What would you do? Unusual Situation

Question

Hello all.  I'm in contract to purchase a house right across from a large retail center with a home depot, target etc.  Come to find out, they are planning on buying the houses including the one I have under contract for a new development (on the whole street).  Sounds like the city is going to pay appraised value whatever that means to the home owners and if some of the home owners don't want to do it then the city may force them to sell.  The house I'm buying is $90k purchase, 40k rehab and ARV is $180k.  Would you buy something like this in hopes of having the city pay a premium and should I fix it up or wait? Or just pass on it?  They will be making offers within 3 months.  Never dealt with something like this.  Any advice would be appreciated.  Thank you.

John Evan Miller · Answer

I have a background in commercial real estate and worked on lots of deals like this.  You could have a potentially very profitable deal here.

First, do not look at the house. Look at the land. That is where your value lies.  If it is across the street from a large retail center, then the odds are that the property has been rezoned into some form of commercial zoning.  This makes the land much more profitable.  But how much?

This is where you need to contact a commercial appraiser - not a residential one - a commercial appraiser. Have them value the property under its "Highest and Best Use" which is most likely commercial.  Do not be surprised if the house brings down the vacant land value.  Most commercial buyers are going to have to figure in demolition costs and subtract that from the land value.

Okay so you have your appraisal, now you know what the true market value is.  Compare that to the listing price.  Is there a profit margin?  If there is a negative value to the home, could you remove the house, put it on a cheap lot and renovate it for a profit and sell the original land as vacant commercial?  That is where you make your money.

If you think there is some potential, hurry up and put a purchase agreement on the property subject to a satisfactory appraisal, etc.  This will give you time to do your due diligence. Let me know how it works out.

Joel Owens · Answer

Hey Greg,

You can e-mail me the specifics if you want. I did land development with a big developer before I went into apartments and triple net.

The future value will be tied into the highest and best use for the property.It is actually a benefit when banks or a regular seller are holding traditional property and do not realize the potential of the land.

You have to analyze what the best use will be and how long you will have to hold it for that return.Also if the others all go easily ti will move things along but if one or two owners of the assembled land cause problems it can make the process take much,much longer.

Account Closed · Answer

Joel Owens and John  Evan Miller  Thank you for sharing the information about highest and best use and appraisals.  We have a musician friend with no RE interest or experience. He is an only child who is now managing his elderly mother's RE assets, some of which will need to be sold to continue to pay for the mother's care.  The properties include a property in Nor Cal the mother bought 30 years ago. 2 acres with some residential shacks (now vacant) on a main thoroughfare now across the street from a Target and Kmart. Indeed the property has been rezoned in the last few years.  I appreciate the advice to get a commercial appraisal on such a property.

Account Closed · Answer

So who is buying the land across the street and for what kind of development?  The city, or a developer?  If the city is preparing offers for homeowners, then the development plans and approvals must be pretty far along.  Unless I could read and understand what the project is and what the buy out offer would be, I wouldn't even go through with the purchase.

You say they will be paying "appraised value whatever that is." I'd want to know what that is.  If your purchase price is $90K and they use your purchase as a comp, it's unlikely you'll come out ahead.

Rob K. · Answer

Right after the Supreme Court made that ridiculous ruling, Michigan had a ballot proposal that passed by over 80% of the vote to restrict eminent domain. I'm not sure what other states have done.

Account Closed · Answer

I'd increase my offer price and ask for longer terms.    I'd even consider making a larger deposit non-refundable to keep it locked up.   Calculated gamble.

I don't think i'd be willing to close though with so much "up in the air".   If the city appraisal goes poorly for you and they use your sale as a comp, it could cause a big mess.    If the deal somehow never takes shape in the next 90 days or whatever, i'd strongly consider just moving forward so I didn't lose my deposit.

Jason S. · Answer

I'd be very careful and investigate the means by which the properties are being taken. I have heard wonderful stories and big loss stories given the same circumstances.

I am not certain Rob K is correct given the Kelo Supreme Court decision.

Joel Owens · Answer

The question will be how much of that 2 acres of land is USABLE and what it will cost to grade level and develop the land ?

Also where utilities are located and any easements needed to tap in for commercial applications.The traffic count on that side of the road and any cross streets will play a role as well.

The 2 acres her land sits on might not be as valuable as the Kmart and Target side or it might be more valuable to the right corporate tenant.They have varying degrees of criteria and like different things for different reasons.

The more elevations and dips the property has the more it will cost to grade it.Going vertical is mostly the same cost but the grading and other issues to get there is where costs can get expensive.

Demoing a house is very cheap and not that much of a concern for a developer cost wise.What does concern them is the city and county architectural requirements to build there,traffic lights,road ways,required retaining walls do to slope issues,soil composition with drainage issues and or rock formations,rivers and streams with endangered species,historical sites or houses,properties next to funeral homes or graveyards,etc.

Those types of things along with of course demographics are of a big concern to a developer.

If the 2 acres is on the corner or next to it where a pass through from the corner property once built out can be obtained you have good value.The further it gets away from the corner the more it limits who wants to be there and what price will be paid for it.

Greg P. · Answer

Thanks for the responses.  The appraised value would come from a appraiser going to the house and giving a appraisal of the as is condition.

Rob K. · Answer

It depends what state you are in and what the eminent domain laws are. In Michigan, you can not take property away from someone for a private development.

If it is for the "public good" (freeway, bridge, etc), the state can force you to sell and must pay you 125% of appraised value.

What would you do? Unusual Situation

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