What's a fair share for builder and land owner

[Manu Bhardwaj]

Hi Every1,

I have done a couple of fixer upper projects and now I am considering taking a leap into the big game viz. a home construction project on a vacant land. Here's what I am dealing with -

(A). Empty lot owned by a real estate agent asking for $2 Million for the lot. She bought it 25 years ago for $250K.

(B). Its a custom home community (in CA) where homes sell for an average of $650 to $750 per sqr feet.

(C).The lot has a slight slope, right to left and also has a water tank easement from the city.

(D). I got a construction quote of $250 to $350 per sqr feet, depending on how fancy I want to get. 

Here's what I estimate I could sell the house for -

3000 sqr feet home = $2.5 to $2.7 Million

4000 sqr feet home = $2.8 to $3.1 Million

5000 sqr feet home = $3.2 to $3.5 Million

 (E). Accordingly, I will be invest between $800k to $1.2 Million of my money for constructing the home. $400K cash and remaining as debt.

(F). Project will take 1yr to to 1.5 years.

So here are some questions that I am grappling with -

1. Should I buy the land from the agent or make her a partner?

     1 (a). If I buy, what's a decent offer keeping my 1.5 years of time and $1 Million in investment?

     1 (b). If I partner, and lets say we build a 5000 sqr ft home and sell it for $3.5 Million, how much should the realtor get for the land and how should we split the profit?

2. Any advice on what to watch out for in vacant land construction projects and more specifically custom home construction?

Appreciate any guidance and help?

Thanks,

MB

P.S. Home construction contractor referrals welcome

[Greg Dickerson]

Originally posted by @Manu Bhardwaj:

Hi Every1,

I have done a couple of fixer upper projects and now I am considering taking a leap into the big game viz. a home construction project on a vacant land. Here's what I am dealing with -

(A). Empty lot owned by a real estate agent asking for $2 Million for the lot. She bought it 25 years ago for $250K.

(B). Its a custom home community (in CA) where homes sell for an average of $650 to $750 per sqr feet.

(C).The lot has a slight slope, right to left and also has a water tank easement from the city.

(D). I got a construction quote of $250 to $350 per sqr feet, depending on how fancy I want to get. 

Here's what I estimate I could sell the house for -

3000 sqr feet home = $2.5 to $2.7 Million

4000 sqr feet home = $2.8 to $3.1 Million

5000 sqr feet home = $3.2 to $3.5 Million

 (E). Accordingly, I will be invest between $800k to $1.2 Million of my money for constructing the home. $400K cash and remaining as debt.

(F). Project will take 1yr to to 1.5 years.

So here are some questions that I am grappling with -

1. Should I buy the land from the agent or make her a partner?

     1 (a). If I buy, what's a decent offer keeping my 1.5 years of time and $1 Million in investment?

     1 (b). If I partner, and lets say we build a 5000 sqr ft home and sell it for $3.5 Million, how much should the realtor get for the land and how should we split the profit?

2. Any advice on what to watch out for in vacant land construction projects and more specifically custom home construction?

Appreciate any guidance and help?

Thanks,

MB

P.S. Home construction contractor referrals welcome

I have built many houses at this level on spec. I would need a lot more information to be able to advise you better. Location, comps for lots and houses, current active listings and pending sales etc. As a developer I typically value the land as a percentage of overall sales price and often will tie the land cost to the sales price in a subordination deal like you are contemplating. You could either have the seller subordinate the lot and pay them when it sells or bring them in as a partner. Either way the land vale needs to be appropriate and tied to the overall sales price.   

There is a lot of details and things to know in the entitlement, permitting and construction process. You need well known architect and builder or design-build contractor that is known for these types of houses in that area.