Take unsolicited offer or continue as planned?

Question

Hey everyone,

I started my business about 3 months ago and have been fortunate enough to hit the ground running.  Recently closed on a lot in Coronado Island, which is in San Diego.  The lot has two 70+ year old cottages on it, and our plan is to demo and build up to 5 condos or 4 single family homes for sale.  Our pro forma is pretty tight after having spoken with multiple architects, general contractors, and agents on the island.  It would take about 18 months from now to get the product to market, with about a 25% IRR.  Today we just got an unsolicited offer from another development group that would give us an 11% cash return on our investment.

It makes me wonder whether an 11% return days after closing makes more sense than holding onto this for 18 months.  The risk involved in trying to unload multiple $1MM plus properties in a business cycle that seems to be coming to an end does make me think twice now that we have this offer.

I would appreciate any thoughts or advice on this!

Daniel Frye · Answer

Sarah D. that would be a great option.  However the offer was from a religious organization that wants to expand their footprint in that area of Coronado with a worship center of their own.

Jessica Thompson · Answer

I would take the money and run :)

Ed Evans · Answer

I'm building 2 townhouse units at 9th & G.

Keep in mind R3 zoning has recently changed:

- roof decks now require "design review" - i.e. extra timeline in approval process and neighbors have a say in design.

- What was built at 7th & G  can't exactly be built now as the FAR in the zone has been reduced.

Ed Evans · Answer

I'm building 2 units at 9th & G right now , designed by Christian Rice.

Keep in mind R3 zoning has recently changed:

- roof decks now require "design review" - i.e. extra timeline in approval process and neighbors have a say in design.

- What was built at 7th & G  can't exactly be built now as the FAR in the zone has been reduced.

Daniel Frye · Answer

@Ed Evans I should have mentioned that the project at 7th & G will be similar in layout to what we will do, with rooftop decks etc.

Daniel Frye · Answer

@Ed Evans right now attached.  We haven't signed the contract with the architect yet so we haven't developed a design yet. There is a Christian Rice designed project at 7th & G (our architect most likely.) It is zoned for up to five units but given the parking requirements we would be able to accommodate parking for four units without going underground. Out of curiosity, where is your town home project?

Ed Evans · Answer

I live here in Coronado and know the local market rather well. I am about 2 months to completion on a  townhouse project and about to begin another. I know the property you are talking about - corner of 9th and C.  Are you considering attached or detached units?

Sarah D. · Answer

@Daniel Frye Are they interested in partnering with you?  You get some cash up front, and have someone to share risk with/learn from?

Daniel Frye · Answer

@Kevin Siedlecki The purchase was $2.15MM so fortunately its not small potatoes.  We have an architect, general contractor, designer, and various engineering consultants in place ready to go.  I actually was getting ready to sign the contract with the architect when I got this offer so I have held off.

@Chris Gilbert We purchased this deal off market in a very one off kind of scenario.  Deals of this kind are very hard to find considering the competition for them in San Diego. Very limited supply of developable land.

@Andrew Johnson This is the key for me, it is difficult to tell what the demand for housing of this type will be.  I admit I am more pessimistic than most about the economy as a whole, but given the different demand dynamics of Coronado I think that it may perform slightly differently than other parts of San Diego.  The key issue here is that while this immediate payout would be very very nice, taking this project to completion would allow us to turn around and fund another project of this sort with the house's money so to speak.

@Jeff Rabinowitz There will almost certainly be cost overruns even though we will do our best to make the important design decisions at the start rather than change things and interrupt the critical path of this project.  So unless these homes just completely do not sell (if thats the case then there will be some bigger issues with our overall business plan and the economy as a whole) then we will be making considerably more money than this payout.

Overall I appreciate the feedback from all of you. Bigger Pockets has been a fantastic place to learn about REI.  Its one of the key things that helped me form my business and create my plan.

Jeff Rabinowitz · Answer

Fast money is almost always better than slow money. Do you know what the market will be in 18 months? Do you know where interest rates will be?  Might you encounter cost overruns and delays? There is always a chance that you might lose money if your project runs over budget, the market softens, or you encounter some unknown issues? There is no chance you will lose money if you take the offer before you. If you still wish to construct condos search for another site. You will have 11% more money than you had before. Of course, you can try to negotiate for a higher profit or try marketing your lot to other buyers but that could cause the current buyer to withdraw their offer.