Buying land and building in a down market?

Question

I fully understand trying to time the market is not generally a good idea, however, do down markets open up opportunities for buying land and building? I would assume that non-income producing assets (vacant land) would get hit harder and labor would be less expensive. Has anyone who has been through a downturn or seen the data seen this? I am in SoCal (San Diego) to be precise.

Dan H. · Answer

Every downturn is different on both a macro and local level.

I do not know how raw land did, but San Diego county homes suffered around 20% decline in the Great Recession (GR).  There were areas that suffered worse.  Valley Center had recently completed a large residential community that had issues finding buyers.  It drove the entire area down more than most other areas.  However, the area where our rentals were located suffered no noticeable decline in rents.  People moved into high occupancy living situations but the banks had so many empty units the supply and demand stayed fairly level.

The 1987? stock crash was a few years before I purchased our first RE, but I do not remember it resulting in a significant RE price decline but I was just graduating from college and could have simply been unaware.

The Dot Com bust (circa 2000), in the local market, had RE prices rising.  We purchased a great RE in 1999 that had enough appreciation (mostly market appreciation but a little value add) that we were able to leverage it to do 2 additional purchases (I think both in 2000 but one may have been 2001).

The issue with the GR on taking advantage of the price drop is that money became scarce.  Only wealthy investors could get financing to take advantage of the situation.  So a lot of the wealth to be made on the reduced price was by housing corporations and some by REITs.  If you cannot get financing, it is not easy to buy much RE.

To summarize, down financial markets have not always resulted in down RE markets.  I suspect the same is true of raw land.  The one time in my RE investing life that the down financial market did result in large declines to RE prices, the scarcity of money made it difficult to take huge advantage of the situation.

Good luck

Alex Olson · Answer

@Adam Bileckyj Development is a long process and complicated. If doing it, i would find an experienced partner. Two partners in which neither have done it is a nightmare. Be the LP of the project so that the expert can take over but watch them every step of the way to learn what is going on.

Dan H. · Answer

I do not plan on doing much work myself nor am I that well connected but I also do not believe my prices are low for what I want.   My intent is that they are both conservative and higher end.

I allocated $250k for the ADU which will likely be 750’ due as much for the room, including my desire to include 1 car garage, more than to avoid impact fees.  If I am told it can fit substantially larger than the 750 (I.e. at least 850’), i will build larger and may need to increase the budget.

For the JADU I allocated $50k but expect it to be a bit over $30k.  This is because it was already set for an ADU due to a previous addition.  The previous addition already had a master bedroom en suite (bathroom, walk in closet), a spare room, and it’s own entrance.  Basically the $30k will go to design and the kitchenette, but to be conservative I allocated $50k.

$850k purchase + $250k ADU + $50k JADU eventually (when owner occupancy is not mandated) = $1.15m.

Where do you believe my numbers are too optimistic?   We have not done an ADU yet.  We have a fair amount of relevant experience including many rehabs (over a dozen) and right now are rebuilding two heavily fire damaged units (over $200k damage), but no ADUs.    I have heard various numbers and believe and hope I am being conservative.

Tay Aguirre · Answer

If anything, people are really worried about finances right now and are wanting to sell off properties, no matter the deep discount the buyers are getting. Due to the fact most people are stuck at home and are self quarantining, one of the highlights of the day has been getting mail (at least some kind of connection to the outside world, right?). We just launched a direct mail campaign with a direct mail site that is still open (I only know of one right now, feel free to connect and ask about it) and are seeing much better results than we normally do from absentee owners, preforeclosures, etc.

Justin R. · Answer

@Adam Bileckyj Over time the past 10 years I've moved from (a) renovating MFR to (b) creating MFR by adding on to existing SFR to (c) in-fill subdivisions and new construction to (d) razing and building larger apartments + raw land subdivision and build.  The in-fill subdivisions, even if the proposed structures are by-right, will take at least 18 months (but, if you've never done it before, upwards of 24-30 months).  The raw land subdivision, especially if mixed use, can easily be double that.

I say this because the housing product won't be ready until our economy has worked through this situation, so there's a lot of reasons to keep the design and development process going.  The big issue is how one goes about financing this sort of thing - investors (whether private or banks) aren't great at investing when they aren't confident what the future holds.  And, of course, what to do if you're mid-construction right now.

Personally, I've got three projects in the works in the (d) category above.  We're not slowing down.  Using this time to focus energy on the non-physical work of designing and arranging for those so when things eventually calm down we'll be that much closer to shovel ready.

It's hard, but have to keep the eye on the horizon and not so much on the road in front of you.

Dan H. · Answer

Your correct on ADU.  Your incorrect on the JADU.  State rules allow jurisdictions to mandate owner occupancy if adding a JADU.  Every jurisdiction that I am aware of does require owner occupancy if adding a JADU.

I expect this will change in the not so distant future.  It is why our plans started with the more expensive detached ADU.  We would need to wait for a rule change to do the JADU that mostly only needed a kitchenette.  Even high end for Green Valley it should be far less than $50k (I budgeted $50k but think in should be doable for $30k).

Good luck

Dan H. · Answer

I have read the 6 CA ADU regulations too many times that it is starting to get muddled but I believe a JADU can only be 150' of new construction (I am too lazy to look it up to verify) and therefore must be mostly existing construction.  It is most important to understand what the ADU regulations allow when determining the pro forma.  To find out at the permitting phase that something is not allowed could be real bad to your expectations.

If in doubt, maybe at time you are acquiring (during due diligence) pay a consultant to verify your assumptions with regard to ADU and JADU thoughts.  It would suck to have pro forma with a detached free standing JADU and not be able to actually do it.

Good luck

Adam Bileckyj · Answer

Hi Dan,

Yeah, that sounds right. I was thinking you were building more of a free-standing JADU which is something I'm looking into and considerably more expensive as I am sure you know. I'll give you a shout if I pull the trigger on anything and start the process here. The planning department seems pretty eager to help. I need to get connected with a good contractor though. I've just been looking at a lot of the Maxable stuff and other random info if you know of anyone.

Adam Bileckyj · Answer

Thanks for clarifying. Thats incredibly inexpensive, everything I have seen is about 3x that much to build. Are you a DIY type or just really well connected?  I have so much to learn!

Hai Loc · Answer

For me I am only willing to take the risk its land in an A area. Sounds kind of silly if it's even possible to find development land in A class area that is not infill.. Value of A class land is capable of bouncing back when the market turns and will give you confidence in holding it especially when it may be difficult to take the neccessary steps to develop the land itself during Covid-19.. There maybe a lot of departments that is involved in the development process that might be shut down like city hall, city planner, architects, field studiers, engineers etc...

Lots of points to consider

Buying land and building in a down market?

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