Finding the Highest and Best Use of a Property

An intriguing property was recently listed for sale on the MLS in Nashville, TN, just a tenth of a mile from the popular Riverside Village in the Inglewood neighborhood. The house, built in 1930, is over 2400 square feet and has charming historic character, but the land (.8 acres) at 1424 McGavock Pike, may offer more value. Priced at $299,900, this property provides several profitable investment strategies, but raises several questions as well:

Existing house vs. teardown?

Current zoning vs. zoning change?

Residential vs. commercial?

Existing lot vs. re-subdivision into smaller parcels?

What is the highest and best use of this property?

1424 McGavock Pike

Steady population growth in Nashville has triggered escalating property values in the inner-ring neighborhoods. Demand is currently higher than supply, so investors and prospective homeowners alike are both facing fierce competition for some of the same properties. Within the investor class, there are subsets who have different investment goals: the high-density residential new construction builder, the single family home builder, the fix and flip renovator, the commercial developer, the buy/hold/rent landlord, and more. Since 2013 any good deal listed on the MLS seems to get multiple offers and frequently exceeds the sales price. Due to this increased competition since 2013, I have tried to find investment properties off the market.

One of my strategies in finding properties off of the MLS is a simple handwritten letter inquiring if the owners have any interest in selling. Whenever I am driving through investable neighborhoods I stay alert to any potential properties. That is how I first became acquainted with 1424 McGavock Pike. With curtains covering every square inch of window space, and a tidy yard void of fresh landscaping and kids’ toys, it appeared to belong to elderly owners. A quick online search of the local tax records confirmed my suspicions. The last sale date was in 1960. I sent a letter.

The owners never responded to my offer to buy their house in as-is condition, with a quick cash, no hassles closing. But my instincts were right, as they were close to being ready to sell. I had already thought through many of the possibilities with this property when I mailed the letter six months ago. How would I proceed if the owners obliged to selling it to me?

Conventional real estate investment advice suggests that one needs to have a clear exit strategy for every property purchased. While that advice has some wisdom to it (especially for the beginning investor), a rapidly appreciating real estate market offers several options for an exit strategy so you can purchase first and figure out the plan later. However, in order to be profitable, the property must be purchased at a discount of fair market value. With equity in hand, one can safely choose from the different exit plans, finding profit down each path. But one must be sure of the numbers and know that there is true value there.

The current zoning for 1424 McGavock Pike is RS10, which means that it is zoned for residential single-family homes, one house per 10,000 square foot lot. An acre has 43,560 square feet, so this equals a rate of roughly one house per quarter acre. The McGavock property is .8 acres, with dimensions of 179’ by 195’. It is nearly a square, sitting on the corner with a quiet side street Geneiva Drive. The total square footage of the lot is 34,905, which would afford three lots if the house was torn down and the land re-subdivided into three equal smaller parcels. That plan complies with the current zoning of RS10, and would easily be approved by the Metro Planning Department since all requirements for new lot size are met. However, at a cost of nearly $100,000 per lot, there isn’t much, if any profit to be made by then selling the three lots to a builder/developer, as that is about the top price each lot could bring on the open market.

I sold two different building lots on nice streets in Inglewood that I re-subdivided. One closed in November, 2013 for $75,000, and the other closed in February, 2014 for $70,000. I profited nicely on both of those deals because they had existing houses situated to the side of the center of the lots. In each instance I was able to partition the lot in half (or close to half), keep the existing house (sold separately), and created a new vacant building lot. Land prices have gone up since then (yes, it happens in only eight months), but anything over $100k seems like a stretch. The existing house on the McGavock property is more or less in the center of the lot, but it isn’t clear that three lots can be made without bulldozing the house. It seems as though positioning one of the three facing Geneiva Drive would help, but that may create complications with the side and rear setbacks. In other words, it will be trickier to get approval through Metro Planning without scraping the structure.

But the house itself has real value. At 2446 square feet, it is constructed of brick, has four bedrooms, two bathrooms, and hardwood flooring. My approach would be to renovate the house and work with Metro Planning to create two more building lots through re-subdivision. If they won’t approve two, they would approve one, and that is pure profit when sold to a builder/developer. Of course, the option is there to build and sell the new house (or two) instead of selling it. In this plan, the numbers have to work for the renovation of the house as well. They do.

A fully beautiful 1130 McChesney (which I owned and sold to the investors who renovated it), is on the market for $433,900. It is 2529 square feet and has four bedrooms and three bathrooms. The McChesney house is comparable to what the McGavock house could be, proving there is quite a bit of room numbers-wise between the purchase price of $300k and the renovated sales price of $430k.

The house carries the deal and I walk away with easy profit from the one or two extra building lots that I created by re-subdividing. Yes there are survey expenses, application fees, and holding costs, but this strategy seems the least risky, and probably the one I would take. The two newly created lots would fetch between $160,000 -$200,000 total.

1130 McChesney Ave.

If one is willing to go through the process, it could be incredibly profitable to try rezoning 1424 McGavock into a different classification. It is only six lots away (approximately 400’) from the MUL-A zoned Riverside Village, a cluster of restaurants and small businesses. MUL-A stands for Mixed Use Limited, “intended for a moderate intensity mixture of residential, retail, and office uses”. The “A” in MUL-A stands for an alternative zoning district, “which requires building placement and bulk standards designed to create walkable neighborhoods”.

Changing from RS10 to MUL-A is quite a jump in zoning classification. Perhaps a higher density single family or multi-family use would be more attainable. Regardless, the rezoning process is quite lengthy, with a minimum of nine steps that involve the councilmember, the planning department, the planning commission, three readings at the metro council, and the mayor signing a bill. During all of that, holding costs are accruing, and there are no guarantees whatsoever that any zoning change will be approved. If denied, it is right back to square one.

It is entirely possible that an owner occupant will fall in love with 1424 McGavock Pike and purchase it to live in. The large level lot and close proximity to dining options are two features that are not easy to find, and are highly valued by residential shoppers. The homeowner can live in the house while updating it to his or her taste. It is a manageable renovation, not a complete gut-it-to-the-studs overhaul.

1424 McGavock is already under contract, soon after being listed on the MLS. I have money tied up in other projects and didn’t want to get into a bidding war, so I didn’t get to execute my plan for re-subdivision of the lot. But, I am very interested to see what is next for this property, and how its future unfolds. It is unique in itself, but also representative of some of the challenges facing Nashville’s (and other cities’) growth. Check back with The Urban Investor to see what happens, as I will definitely keep tabs on 1424 McGavock Pike.