Strategies for selling my LR1 lot for development

[David Lukas]

So, we bought our dream home in north Ballard (Whittier Heights) in 2014. However, we were upzoned to LR1 last year, into the Crown Hill Urban Village, along with the adjacent block. Our area of Whittier Heights predominantly has lots around ~6,500sf, which is among the largest you tend to see in Ballard. However, the houses, for the most part, are large and fixed-up, so I did not expect that developers could afford to entice many of these folks to sell.

That, it turns out, was naive. We just learned that 6 houses on the adjacent block are in the process of being sold to a developer, who will put town homes (37 units total) on those 6 lots. The lots sold for $170/sf of lot area. Now many of the families on our block (including us) are considering pursuing a similar deal, mainly in order to avoid being surrounded by 30ft-high HardiePanel boxes 5ft from their property lines.

As we explore this possibility, some of the questions I have are:

1) How much of a premium can I really expect from a package deal vs. selling individually? Particularly given that the package deal means a longer close, and then likely competing for a new home in this same neighborhood with some of my current neighbors.

2) If we hold off on selling for a couple years until the nearby development actually starts to impact our quality of life, how (if at all) does that shift our bargaining leverage? Is there a sweet spot of some kind whereby we want to sell while others are selling, after which our lots somehow becomes less valuable relative to the market? Or would we be better off not throwing in alongside the sudden burst of supply on our street?

3) How can I find the most active multifamily developers in my area? I can find a thousand websites, but many of them seem to be inactive.

4) Any other advice on strategies for pitting developers against one another to get the highest price?

Thanks in advance!

[Brian Hughes]

I'm no expert having gone through this once,  but I went through a similar experience recently with my duplex (1 unit was owner occ) in georgetown.    It was zoned L2 the entire 10 years I had it, but for the first few years (recovering from the great recession) the neighborhood was stable.  Starting in about 2014 one particular developer "discovered" the neighborhood and systematically bought up and ended up developing about half the lots over the next few years.   At first it was the couple remaining vacant lots,  then the small run down homes,  and then a few decent homes started to sell out to them.   

I decided to sell once two the the 5 adjacent lots to mine had been redeveloped (2 either side, 3 across alley),  and a third had been purchased by a developer.   The remaining two neighbor houses were both smaller and somewhat tired.   Other reasons I chose to sell were to start unwinding my rental portfolio in seattle (I will reinvest someplace south of seattle,  once I know what the legislature tries to do WRT rent control this coming session), that location was getting increasing negative impact from RV camping and property crime, and because while structurally sound and in decent condition,  it was 120 years old and would have required a lot of updates if I wanted to keep it another 10 years as a full on rental.

I had been collecting all the "we buy houses and land" flyers I had been receiving and keeping a spreadsheet.   I also did some research and figured out what all the neighboring lots had sold for and to whom.   There was quite a bit of variability,  all 5000sf level L2 lots and some had sold for 300K and the top sale was $740K.   the highest one happened to be the property right across the alley from mine.   Of course there was a time component too and some of the lower sales were much earlier on. 

At that point I approached several of the authors of those "we buy" letters, and as expected most of them while offering "off market" transactions were brokers working for clients behind the scenes. While they claimed no commission, of course the buyers were paying it and just deducting it from their offer. A lot of these parties also wanted to do assignment deals, e.g. they were wholesaling, birddogging or whatever you call it. Most of them also wanted extended closings (up to a year) I was ok with about 6 months since I needed that time to make my new SFR home habitable before moving there.

I also did enough digging to come up with the mailing address for the LLC that had bought the property across from mine at $740K. I wrote them a snail mail letter and sent it to the address of some house in bellevue with a description of the property, general terms of sale, etc same as I was sending to everybody. In a couple weeks they contacted me and we eventually reached an agreement on price - $700K. I took a bit less than they had paid for the property across teh alley even though mine was a much better property - fully functional and habitable - the one across the alley was not such - but by that point the market on townhouses had started to cool. I didn't want to get greedy and it was a good move I think. The closing period was 8 months to coincide with the tenant's lease ending, and the agreed EM was $50K, nonrefundable. Half was released to me after signed around PSA, thought I did not touch it til the sale closed.

The next best offer I had from the horde of brokers and middlemen was $650K,  most were around $600K.   Lowest was $500K.   I did have one developer who I met with in person who wanted me to 'partner' in the redevelopment - basically by letting him build on the property while I still owned it,  then I would be compensated with a "percentage of the profit".  He seemed decent enough, but we stopped talking after I said "Percentage of sale price" instead,  and I voiced my concern about the point in the economic cycle we are in and 2-3 years til payoff.

The terms of sale I offered were basically - best offer up front - no inspections other than what can be seen by walking interior and exterior property - no "and/or assigns" on offer (no middleman, assignments, etc) - as is no repairs - tenant renewed with month to month agreement before closing - substantial nonrefundable earnest money if extended closing period - no owner financing - buyer pays all non government mandated fees/commissions.    I also made it clear the sale was not a distress sale, and while dated the home was fully functional and habitable and occupied to try and discourage lowballers.   I did say in my offering that I was contacting multiple interested parties.   Some of them were put off by that,  but those are the guys most likely to be looking to get a below market price.   So if they make a fuss about it, let them walk.

I did try to get my adjacent neighbor to sell at the same time as me,  since with a 10000sf lot an additional townhouse unit or two could have been crammed in due to ability to use the space between lots otherwise needing to be set aside for setbacks, and theoretically we both could have gotten a bit more.   However,  the neighbor was not ready to sell yet.   I didn't want to wait another couple of years so I went ahead on my own.

Once I got to an agreed price and basic terms with the buyer,   I got a good recommendation for a RE attorney and worked with him to review the written terms and negotiate details with the buyer.   It was worth the $1200 or so it cost me.

I guess if I were you and I decided I was committed to selling:

1)  I'd work with neighbors and coordinate selling adjacent properties together if at all possible.   Either negotiate together or communicate openly amongst yourselves.
2)  Talk with people who have already sold (sounds like you have) and make sure you know what the going terms are.  Don't take less unless there is a good reason, like unbuildable portion of your lot, etc.
3)  Find an attorney.
4)  Target developers who have a pipeline of projects nearby already.   Talk to people working at the sites - especially if they are NOT wearing a hardhat and swinging the hammers - and you can probably find somebody in charge pretty fast.    Also you can find the investors by going to the open houses on completed units and talking to the agents.   You can also do this with other townhouses just built - go in and ask the agent who the developer is and their info.   They will surely share.    This might also give you some control on the style of building that gets constructed to replace your house since different developers use different plans, etc.
5)  Make it clear to interested parties you are not doing a distress sale and the home is in good condition and price needs to reflect that.
5.5)  Try to avoid middlemen.   That means no brokers,  and nobody who wants to wholesale or do an assignment.   If their offer says "and/or assigns" on the buyer's name, thats what they want to do. It means they want to turn around and assign the sale to somebody else for a fee.   
6)  Try to avoid being the last one to sell out.   If there is a lot of redevelopment activity going on now,  now is probably a good time to sell.  
7)  Don't agree to an extended closing period without a substantial EM (say about 1% of sale price per month) nonrefundable and paid up front if possible.   Note that just because the agreement says nonrefundable doesn't mean you won't have to sue to get it depending on circumstances.  Don't touch it til closing.
   
Again, I'm no expert,  but hope this helps.