Tear down and build two in Nashville?

Question

Hey BP Community, need your advice!I own half of a zero-lot-line home in Nashville. My neighbor, who owns the other half of the zero-lot-line home wants to sell. The home is located in a very nice area of Nashville on a great street. They have been tearing down homes on this street for the past 4 years and building homes that range from $700,000 to $1,000,000.Details:-My side of the home cost me $264,000. The other side would cost me $300,000 to purchase. -The home is in a flood zone.My question is two folded.1. Should I purchase the other side of the zero-lot-line in order to tear down the whole home and build 2 brand new homes that could be priced at a minimum of $700,000 individually?2. How risky is building 2 new homes in a flood zone?Any advice will help! Thanks! Matt

Bryan Wallace · Answer

You can use dirt, blocks etc. to raise the structure out of the flood zone. However, States and communities usually have a 'Freeboard' (FB) requirement - this is a safety factor. In Indiana where I am located, there is a FB requirement of 2 ft. If the FEMA 100 year floodplain elevation is at 100', then a structure must be raised to 102' to be 'in compliance' and therefore not subject to floodplain regulations. Go talk to your local community Building Dept and they should be able to help you. You will also have to get a licensed surveyor to do some elevation checks for you to prove to the Building Department that you are truly above the flood zone and have incorporated the Freeboard.

Roger Poulin · Answer

Flood zones are risky, no doubt about that. You will likely take longer to sell, and may have to make concessions. You don't give specifics on the size of the lot or what part of town, so it is hard to give specific advice. Your price range of 700K to 1 mil is pretty broad. Here is my back of an envelope calcs' on putting up 2 premium homes of reasonable size, assuming you use a general contractor (3000 ft * $120/ft * 2 units). Property 564,000Closing 10,000 (blue prints, loan points...)Demo 20,000Construction 720,000Exterior 20,000 (driveway, sidewalk, landscaping..)Holding cost 50,000Total Exp $1,444,000I like to add add a 10% fudge factor for unexpected expense. If you sell the homes for $800K each, and pay RE commission, you may break even. Know what the comps are in that immediate area for new construction, the size, and level of craftsmanship, do not guess.Before you build a pair of beautiful homes, Look it up in the county property maps and turn on topography and flood zones to see how deep in the flood zone you are in. If it is shallow, add a couple extra courses of block to your foundation. If deeper, consider building them so the garage, storage, utilities are on the first level and not much else. Use block or poured forms for the lad bearing walls in the first floor to minimize damage if there is a flood. This type layout is normal at the beach where they have to worry about storm surge. It also adds to the cost significantly.

Matthew Glover · Answer

@Luka MilicevicThanks for your additional insight! I met with a potential builder yesterday. They can do $95/sq. foot plus a $50,000 builder fee. Also, to your point, I am weighing my options and one of them is to build and live in the other side for at least 2 years. This would then avoid capital gains taxes and also would have a nice bit of equity built up.If we move forward, we are definitely going to hire surveyor to look at flood zone. Would love to be able to completely pull out of flood zone according to city and FEMA maps.

Luka Milicevic · Answer

@Matthew Glover What everyone else said, but would like to add 2 more points that I didn't see mentioned.The actual flood zone will only be 100% accurate with a survey and flood cert. The maps you are looking at might not reflect where the flood lines actually end. For example: I was looking at a home on the Nashville parcel viewer and it appeared that the entire structure was completely covered in a flood zone. After the survey, it showed that only the back of the lot was in a flood zone. I would also check with a couple of lenders and ask them if they would require the new homeowners who purchase the houses to carry flood insurance. If the answer is yes, then I personally wouldn't even consider the deal. Flood insurance is expensive. Another thing to consider is that lenders for new construction loans won't fund builds if the structure will be built in a flood zone. At least the lenders i've spoken with.Talking to the numbers: It doesn't seem like a great deal to me personally, BUT that doesn't mean it's not a good deal for you. We all have different goals.Have you thought about maybe building 2, living in one and selling the other? That way you get a really nice house in a desirable neighborhood and can make some money/offset the cost of your new house. Just another angle to consider.

Devan Mcclish · Answer

you're still at 282,000 a pad which is REALLY high. saying you have your realtor license to buffer the profit is trying to make an average deal good. When you find yourself doing that, walk away. If you partner with a builder it could work. I would check other lots that have sold around it. Are other builders paying 282,000 a pad? I seriously doubt it. And you have to look at worst case here, if each house slides by 50,000 in value and / or you go over budget for whatever reason, is it still a good deal to you?

Matthew Glover · Answer

@Devan Mcclish Thank you!Would it make a big enough difference if I told you I have my realtor license? Also I already own the $264,000 side of the home?Lastly, I could potentially partner with the builder I have in mind for this deal. I could see if they would be interested in purchasing the other side ($300,000) and then we go into the deal together. My only risk would then be the $264,000 side. Does that sweeten the deal at all from your perspective??

Devan Mcclish · Answer

@Matthew Glover couple things here:1. Flood zones - The city of nashville (zoning) won't let you pull a building permit in a 100 yr flood plain. They are trying to get rid of structures in flood zones. Now you need to not only check the fema flood map but also the nashville flood map, they look at both. The new diagram shows the other part of the zero lot line in a 500 yr flood plain. You can build in a 500 yr plain but the buyer will need insurance UNLESS you build it out of the flood plain by adding courses of block to the foundation2. The deal itself:Your purchase price combined for both properties would be 564,000 not including closing costs. Sounds like a good deal but it's really average if not bad1,500,000 sale priceless 105,000 for commissions (5%) and closing costs (2%)less 564,000 purchaseless 575,000 to buildI am using 115 a ft which is cheaper for that price tag you will be asking. More than likely you will fall around 120 a ft especially since you have to add more block, are there roof top decks, tall ceilings, higher finishes. and I am using 2500 sf dwellingsless about 20,000 holding (interest payments, insurance, utilities, etc)less 10,000 to close the construction loanstear down 10,000-15,000? Idk the size of the dwellingsoft costs - about 10,000 on this size of a deal between architect, surveyor, site plan, etcDesign fee - 5,000 - 7,000 (if you use a designer, which I would advise at your exit price)Rough Net = 201,000ROI = 16.8%This isn't bad but it's not great either. You want to try to get to 20% projected in case you go over budget, or you do not sell for what you think you're going to sell forIf it were me personally, the deal isn't good enough. You're paying 37% for the land based on what you think you can sell for. That is a pretty risky play. I like to be around 20% for the land but can adjust up 1-5% based on the area, but not 17%. However, to each their own on risk toleranceThe other thing you have to consider is being able to qualify for that big of a loan. If you can't, now you have to bring in a partner and the deal gets even slimmer.

Bryan Wallace · Answer

One thing that concerns me is that you said 'proposed' FEMA map...do you know the timeline that the new FEMA map will become effective? If you build a structure where the red star is located, it is still possible that a lender will require you to purchase flood insurance (it is their discretion). However, without knowing the overall drainage for the entire community / area, I am concerned that the FEMA flood zone is still close to the area with the red star. I would consider raising the structure slightly as discussed above. I work for an engineering firm and help build these types of maps for communities - they are just computer models based on surveying and topographic data. You can still have a flood and take damage to the structure even if it is not in the FEMA '100 year floodplain'.

Matthew Glover · Answer

Thanks @Sean Davidson @Roger Poulin @Bryan WallacePer Roger's suggestion, I researched the FEMA map versus the topography. While doing this I ran across a comparison of the old FEMA map verus new proposed FEMA map. It looks like my home has pretty much been moved out of the flood zone. Am I reading this correctly? If so, this is really good news right? Please see the attached diagram I made. My half of the zero-lot-line home is labeled with a gold star. The side I am thinking about buying is labeled with a "red star" haha. Thanks for your input!

Matthew Glover · Answer

Thank you Sean and Roger! This is very helpful information.To answer a couple of your questions...Yes, the home is an attached zero-lot-line home. It sits on a 20,000 acre lot in Green Hills. A new build (3,000 sq. ft.) on the same street flew off the market at $750,000 last month so I think I could get at least that.However, the information both of you have provided is disheartening. Thought I was on to something! Glad I asked!Quick question, if I check the flood maps closely and see that the home is not very deep in the zone then is there an option to bring additional dirt and rock in to build the lot up so it is above the flood zone? I'm not talking about building the home up on blocks just simply bringing in dirt etc. to increase elevation?