is building relationships with investors and lenders so when you do have a property they are not surprised!

Second, as @Jason Hsiao mentioned, we won't have all the numbers finalized, perhaps the zoning.  That is what the due diligence of the contract is for - to determine if we can confidentially move the project forward.  On large projects like the one you are considering (a big one for "new" investor (your words not mine), we would have zoning, financing and environmental contingencies to mitigate the risk of closing and our earnest money.

How do you decide if a large lot is worth putting an offer on?

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