Using Speculation in Contemplating a Deal

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Using Speculation in Contemplating a Deal

Sherry Lewis
Rehabber · Fort Walton Beach, FL · Member since 2011 · 240 posts · 48 votes

I have located a possible deal that could be the "diamond in the ruff" scenario but it is partially based on speculation. How dangerous is it to proceed and what are the chances of finding a money partner that is willing to go for it when speculation is involved?

A basic idea of the deal. I found an area where the owner of multiple properties passed away and I can get a good deal on multiple lots making up 2+ blocks of a neighborhood. There are also a few other houses in the area for sale. Right now this area would be considered a C market i.e. houses run down, older home owners and blue collar family area. This is not a "ghetto" area, just neglected. There is a school opening next year within walking distance of these properties as well as 80,000 troops being transferred into the area. The houses that are on some of the lots just need to be torn down, no value in fixing them up, and an entire block is vacant land ready to be built on, but the way the properties connect together, could make an excellent townhouse or modular (not manufactured) scenario. The rents in the area are 650-800 per month. The school will be undergraduate and masters degree programs.

My thoughts, although the neighborhood currently is a C market, because a large portion of the area is obtainable it will bring the value up for the entire neighborhood making it a much desired area especially considering the upcoming demand for housing.

I would like to know what people think of the idea, either good or bad and if there is anyone out there that might be interested in either partnering on a deal or paying a fee for all the deal and I would pass all research etc. to them.

Anxious to see what everyone has to say. I take the opinions on this site like gold! So here I am waiting for my gold rush!

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Steve L.
Investor · Rancho Cucamonga, CA · Member since 2008 · 1k+ posts · 684 votes
14y

Sherry, I think pursuing these types of deals is a waste of energy in this environment.

Unless it is highly sought out area (AKA San Francisco Bay) very few building projects can profitably pencil-out even if you get the land for almost free.

By the time you acquire the properties, demo the land and get permits approved it will be a multi-year process and probably not for a beginner.

Pursue the "low hanging fruit" for right now: buying a property for less than replacement cost, repositioning it for a resale profit or cash-flow.

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  • Shawnn Lynch
    Rehabber · Jackson, TN · Member since 2011 · 12 posts · 1 vote
    14y

    Refreshing approach, as all real estate ventures are somewhat speculatory I think you are on to something here. I can only assume with the projected growth and development in the area in the months and years to come that are anticipated the local official have done a demographic and feasabilty study on the demand that will be put on the area, the economic impact, tax affect,and municipal burden and the projections for this have been done. I would suggest you speak with those governing members in the area at City Hall and do some elbow rubbing for the skinny, who knows.. they may have a complete report they're willing to share in supporting your speculation as well as encourage you to help in the local economic development. I think you will do well to pursue this venture. I will follow along. Best of luck

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  • Sherry Lewis
    OP
    Rehabber · Fort Walton Beach, FL · Member since 2011 · 240 posts · 48 votes
    14y

    Shawnn,

    Thanks so much for your input. I do know that within 2 years of the school opening there are supposed to be 2 other major industries locating offices in that area due to the college.

    I see you are from Mandeville! I am here from New Orleans post Katrina! My first rehab project was in NOLA lol. Small world.

    I am hoping to pursue this, but I definitely need to find a money partner for the project. I simply do not have the equity to fund a project of this size. I am hopeful though that someone else see and believes in my vision of what it can be.

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  • Steve L.
    Investor · Rancho Cucamonga, CA · Member since 2008 · 1k+ posts · 684 votes
    14y

    Sherry, I think pursuing these types of deals is a waste of energy in this environment.

    Unless it is highly sought out area (AKA San Francisco Bay) very few building projects can profitably pencil-out even if you get the land for almost free.

    By the time you acquire the properties, demo the land and get permits approved it will be a multi-year process and probably not for a beginner.

    Pursue the "low hanging fruit" for right now: buying a property for less than replacement cost, repositioning it for a resale profit or cash-flow.

    1Reply
  • Brian LevredgePro Member
    Investor · Chattanooga, TN · Member since 2009 · 1k+ posts · 903 votes
    14y

    If it's currently a C area, why do the homes need to be torn down? Unless the market is booming already, it's cheaper to buy existing inventory than it is to build new. You would also be giving everyone else more of an equity lift than you would yourself by building new as well. If you are looking to make the market, that's fine, but the payoff won't come for quite awhile.

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  • Scott Hubbard
    Rehabber · Tucson, AZ · Member since 2008 · 1k+ posts · 802 votes
    14y
    Originally posted by Sherry Lewis:
    I have located a possible deal that could be the "diamond in the ruff" scenario but it is partially based on speculation. How dangerous is it to proceed and what are the chances of finding a money partner that is willing to go for it when speculation is involved?

    My opinion is that you will likely have a difficult time convincing a private money investor to put a dime based purely on speculation. At the very least, your going to need to some financial projections based on both current and proforma data. And, I do not think putting your name on something speculative is a good feather in your cap.

    However, I would support this project should this area need small multi-unit s. The return on investment for MU's are higher than for single and this might give you the edge necessary to get financial interest.

    This is what I would do if I were in your shoes.
    1. Look to vacancy rates in this area to see how much available housing now exists.
    2. If rates are low, then see if there is any data on how many full-time jobs are expected to be created by the build out of the school.
    3. Look to see if there are any multiple-units projects in the pipeline and if there are any empty MU lots available.
    4. Look to the current zoning and see if you can build small multi-units. You may need a variance which is why you need to look to see if there are any proposed MU projects or MU lots available. If not, then you will have a better shot at convincing the zoning commission and property owners that this area will need low-cost housing to support its growth.
    5. Once you have done your due diligence, look for a developer to see if they will get behind your project. With a developer, you stand a much better chance of getting the backing.

    Of course, before you commit all this time and energy, you should have these properties under contract. I would also use an option contract as you may find an opportunity to wholesale this to a developer right off the bat. unless you have development experience and/or financial backing, your probably going to need to assign this or take a minority stake.

    When your looking for private capital, most will not wait years to see a return. If you can put this under contract with a lengthy option, you might be able to shorten the realization period by a year or more.

    Good Luck!

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  • Sherry Lewis
    OP
    Rehabber · Fort Walton Beach, FL · Member since 2011 · 240 posts · 48 votes
    14y

    Thank you all very much for your replies. As I said I kind of stumbled on this. I am more asking whether its something that is worthwhile and I believe I have a pretty good answer now. I have done quite a bit of due diligence on the area and in my scenario I was looking at MFR. Either Townhouse or Quads. I already talked to the zoning department. The area is SFR and they feel MFR would have a good chance of getting approved. My concept was to offer to buy the properties on the contingency that they applied for zoning change and received it before closing is made. I wanted to share the concept and put someone with more experience in the drivers seat. I am fine with a fair bird dog fee. I have comps for the area in both sales and rental as well as info on what is to take place over the next 2 years. I am not foolish enough to think I can go from flipping one rehab and have a siding business to building to this level; having said that, I have lots of research time on my hands so when I came across this, I thought it would be worth sharing with my colleagues on BP. Someone with more experience might be able to shine the diamond up and find it wasn't just crystal lol... Sorry the female in me went to gem analogies.

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  • Shawnn Lynch
    Rehabber · Jackson, TN · Member since 2011 · 12 posts · 1 vote
    14y

    I have addtional help to offer. As I suspected you have a firm grasp on what it is your looking at. I am new here and do not know how to make you a colleague.A helpful lead.

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