Due Diligence, What Do You Do?
I am just starting to look for land to develop. I have found a lot of land available and it all looks good, but I am scared something is going to bite me is the ass if I miss something.
My questions to all you experts, and from this forum i truelly mean experts, from other posts I have read.
What are some of the items you look for first, that some other investers in your area might miss?
Do you have a set list of things to do and stick with it?
Also when you see land you like, is there a quick formula you use to see if it is feesible in only a few minutes?
Thanks
My perspective is that of a land broker.
1. Start with finding out the current zoning by looking at the ordinance. This includes permitted uses, min. lot size and width.
2. Find out about accessibility of public utilities through maps at the municipality and check on capacity (availability of sewer permits) from sewer authority manager.
3. Identify the target market--is it builders or end users.
4. Roughly estimate site yield
my rule of thumb is
gross AC x 43,560
deduct at least 25% (may be more if site features warrant)
divide by min. lot size and round down result.
5. Determine what the new home on its lot would sell for
SP X 25% = value of lot with its share of horizontal improvements
6. Roughly estimate lot horizontal improvements
min. lot width x $250/LF (if public utils) or $150/LF (if on-site utils)
If on-site, I would add in cost of well & septic
7. Then evaluate seller's asking price and if seller will sell fully-contingent
I look at the surrounding area--what's happening (or not happening). Who building what where, for how much, and how is it moving.
Any offers you submit should be done with the assistance of a RE attorney with contingencies for upfront feasibility period, municipal approvals, etc. Offer price on per approved lot basis, not lump sum.
Example:
15AC parcel, zoned for 40,000 sq. ft. single-family detached, min. width 200 ft.
New construction would sell for $500K
on-site utilities
Seller will sell fully contingent and wants $1mil
15 x 43,560 = 653,400 X 75% = 490,050
divided by 40,000 = 12 lots
hor. improv. 200 ft x $150/LF = $30K + say $15K for well & septic = $45K
NC value $500K x 25% = $125K
$125K-45K = $80K (raw lot value)
$80K would be the value of the lot to builders in my area. If you'd be assigning to builders, then the offer needs to be less than $80K so that you could flip for $80K. The seller's price is close but yield ultimately will depend on site testing for utils and # of lots approved by municipality. So offer should be on per approved lot.
You will need a good RE attorney and a civil engr & surveyor if you plan on buying/assigning and subdividing. I would also suggest that you do some research among the Articles on this site.[ Edited by NancyChadwick on Date 05/15/2004 ]
I am a little confused by your land value formula?
How much profit have you accounted for?
If you find an area where finished houses sell for $200,000 on a 40x80 lot would equal: $40,000 for land.
I have seen numbers like 20-30% finished price ($40,000 - 60,000)
Thanks
Matt
Quote:
On 2004-05-15 16:38, unomateo wrote:
If you find an area where finished houses sell for $200,000 on a 40x80 lot would equal: $40,000 for land.
I have seen numbers like 20-30% finished price ($40,000 - 60,000)
unomateo,
Rules of thumb--any rules of thumb--are subject to modification based on market and other conditions. If the house on its lot would sell for $200K, using 25%, the "finished" lot value would be $50K.
Right, I understand that much, my question is how much profit would you make on the deal?
Do you have a rule of thumb for that, say 20-30% of the total completed package?
Thanks
Matt
unomateo,
The purpose of the rule of thumb is for screening.
To determine margin, you'd run a pro forma. Margin would be more than 15%, I would expect.