Rules of Thumb for Land Development Costs?

Question

I'm in the early stages of an investor pitch for a small, niche community in the Houston area. I *know* this is a loaded, hard-to-answer question, but I need some input re: what to estimate for what I would call "lot prep" - fencing, horizontal utilities, paving streets and parking lots, etc. Assuming a flat, cleared, buildable parcel, should I figure a percentage of the lot cost? A per-square-foot number? Per SF for paving, per LF for fencing?

I don't have a site plan, because I don't have a parcel picked out, but I need a rough idea of the costs involved so I can build out a financial model to present with a couple of different parcels as examples.

Thanks in advance for your input.

I don't have a site plan, because I don't have a parcel picked out, but I need a rough idea of the costs involved so I can build out a financial model to present with a couple of different parcels as examples.

Thanks in advance for your input.

Nik Moushon · Answer

I wasn't trying to say you should get bids to show investors. But you have to have something more firm than rule of thumb type numbers. There is too much flex in those numbers to give most investors the security they need to know what something is going to cost...in a range of course. They know its all starting numbers.

When you call engineers your not asking for a contract to sign or for them to do any work. You are asking what price ranges they have seen this year for projects. You could also call some GCs. You dont need a planned out design to talk to them. You just need to know if you are target a small 4 lot subdivision or a 20 lot or a 100 lot. Because you (and they) have to take into consideration the economy of scale. If a per lot price of a 4 lot subdivision is 40k then a 20 lot will probably be closer to 30k and a 100 about 20k. Thats the kind of information you need. Even you need to figure out what scale of development you are looking for.

You cant go to investors and pitch a plan that has somewhere between 4 and 100 lots and tell them it all depends on how much they invest...because thats not how it works. You need something more narrowed down. Say like...a 10-20 lot subdivision on 3-5 ac and I'm looking to be in these two Zoning Districts that allow me to build to the density to meet that 10-20 lot goal. And even that could not be enough for investors....hell its not even enough for a bank to even say they would loan you the money or not. Most investors are wanting to see what they are investing in. Not just hypothetical numbers. Some will your projections/numbers look great. I'd like to invest in a project that makes those returns. But come back to me with plans and the lot under contract and then I'll sign up. Unless you have family money to borrow or a long business relation with an investor who trusts you, you will very rarely get money tided up for you have at least schematic designs to resent.

Thats the thing about developments, and why so few actually do them, is that there is a LOT of upfront soft costs (time and money) that are required. And a lot of times you have to pay thousands of dollars (sometimes it can be as little as a couple hundred) for professionals to do schematic designs to even figure out if the project is possible. Sometimes it turns out the project isnt feasable and you loss your money. Others it works out just as you thought and the money isnt wasted. Developers losing out on thousands of dollars because a project go bust before they even step on it happens more times then you think. If you arent prepared to pay a couple thousand dollars up front for design work, aside from the accepting the risk of you losing it, then development may not be what you want to get in to. When you are first starting out its risky for sure. But as you gain experience that risk becomes less and you become more knowledgeable on how to properly vet a project site to see if it will work or not. Even to the point that you dont need design professionals for plans. The only other way around this is teaming up with someone (as a partner not investor) that has that experience (and possibly cash) to help mitigate the risk to you.

With great risk comes greater rewards. Thats why so many want to do development but so few actually end up doing it. Risk isnt always because you dont make money at the end...its putting up money at the beginning not knowing if the project will even start.

Nik Moushon · Answer

Like @Greg Dickerson said, rule of thumbs on cost in development dont exist. If you go by those you will more than likely get yourself in a world of trouble. If you are going to be making a pitch to any investor, you dont want to go to them with rules of thumbs or even ball park numbers. Those kinds of numbers allow for to much unknowns and increase the risk drastically. As a new person, you'll never get investors that way, at least smart one. You wont be able to impress investors with napkin math until you have experience under your belt to prove they you know how to estimate accurately enough. Maybe you already have that, I dont know you, but from they way your post is written I have to assume you dont..at least land development wise. The best thing you can do is call up 2-3 civil engineering firms in your area and ask if they dont mind sharing what the average per lot it is to get all the land improvements in for a subdivision. But before you do you have to have a better idea of what you are targeting as a project size. Because the per lot prices change pretty dramatically from a small 4 lot subdivision to a 100 lot subdivision. For example, call and say you are looking for relatively flat land in the 3-5 ac range and are looking to put 10-20 houses. Whats the range of infrastructure costs you are seeing these day? (in my area its about $35-40k per lot for a 20 lot subdivision...and that is not including the price of the land, just the improvements) While you are at it also ask what their fees would be and what their time frame is. Professionals are very busy atm everywhere. Businesses in my area have been 4-6 months out before they even start on projects and thats been all year, even with covid. You will need to start compiling soft cost numbers to show investors too. Soft costs includes all professional fees, land cost and permit fees. A lot of times even infrastructure costs...though you can get loans on that. Just depends on the bank.

When doing subdivisions you want to break things down to a per lot numbers. Not per sf of anything. especially at this point in the project. The per sf cost come in later once you actually have a parcel picked and the subdivision designed. And fencing, btw, is part of the house costs...not land development. Land development is literally everything that makes the individual lots and makes them accessible and sell-able. Anything other than that gets built with the houses and is part of the house costs and are totally different numbers.

Greg Dickerson · Answer

There are no rules of thumb. Costs vary greatly depending on a variety of factors. Costs have also been escalating rapidly over the past 2 years. The best thing to do is talk to some site work contractors in your local area and ask then what the projects have been averaging for the size development you have in mind.

Doniel Winter · Answer

If there's a comparable community under development you could go to the site and get the name of the engineering firm from the contractor, or the plans in the job box. Actual costs will be different, but engineers can get you close, and those costs should be local. It's possible there's a rule of thumb, I just don't know how accurate it would be across geography, there are so many factors at play. On our 7 lot subdivision, the estimate from our engineer was within 10% of the bids we got from contractors.

Eric F. · Answer

For me when approaching raw land developments I take a reverse engineering approach. What are builders currently paying for lots (or teardowns) in the area?

Then I work backwards by assessing the cost to put infrastructure / curbs in. Once I have that depending on what kind of return I need in order to make it worth my while and then I see what I can buy dirt for.

That is a very simplistic answer but all the above comments about checking with civil engineers, really doing due dilligence on the value of lots currently in the area (and if there is an expected appreciation in the area) etc.

I see you are from Magnolia - back in 2013 I was doing a lot off Honea Egypt and 1488 which isn't too far from you.

-Eric

Andrew Taylor · Answer

@Nik Moushon You're right - all of my experience (20 years or so) is in residential construction and remodeling. I've worked for builders who were the first boots on the ground in a new development, but I've never worked on the development side of the business.

FWIW, I'm not looking to bid the job based on rules of thumb; I'm looking for 50,000-foot numbers for use in an elevator pitch - the purpose of which is to get invited back to go into greater detail. Your $35-40k per lot information is really what I'm looking for. (My per SF and per LF numbers were for paving - which is per SF - and perimeter fencing and access control for the community - which is per LF, not per house.)

I understand the "call around and ask engineering firms" concept; the problem is that, like you mentioned, they don't really have a lot of time for tire-kickers. I can't put together a realistic cost estimate without a project plan, and I can't create a project plan without a cost estimate. I can spend several thousand dollars having a conceptual site plan drawn up based on potential project sites, but if I then find out those sites require a million dollars of paving and utility infrastructure I'm going to have to go back to square one - and spend another several thousand dollars on a conceptual site plan for a different parcel.

Again - not looking for something to go in a budget spreadsheet. I'm looking for something to go on a slide bullet point.

Rules of Thumb for Land Development Costs?

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