Private Group: 36 Micro-Farms Quick Flip Near Seattle - 200%+ CoC

[Chris Newman]

Summary:

This offering is for participation in the quick flipping of an unlisted aggregation of four entire city blocks containing 36 pre-existing, but not developable, ag-zoned micro-farm (sub-half-acre) lots near Everett, WA, just north of Seattle. Not suitable for housing, however these lots are absolutely perfect, and perfectly located, for “recreational agriculture“ individual ownership, which was only recently grandfathered back as legal. These lots, each about triple the size of a normal city house lot, are big enough for some serious family/small commercial gardening, yet not so big that it requires major economic and life commitments. There are fewer than 100 of this type of tiny undeveloped “small denomination farmland” lots in the entire county (pop: 700k) and these will be the first such offered for sale in generations.

The investment plan is simple: To buy this group of ultra-rare “small denomination farmland” lots for a wholesale price of about 25% of the total retail value and then resell them to people who want them, for the lowest per-lot price in the entire county. I know this property and this RE market very well and I’ll do all the work. In exchange, I want 25% of the deal, plus the TDR rights, and I won‘t see a dime of profit until everyone else has been paid first.

It's going to take a total of about $160k to swing this deal, not a loan, although still secured by the land, and I expect that the JV partner(s) (passive or active) will quickly at least double their money, with a zero downside risk. Minimum capital share: $40k, which buys 25% of the investor‘s 75% share of the cash return. Working with me now also opens the door to doing a variety of new high profit land deals together - I'm drowning in them.

     Next door to downtown Everett, WA

     Less than 30 minutes from Seattle

Backstory:

If this was the same old residential stuff in real estate investing, it wouldn’t require any backstory. But, the problem with the same old stuff is that it’s usually a lot of work and, relatively, not very profitable in the short run.

If this was an ordinary deal, instead of the long post that follows, I could throw out a few abbreviations and numbers and most BP Marketplace readers would understand the meaning. But, when it’s something even just a little out-of-the-ordinary, it requires more information to be able to make an informed decision.

For me, real estate investing isn't a hobby. It's about making good money as fast as possible with as little work and risk as possible - I have other goals in my life and REI isn‘t one of them, it‘s just a means to higher ends. One thing that I learned long ago is that there's very little connection between how hard you work, or how much you invest, and profits. But, there is a huge connection between profits and how smart that you work.

Some RE investing strategies are just far more profitable than others. I follow the money, wherever it may lead, even into slightly rarified territory like this deal, where there is almost no competition because nobody else knows about it. It’s the lack of competition that leaves the profits on the table. For instance, just because you may have never heard of “recreational agriculture lots” doesn’t mean that they don’t sometimes exist and that there isn’t a big market demand for the very few that are available.

A little about me: I flipped my first SFR back in the late 1970's and haven't worked for anyone else since the early 80's. I've always worked for myself since then. If you count everything that I've bought and sold over the decades, I've literally done thousands of successful deals. So, this current deal isn't my first entrepreneurial rodeo, both in REI and other businesses, by a long shot.

I'm a true believer that "The riches are in the niches." And, in my home turf of Snohomish county, WA, northern suburb of the exploding Seattle market, the riches sure won't be found in residential investing. Some people are satisfied making a 10% - 15% cash-on-cash ROI, for a lot of hassles and costs, then working hard to find the next deal.

But, I’ve found so many great deals in local rural land, in correlation with an ongoing series of major land use changes, that I won’t even consider any kind of deal that doesn’t hold the potential to at least quickly (as in less than a year) double my money, and preferably even more/sooner. Why chase nickels and dimes when there are $100 bills floating out there, just waiting to be picked up?

Life's just too short to "get rich slow" and the land deals are out there waiting, if you know what to look for and can expand your investment thinking at least a little outside of the SFR box. This is one of those deals and they don‘t get any simpler or quicker than this.

Over many years of research and exploration, the most profitable local REI deals are unquestionably to be found in local rural acreage with one or more "hidden values." Many people, because of their narrow perspectives, would call this "junk" land, but it has been a favorite of mine for decades. So far, I'm up to five different categories of hidden values and know that there are even more to find Often, the same piece of land will have more than one distinct value, for a nice double-dip in profits.

Unlike “forced appreciation,” which requires you to do something, usually costly and labor-intensive, in order to add value to an investment, these hidden values are already there. But the seller and the general real estate market don’t know about them, at least yet. Basically, this is arbitrage investing where the known profits are locked in at the closing, with little or no further development required.

Typically, it does take at least some effort to turn these "buried treasure" values into cashflow and sometimes, like wetland mitigation banking, this is very complex, but still well-worth the effort. At other times however, as in this deal, it's as simple as just listing the lots on the MLS and then quickly reselling them individually with no further development.

This is where my years of research and local experience, and knowing a fair amount about a lot of different things, pays off.

For more about me and my investing specialty, please see my recently-updated BP profile page.

But, enough background:

The Short-ish Version: I’m looking for a capital partner (or perhaps a small group), not a loan, to purchase four city blocks containing 36 pre-existing lots, totaling 14 acres, in western Snohomish county. As the photos above show, this site is literally next door to downtown Everett, WA (pop: 100k, w/ another 600k nearby). Lake Stevens and Snohomish are just a few minutes east and downtown Seattle/Bellevue are about 30 minutes south. This 4,000 acre river delta island neighborhood is a unique green oasis sandwiched between the city and the suburbs and there‘s no other quite like it in the Puget Sound region. A major freeway crosses the island and access to/from it in either direction is easy.

But, only a tiny fraction of the island consists of tiny (sub-half-acre) micro-farm lots like these, and there will never, ever, be any more created. To be specific, only .01% all the undeveloped farm land in this neighborhood is subdivided down this small. And, as near as I can discover, these 36 lots are actually about half of the complete supply for the entire county and none of the others are for sale

This property was recently foreclosed because of an unmet note balloon payment and the original seller/re-owner doesn’t want it. She doesn’t know about the new added value, which nobody knew about when the property was originally sold. She just wants to walk away, as whole as possible, which is about $160k.

I have an inside track on this acquisition, I’m in regular contact with the seller’s attorney and the seller’s side is ready to go. But, she’s not going to wait long before starting to get serious about disposal, so time is of the extreme essence here. A $5,000 earnest money deposit, payable directly to the seller’s attorney in Everett, will lock down the deal with 30 days for full diligence.

But, it’s going to have to happen very soon. This is no time for “analysis paralysis.”

The Plan:

The basic deal strategy is simple: Buy up this collection of pre-existing lots at a deep discount, then resell them individually at retail prices. It’s like any other land subdivision economics: Rare smaller lots are worth more per square foot than common big parcels - it’s simple supply and demand.

Many people make a living just buying big chunks of land, subdividing it and then flipping the individual lots. But, in this case, the subdividing, which can never be repeated, has already been done.

There may also be a way to fast-track a top-dollar resale of the entire collection to the local government, which I’ll describe a little further below.

It’s going to cost a total of about $160k to swing this deal, with a fast $5,000 earnest money required to lock in the deal, and it’s going to need to be paid in full at closing. Whatever the cost is will be the cost of 75% of profits. But, it should also conservatively give at least a 200% capital return to the partner(s), which isn’t bad for a simple passive investment (or active, if you wish) that’s well-secured by the land. All transactions will take place within attorney’s offices in Everett. All return cashflow goes to the investor, first, before I see my 25%.

As for the investment group ownership structure, there are two options here:

1. This land is already owned by a WA LLC. So, the simplest and cheapest way to go is to just buy the LLC and the land comes along with it. Most group real estate investments are held as LLC's. This route will save both real estate sales taxes and the trouble and expense of forming a new LLC. Any agreements between new partners can be easily locked in through the LLC's new bylaws. This is also simplest because the entire transaction can be handled by the attorney.

As the individual lots are sold, it will take the signatures of all LLC Members to release each sale. So, that's the legal protection and how the investors can be certain where the funds will be going at closing.

2. Buy the land in the ordinary way. This will trigger at least several thousand dollars in taxes, plus require the formation of a new LLC or another form of tight partnership agreement. I don't see any advantage to this "ordinary" approach.

The Long Version:

Since many BP-ers won’t be familiar with the basics of raw land flipping, at least the kind that isn‘t some sort of Arizona desert land seller-note scam, more information is required to understand it. You’ll need to know this information in order to make an informed decision, which I always encourage:

This will be a 25%/75% split, with me doing all the work and the investor keeping 75% of the cash return, and I'll pledge my share to guarantee that the JV partner will not lose money.

This is all secured by free-and-clear ownership of the land, and first cashflow will go to the backer(s) until they’ve at least broken even, and that’s only selling seven lots. So, the downside risk is essentially zero. But, I’m willing to put my money where my mouth is; I won’t see a dime of profit until the land is sold and the investment partners have first been paid.

Micro-farms:

The main quick-flip hidden value on this land is that it is already subdivided into very rare “small denomination farmland,“ plus the big bonus of being located very close a large main population center. Just a few minutes, in fact, from downtown Everett, where many100’s of new condos are selling as just fast as they can be built.

For some value context, just one mile away to the west, commercial land in Everett is selling for $1 million/acre and small suburban house-building lots to the east, if you can find them, start at around $100k. The fastest growing city in the state is Marysville, just a few minutes north. Thanks to the explosion in the Seattle market, the long-awaited local gentrification is finally happening, it’s getting crowded around here and that’s just the beginning of heavy urbanization that is expected to continue for at least the next 20 years.

This rapid urbanization matters because it’s these city folks who are going to want these micro-farm lots for recreational gardening and, the more crowded that the cities become, the stronger will be the demand for a nearby peaceful, private place on which to escape them.

This is farmland in every sense, both zoning and the exceptional “no-irrigation” stone-free soil character. But what’s rare and different is, again, that it is already broken up into relatively tiny small lots, ranging from 7,000’ - 21,000’. These undeveloped lots are over 100 years old and they haven’t made more of them in many decades.

Ordinarily, local farmland cannot be broken up into lots smaller than 10 acres (435,600’). But this farm was subdivided back in 1909, and just recently (2009) the lots were grandfathered back as individually ownable. Prior to 2009, when some little-known new land use codes finalized, and for many years before, they could not be individually sold or owned in less than 10 acre chunks, no matter what. That’s why this group wasn’t broken up long ago.

Again, there is no further subdivision required: Each lot already has its own legal description and you just sell them off.

I’ve already verified this with county Planning and Development Services. You can find the county bulletin on legal lots here: http://snohomishcountywa.gov/DocumentCenter/Home/V... These lots qualify under the conditions at the bottom of the first page. The Formal Plat/Subdivision was created in 1909 and I have a copy of the original filing.

One other significant hidden value here is that each lot is also permitted to hold one occupied off-grid RV from Spring through Fall. $3,000/year isn’t an unreasonable value for this extra RV pad value. So, one other good buyer demographic is retired Snowbirds who want permanent summer quarters to grow food, preserve it and then cart it back to Phoenix.

There are fewer than 100 of these undeveloped “small denomination” “micro-farm” lots in the entire county and I know where they all are. All are groups of lots and there are no “singles,” or other groups, for sale. So, this one property is close to 1/2 of the entire supply. There will never be any more and, with a population over 1 million within a 30 minute drive, 36 recreational agriculture lots isn’t very many to sell.

Buyer profile:

The kind of buyers for these lots are hard core gardeners and/or folks who want an escape from the city. Not quite a “vacation home,“ but in that same direction at a much lower cost. With the ag zoning, farm animals are also permitted, too. If you want to raise chickens, you’re not limited to just four hens and no roosters. A lot of pigeon fanciers have been here at times. This is a classic “little place in the country,” except that its literally right next door to the city, with freeway all the way, and you don‘t have to buy 10 acres.

In a way, these lots are like giant privately-owned p-patch gardens. While Everett only has a couple of dozen individual spots, which never become available, Seattle has about 90 neighborhood p-patch groups with a formal waiting list of 1,800 impatient gardeners, and with a typical wait of 1 - 2 years for a spot to open. The advantage of owning your land, besides a MUCH bigger garden than any p-patch, is that any soil improvements and berry bush/fruit tree plantings etc. that you do, which take years to bear much fruit, remain with the owner.

I know personally that there’s local demand because people regularly stop by asking if there is land for rent, which is not a good holding strategy, BTW, for many reasons.

As for buyers, there are literally no micro-farms for sale around here, and haven't been in local memory, so buyers don't yet know that something like this even exists. I've lived here all my life and I'd never heard of this small land niche, until I started doing deep research into local land use laws. But, the buyers will know as soon as these lots hit the MLS and they'll quickly recognize the advantages that ownership offers. Just 36 lots is a sellout.

Market value:

As for market value, the local farmland broker says that around $25,000 for a sub-half-acre farm lot is reasonable to expect. But, that was 5 years ago and local real estate values have since gone up more than 30% (w/ local RE appreciation currently running @ 12%/year). So, starting off with an asking price of $29,950 isn’t unreasonable. With this fat profit margin, there’s room to maneuver on pricing, depending upon how much demand shows up.

For a market value comparison, I recently did a RedFin search for any kind of existing lots between 6,500’ and 1/2 acre and priced under $50,000. The total return was just five lots in the entire county. One of them, right next to a flood-prone river, was priced at $25,000 and the rest were priced between $37,500 and $49,950. But, none of them were excellent farm soil and all of them are at least 30 minutes further out in the country.

A $25k - $30K selling price will make these lots the cheapest in the county. Factoring in only the 28 large lots, the cost per lot is just $5,700 each. So, even an $11,400 selling price is still a cash doubler.

If you take another look at the plat map at the beginning of this post, you’ll see another 8 tiny lots, of 7,000’ each, along the bottom edge. Partly for simplicity, I’m not factoring them into the profit calculations, but they should be worth at least $12,500 each, or an additional $100k or so.

So, here’s the group investment offer:

In exchange for capitalizing this deal, I’ll do all the work through the final sale, on top of the cash and years of work that I’ve already invested, and the capital partner keeps 75% of the lot selling prices. It’s really just that simple.

Once acquired, the basic plan is to quickly list these lots for sale on the MLS @ $29,950 each, both looking for buyers and to set a market price for a type of land/size that nobody today even knew existed.

First cashflow:

The first lots sold should be the seven large lots in the east block. These will be the easiest lots to “colonize” because each has its own roadway frontage. The rest of the lots are interior and not as easy to get to in the winter months.

But, when these first seven lots sell, assuming a $25,000 lot price, that’s $175,000 back in, more than repaying the $160,000 investment. After that, you’re playing on house money and your original capital can be put back to work on your next deal, while waiting for the rest to sell.

The only way to find out for sure is to buy the land and list it. If only one local county citizen in 1,000 buys one of these east block lots, that’s all it will take to go into the black, with plenty more upside to come.

The next lots to sell will still be the investor’s in the center two blocks, until they’ve all been sold, too. Only then do I get title to my 25%, which is the West block of seven large lots.

Fast Track Sale:

However, there may be a shortcut to selling the whole package at once, to the county government, for top dollar. But, again, this will require first having the lots acquired and listed on the MLS.

The county has the money, already earmarked for things like this that promote tourism. In fact, in the past few years, the county has spent $31 million buying important resource land. Purchasing this one-of-a-kind “gateway” site would certainly be in the best interests of the citizens and future generations. However, when dealing with any government, good sense doesn‘t always carry the day, so there are no guarantees.

But, all things considered, I think that there’s a pretty good shot at this package sale. If it doesn’t work, the original plan of just reselling the lots still works. Both options will be marketed at the same time.

The county should be the owner because the highest and best use for this property is as a “regional gateway.” Essentially, Snohomish county’s version of NY’s Liberty Island. This site is literally the only option for such a gateway installation.

All of the local traffic between the central eastern county, and all the way over Stevens Pass, chokes down to the large raised trestle (Hwy 2) that runs for 1/4 mile along the south edge of the property.

This is a very high-profile site, with 70,000 vehicles per day passing by 40‘ up in the air. As such, it should be “developed” as something that reflects the heart and soul of the community in a welcoming fashion.

I won’t get into all of the details here on the why’s and how‘s to sell to the county, but the right elements are all lined up: The new county executive has been driving past here every day for more than a decade and is the only elected local leader who actually cares about rural lands. He also controls a dedicated “tourism development” fund that comes from a local hotel/motel tax and can only be spent on tourism development projects. And, doing something like this, at no cost to the taxpayers, creates a lot of political capital for the next election, and that’s always the key consideration.

At the moment, there has been $1.8 million in this hotel/motel fund that‘s bee gathering dust for years, with no plans budgeted to use any of it at least through 2018. Normally, this fund is only visited for consideration twice a year, but there are provisions for “emergency” actions when time is tight and the loss from inaction would be big.

The basic idea, again, is get this property quickly listed on the MLS both to establish a market price and, especially, to create an "emergency" to spur the executive and council into quick action. It will be presented as now-or-never, which is the literal truth.

The upside of acting will be a gateway of which we can all be proud, and which also boosts both tourism and local agriculture.

The downside from not acting will be a “chaotic unpermitted RV park eyesore.” This is certainly plausible, but by the time that it becomes apparent, it will be too late to do anything.

That's the selling plan to the county government. But, I can't pitch the county exec with any degree of manufactured urgency without first listing the property on the MLS and that requires owning it.

As I mentioned in the beginning, a part of my profit will also be the county TDR credits that the land holds. It may be years before a market for these ever starts up and nobody knows what the final market price will be. In any event, “clipping off” these credits will have zero impact on the market value of the land. There’s a county process to get these credits certified, which I will do, and it shouldn’t take more than 90 days to complete.

We can still start the sales efforts immediately, but the final closing will have to take place before the lots are broken up. After they’ve been split up, they will no longer qualify for TDR credits, so it’s now-or-never here, too.

I’m certainly open to the idea of a possible split investment with up to four partners, with a minimum $40,000 buy-in, secured by land that’s worth a lot more. At a bare minimum, I can’t think of a single reason why the investors won’t quickly break even and, not long after, at least double their money. The partners can be completely passive or they can be actively involved and, possibly, eventually learn to take over this land investing business, so that I can start semi-retiring.

If you have questions etc., please PM me. 

(Public trolls will be publicly flamed.)

Thanks!

Chris Newman