We own land. Should we partner with builder?

Question

My parents own about .8 acre on Main Street in our town expensive/expanding town. Hot market. Homes gone in a day with cash offers. They have an old building there and we were considering tear down and building townhomes. I contacted a builder who is building townhomes across the street. We will meet with him today. My parents own th property outright. They want to partner with the builder, where they have the property and the builder brings the construction. What terms will the builder be amenable to and how can we profit from a deal like this? Would it be just as profitable to sell their building/land and not build? I understand that their are unaccounted for variables. Thanks for your expertise.
Brian

Jay Hinrichs · Answer

U want your parents to talk to their CPA FIRST.. if they go the development route they are now ( depending on the amount of units) creating inventory.. which will be taxed at ordinary income rates ( very HIGH)

if they just sell they can 1031  and move on to something else.. many times when you run the math consider the risks of a partnership.. the sale of the land is far better than thinking your going to make some profit..  Bird in the hand

Brian Christensen · Answer

Thanks for the replies. I think I agree that it is easier/cleaner to either sell their property outright or take on the construction loan. They are a little wary about risk. They are retired without much savings. I might try to get the loan. I believe we can build 12 units per code and each is selling (across the street) for $360k. Costs to build is the main variable. Yes we would pay a lot of tax and we will need to figure that out. One option is to sell a number of them to break even and keep the rest for cash flow.

Jay Hinrichs · Answer

YUP and like I said when you take in very low basis and then turn it into inventory most of the time a sale is the far better thing to do

unless they are going to build and hold.

Greg Dickerson · Answer

There really is no reason to partner with a builder. They can probably sell the land for more than a builder would be willing to contribute in a partnership. If they want to develop the property they can just hire a builder no need to partner.

Dustin Allen · Answer

@Brian Christensen

You’re going to have to do the math on this one.  Meet with the builder and see what he’s looking for. Compare what he will charge to build for you as a client and then bring up the partnership and see what the difference is.

After that, run the numbers on what his townhomes across the street are selling for or what they expect to sell for. He probably already knows the range they’ll sell for when finished.  Then run the numbers on land sales in the immediate area.  There are a lot of variables to consider on this. Since you do have the land outright, there’s certainly a way to make something happen here.

Best of luck with your project.

Will Gaston · Answer

@Brian Christensen would your parents not be willing to just hire him as the builder?

I like simple and clean deals. Partnerships with people you don't fully know can get messy pretty quickly so in your scenario I would go to a local bank and get a construction loan. Assuming good pricing and work, I would hire the builder to build the townhomes. He would make money off the construction and I would make money off selling the properties. Everyone knows their responsibilities from the jump.

Others will disagree with me but I don't know jump into partnerships unless I've known somebody for a long time.

Christella Sincere · Answer

Hello Brian,

You'll need to perform some calculations for this task. Begin by meeting with the builder to understand his requirements. Compare the cost he would charge to build for you as a client, and then discuss the potential partnership to determine the cost difference.

Next, analyze the selling prices of his townhomes across the street or their expected selling prices. He likely has an idea of the range they will sell for once completed. Additionally, assess recent land sales in the nearby area. There are numerous variables to take into account in this scenario. Given that you own the land outright, there is definitely an opportunity to make a deal work here.

We own land. Should we partner with builder?

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