Rehabbing land INSTEAD of houses??

Question

Hi everyone!  I'm new to bigger pockets but I'm not new to real estate investing.  For the past 4 years I've been focused full-time on the niche of pre-existing non-conforming land parcels and/or land that is considered undevelopable.

Basically, I focus on rehabbing lots instead of rehabbing houses and I have virtually no competition up here in the New England Area.

Is anyone else here doing this?  If so, I'd love to hear about your experiences!

Thanks in advance!

John

John Marchefka · Answer

Thanks Joe!  It's pretty cool finding these "diamonds" in the rough...

There are two main paths to profit that I follow.  One being a wholesale model, the other I call the profit maximizer.

The real work is locating these properties and I've learned the best way to do this is to work in towns/areas that have online GIS systems that map; topography, wetlands, soils, etc. and assessors data available for download either from local sources or listsource.com.  Then I sit down with a spreadsheet and analyze all parcels for an area and generate a list of target properties right from my computer.  Then I mail a very simple handwritten letter and usually get north of a 30% response rate.

As you astutely ask "how much upfront?".  I've learned that this is the linchpin of success in this niche.  You need to minimize upfront expenses because 100% of your investment is at risk and lost if the lot is not buildable.

My favorite strategy is to locate the property and tie it up for usually no more than $100 for a period of 8-12 months, analyze it myself and if I believe it to have a chance at being buildable I create a permitting plan and market the property to other investors/builders willing to take on the permitting risk.  Sellers rarely mind the low deposit and extended closing period due to the nature of the property, or at least they can be made aware of the fact that their lot has issues that will take MY time and MY money to solve and then they come around.

My terms on the flip are: Minimum 10K spread between purchase and flip value.  1-2K deposit upfront to hold the property for 7 days then the deposit becomes non-refundable after the 7th day and the buyer has the same amount of time that I originally negotiated with seller typically 8-12 months(its a purchase contract but because of contingencies its essentially an option).  So on a flip deal I have only $100 plus my time and the associated marketing costs.  This way I get paid upfront for my work 1-2k plus I know I have another payday at some point in the future if the deal closes.

The costs to fully develop a property and sell for near retail usually involves the costs below and takes 2-6 months or more in some cases, but the profits can be huge if you're working in markets where land costs are high:

• Title 200-400
• Legal 500-2000 depending on zoning issues
• If wetlands are present AND its a buffer zone project: 2000-5000
• Perc & septic design if needed 1500-3000
• Treescaping & cleanup for retail sale 500-1500
• Selling costs of 6%

I tend to stay clear of properties that need more than the above expense items.  Ironically some of the best deals come from properties that once failed a perc test and are considered unbuildable for that reason alone.  A soils evaluator I know says that "perc tests are 90% people and 10% science" I've found this to be true.

John

Chris Newman · Answer

Hi John,

I like playing with raw land, too, in Snohomish county, WA, just north of Seattle.

In my case, my specialty is flipping the transferable residential development rights from resource land such as farm and undeveloped rural-residential multi-acre parcels. As far as I can tell, I'm the only REI in this specific niche within the county. I already have land holdings near Everett that will certify out at 304 salable density bonus credits.

To play this game, I get certified and then "clip off" the transferable development rights for sale to urban developers in the county, who can cash them in for an increase in dwelling unit density from an original 22 units/acre to 58 units, and building heights from 45' to 75'. Developers will not be able to get these bonus building permits without providing such TDR credits.  This TDR is a new program that has been in development for 30 years and should ignite into an active free market for credits this coming July 15. The Snohomish county program details can be found at http://snohomishcountywa.gov/DocumentCenter/Home/V...

My niche is the small amount of qualified Sending land that is also priced well below the value of the new credits that can be clipped off and resold for an arbitrage profit. Some parcels are actually worth as much or more after the credits are clipped as before. Basically, these are lands that technically qualify as Sending sites, but that have issues such that nobody really wants to build there. Water issues are the most common.

But, the profit margins look to be eye-popping, sometimes on the order of 10X or better. Typically, as I'm searching for further acquisitions, I don't even consider deals that won't return at least a fast 300%, with no further CapEx, just by clipping-and-flipping. Right now, I'm drowning in much better opportunities and by the time I wrap those up, I'll be retiring on some riverfront property that I like.

The neat thing with TDR is that, after you've sold off the residential development rights, you still own the land and get to use it in all the same ways as before, except that you can no longer build houses on it. There are a variety of ways to deal with this "residual" acreage. Share cropping with a retail farm stand/farmer's market is one, if it's the right kind of land in the right location.

But, if steady long term cashflow is a goal, with no management, one can always sell farm land on a low down private contract. With no structures, there's little to damage and it's not like a defaulting tenant can steal it.

The highest value post-TDR use, though, is to go further and create "ecological mitigation" credits and then sell those, too. I have heard, but haven't confirmed, that these credits can sell for up to $100k per acre in places like nearby Seattle. Since downtown development land goes for $30 million/acre, $100k imposed by the progressive city government for a 40 story building permit is a minor annoyance. But, if the $100k is coming in from a $3,000 acre from which has already been harvested $20,000 in TDR credits, that's not a bad ROI.

For the truly ambitious, the right site could then be further developed (outsourced) as a "green cemetery," which I refer to as "selling $500 post holes" at a few thousand per acre. I just missed out on a close-in 50 acre site for $250k that would have done all of these profit centers. Arghh! :-)

BTW, I'm actively looking for working partners with some cash to put in for the short to mid-term. There's more low-hanging fruit here than I'll ever need, but hitting the ground running to pick it before land prices start reflecting the new higher values requires more capital than I have and I don't do debt.

There are two main companies in the US who do the work of creating and selling eco-mitigation credits on a joint venture basis, separated by the Mississippi river. The West coast one, with full details, is at http://www.wildlandsinc.com/ and they're actively looking for more project land. I don't recall the name of the East coast company (which used to be in partnership with Wildlands), but it's somewhere in Florida.

I see that MA also has it's own TDR program. The starting point for the info is http://www.mass.gov/envir/smart_growth_toolkit/pag... I haven't read this page to see what's offered as conservation incentives, and then compared that against your local market prices for "junk" land. If you follow up, please share what you learn here. There are about 200 TDR programs across the US, and every one is different.

You might also look up "eco-mitigation" credits for MA. I wouldn't be surprised if Boston required this type of "remote eco-mitigation."

best regards,

Chris

Chris Newman · Answer

Hi John,

Glad to help. Thanks for the colleague request.

The concept of TDR is fairly simple and straightforward. But, find opportunities to make a happy buck off it can get complex. The most important thing is to know the details of your local program like the back of your hand, then look for loopholes.

Just to give you and the other BP'ers a deeper handle on why some TDR programs work and some don't, I just uploaded an excellent study on the topic to my FilePlace at http://www.biggerpockets.com/files/user/ChrisNewma...

These are the universal elements and actually might not be a bad place to start. I can't help but feel that some of the failed programs might offer even better opportunities than the successful ones.

BTW, the easiest way to find out about TDR programs in your state is to Google "TDR" and "(your state name)". And, if anyone wants to follow this, add TDR to your keyword list. If there's any interest, I'll keep sharing and discussing.

C

John Marchefka · Answer

Hey John,

Awesome to hear of yours and your dad's success with land!

I read somewhere years ago that simply entitling raw land (permitting) it for a use increases its value by 3-5x.  My grandfather used this truth to subdivide & sell most of his farmland in rural MA and sustain his family comfortably over the years.  Mostly frontage or ANR lots.

In fact the developers formula that I use to come up with a max offer that was taught to me by a very successful land developer is .4x(Sellout Market Value - Development & Selling Costs) Basically, it's 40 cents on the finished dollar less costs.  When this is applied to frontage lot situations your development costs are minimal because subdivision approval is NOT required.  It's not an "actual" subdivision because a road exists through the frontage.  This is a very valid business model and costs are low.  You will need to cover perc tests if needed for each lot and then hire a surveyor to draft the ANR plan for submission to the town, just treat wetlands as sacred Indian burial ground - stay away from them and your costs will be very low.

And because approval is not required it usually happens the first town meeting and you now have the right to market and sell individual lots.  All this can happen within 30-60 days unless your town has a specific perc season and you don't have sewer access.   And all of this happens during the contract period reducing purchasing risk.

Great strategy especially when practiced just on the outskirts of a major metro area in a country setting(a weekend getaway property that can be marketed to city folk).  Like within an hour of Boston, MA for example.

I've never gone through the zoning change process that you mention although I've heard it can be very profitable.

What I was talking about in my original post is actually something very different.  I target pre-existing, non-conforming lots that town assessors have deemed unbuildable either through a land use code or a very low tax assessment.  I then sift through these properties and use my development skills to identify properties that have the potential to be developable for residential purposes.  Our 4th Amendment Rights as landowners protect us against regulatory takings and that is why lots that were created prior to zoning or zoning changes are typically grandfathered.  Surprisingly most zoning in the US didn't come into effect until the 1950's and most lots in developed areas were created before this.  I find these properties in areas where single lot values exceed 50K.  Typical assessment values for these properties are 1/10 or less of buildable lot values making the negotiations very easy.  I then flip for a quick profit to a local developer/builder who is willing to work with the town to develop the lot or if its a home run I invest the time & money to permit them personally and sell for 10% under retail.  The downside, if trying to maximize the profits, is that it can take months to solve zoning and land use issues which is required to sell at a retail value.  I typically prefer to find and vet the deal and pass it off to local.  This allows me to work somewhat remotely in areas where land values are high.  I can then focus on the best markets and not get hung up permitting in non-local areas.

Thanks!

John Hyatt · Answer

Hi John,

When you say rehabbing land, I am assuming you mean re-zoning and selling the vision to an investor or buying land and subdividing it? if so, then yes, my dad has done several of these deals and I used to accompany him. I love the idea and its really quite nice because the costs are minimal and upside is huge. Some of the easiest deals my dad did were taking a large piece of land and subdividing it into smaller pieces and then selling them off individually. He also used to take land that wasn’t valuable as is and get it re-zoned for residential/commercial, draw up blueprints and sell the vision.

-John

Account Closed · Answer

my older brother "rehabs" lots down in Peru. Really cheap to aquire and almost doubles in value after he uses the bobcat to level it out.... There is absolutely no buy and hold market in this though seeing as the jungle takes it back within 6 months if you don't do anything with it.

Joe Fairless · Answer

@John Marchefka very cool. I love that you're focused on a niche that isn't talked about too much. How much upfront costs are typically involved in a project before you know if it's a viable project to pursue?

John Marchefka · Answer

Interesting stuff Chris!  I'm going to have take a little time to wrap my head around it but if I'm understanding things correctly this is a very interesting opportunity.  Let me digest and I'll comment further...Thanks for the detailed post!  -J

John Marchefka · Answer

Jeff Morelock, that's an interesting strategy!  Like you said, probably not so easy here in MA but you did give me an idea about alternative uses...

I typically focus on properties that I can make buildable by solving zoning issues, access issues or minor wetland issues.  When I discover I can't build a house on it, I usually move on to the next deal without thinking about an alternative use but I like your creativity and will start thinking about alternative uses!

Rehabbing land INSTEAD of houses??

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