Should I sell my home as a SFR or R4 (Development Property)?

Question

Hello to all,

I just discovered this organization and recently became a member. Very excited to have found BiggerPockets and all the great resources here. As I'm just getting on board here, so I've got tons of homework to do. But maybe a few of you can help me along.

I recently bought a home in a booming NW Montana location. Seller financed with a balloon due in a few years. It was annexed into the city limits a few years before I bought it. 3.5 acres with a smaller 1949 home on it. Because it has a (1 acre) spring fed pond and is home to numerous wildlife species, it qualifies as a Sports Afield Trophy Property. Its a fairly hot market here and it would sell quickly bringing a 20% profit. But it is also zoned R4 and can be developed into a business location, school, lodging, or up to 10 new townhomes. Average comps for a townhouse here is around 300k.

So I need advice on whether I should sell the home and land as a Sports Afield Trophy  Property and take my 20% and move on or wait it out and try to catch the interest of a developer and hopefully sell for bigger gains.

The local planning department has ok'd the general concept of townhouse development already, but I don't have the funds or experience (yet) to go forward with this strategy. If a developer buys it, they will definitely level the home. If I decide to go the SFR sale route, I could sell 'as is' for the 20% profit or could improve the home some. Bathroom, basement area, carport, etc. and get maybe 30%.

Any advice from successful developers and/or land strategists? Your expertise in this area would be greatly appreciated.

Looking forward to hearing your replies!

Here's a photo of the property in relation to the surrounding area.

Brian G. · Answer

@Greg A. have you thought about partnering with a developer? You provide the land, they run the development and you negotiate a % split of the end profit. If nothing else, reach out to several local developers and see if they will propose a deal.  If there is enough money to be made perhaps you can structure a win-win and cash out a higher gain when all is said and done while minimizing your risk by working with someone experienced in a development.

Greg A. · Answer

Thanks Brian and Jay H.

I've been talking with an RE agent experienced in R4 land that says he has numerous local developers interested in these types of properties to build townhouses. If the property fits their interest, they would cash me out bringing me more net than just a SFR sale. They might also consider a participation partnership with me but are asking for my mortgage loan payoff balance amount to acturately put together a proposal. Since I have only about 25k in equity. based on the purchase price of 259k and 225k left on the loan, I feel like I may not have a lot to offer unless the land value has increased substantially. The agent thinks it is worth about 350k to a developer since there's enough acreage for 8-10 doors. At 300k per door they could see a reasonable profit after development costs.

I will have lived here for two years this coming October. And I don't know if the tax benefits would apply to a development R4 sale (cashed out by developer) or just SFR. Maybe you both are more familiar with the tax law.

If I partnered with the developer bring my land to the deal, I know I'd lose the tax benefits, but may come out ahead on the larger profits when all the units sold. Also, what percentage of net profits should I expect in a partnership deal like this?

Being more of a conservative type, I'm leaning toward selling out to a deleloper and looking for another SFR purchase. Maybe a flip.

What are your thoughts gentlemen on the best strategy to take. Quick sure profit or longer term 1-2 years risk with potential for higher net gains?

Jay Hinrichs · Answer

couple thoughts  one I don't see how that is a sports afield location surrounded by housing.. I guess maybe a little fishing in the pond. but cant see how that is HBU.

once you partner with a developer you lose your ability to 1031 and your now going to pay full rate tax's as your creating inventory.. so a talk with your CPA would be warranted..  and what is a 20% gain.. 100k 500k  50k  you need to measure that with profits on selling new townhomes which probably at 300k each would be about 50k each..

And for you to do this with no experience and limited funding is a non starter never get financing yourself.

So seems your on the right track

1. Sell take profit now  if you lived there last 2 years its tax free.

2. sell take profit pay cap gains  or do a 1031.

3. partner with developer  most risk and most tax exposure depending on how much gain you actually have.

Brian G. · Answer

@Brian Gerlach @Jay Hinrichs see above post

Brian G. · Answer

@Greg A. not sure about how to find the right individual/developer other than networking at local REIA’s or perhaps calling a few commercial brokers. @Jay Hinrichs might have some wisdom here.

It could be as simple as googling developers and then getting 3-5 proposals. In the end you guys would no doubt use a lawyer to draw up the contract so all parties are protected, don’t worry about that part as it comes later. Connect with some local or semi local developers and get some proposals. This should be free to you and give you an idea whether or not this is a viable and profitable strategy.

Greg A. · Answer

Thanks for the suggestions Brian. I'm just getting started in this field so I'll need to search out where the developers are that might be interested. Is there a group or organization that has a pool of developers that are looking for these types of partnership deals. Where would I get help structuring something like this and a good contract to protect my side of the equation? Thanks.

Should I sell my home as a SFR or R4 (Development Property)?

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