Marketing For Pre-selling Total Package
Greetings from Northern California,
As a result of some previous helpful discussions here about pre-selling spec homes as a total package (this house on this lot) and some encouraging preliminary investigations, I’m about ready to test the market and see if I can come up with buyer.
There are several potentially suitable building lots in my area that I don’t currently own or control. Nor have I yet been successful in establishing a working relationship with a realtor. Apparently, they have heard all this before and without having ever done one of these, it seems I have limited credibility. Since the market is very strong here, they all seem very busy and have little interest in doing any research for something that might meet my requirements unless, of course, I were to have sufficient cash for the high-end projects they are promoting.
Consequently, I’m thinking that if I run an ad in the paper and maybe get a line on a buyer, then I can approach them as a builder with a qualified buyer and all I need is a lot and perhaps then they will be more interested. Does anyone have any advice or suggestions for ads that have worked for pre-selling specs as a total package (this house on this lot, even if I don’t own it yet)?
Secondly, since there are several potentially profitable opportunities in various price ranges, it would also seem that should I encounter more than one qualified buyer, there may be an opportunity to re-assign one or more projects to another builder. Since I’m sure I’m willing to work far more cheaply than any real builder would, does anyone have an idea what profit margin might create some interest for a builder to take a flip?
In the event that this logic is flawed at all, any advice would be appreciated and, as always, thanks to those that are willing to share their knowledge.
Dan
Dan,
In my area, when agents list individual, separate building lots, the lots are often over-priced and they sit on the market. More and more agents here have been forming relationships with builders to market the lots as "total packages." So the property is not listed as a lot but as new construction--buy this property and this builder will build this house on this lot for you for X$. Are agents doing that in your area or are they just listing the individual building lots for sale?
I don't know if you are a builder (and I wouldn't recommend to anyone who's not that they do their own building). Price is critical in finding a suitable property that you could either assign to a builder or partner with a builder to sell to an end user as a total package. Builders in my area usually price a lot this way:
projected sale price of house on lot X 25% less per-lot horizontal improvement costs. For example, if the house on the lot would sell for $750K, then the value of the lot would be around $187K minus the lot improv. costs. So if you wanted to assign your contract on a lot to a builder here, you would want to make sure there was a sufficient spread between the purchase price to the seller and the flip price to the builder.
Hi Nancy,
Thanks so much for your reply. I live in an area of Northern California along I-80, half way between the SF Bay Area, that is unbelievably expensive, and Reno/Tahoe. The demand for prime rural residential lots here far exceeds supply. Lots are listed individually and are overpriced and sell instantly. Creative approaches do not exist because several buyers will bid it up before one is finished asking and realtors look at you like you have 3 heads if you even mention anything other than all cash over the asking price. The only lots that don’t sell are the junk that no one wants (unbuildable). If it’s even halfway desirable, it will get bid up and grabbed by the major players with financial magnitude.
I’m not seeing anything close to the 25% ratio that you mentioned in your area. Selling prices for new construction on smaller acreage start to level off about $300/sf or a little higher. Lots are in the 200-300k range and 150k is the lowest but there is not much that’s decent under 200k unless it’s farther east where completed selling prices are also lower. Best case scenario here is about a 1/3 ratio, with lots selling at 200k with a 2000 sf house selling for around 600k. The market is very strong at 600k or lower. Cost for contractor stick built is $140/sf minimum, so cost is 480k just for the lot and structure plus all the expenses. I’m looking at a lot now that is lower quality 2.7 acres asking 175k, needs a well and engineered septic. I can build a 1600 sf panelized 3/2 farm house, contractor finished, for about $100/sf plus lot improvements. I’ll be in it 380-400k, should sell easily right around 500k. Good as I can get it. I don’t know what any other builders would think, but for me, 100k potential is considerable.
The good news is I think this situation still offers opportunity and that the sell as a package strategy seems like it might work, since anything and everything sells quickly. At least my buyers will know they will get a house at some point in time. I am looking at a potentially large niche market with unique design elements that have a marketing advantage that has been successful in other parts of the country, but is not being addressed in this area. I also plan to use panelized construction finished by contractors and try to save a little there.
I am not a licensed contractor nor do I plan on being one, although I was in rehab construction for several years and was also a construction manager for a production homebuilder for several years. My plan is to market my pre-sold specs as “this house on this lot for this price” packages to my niche buyers, somehow gain control of a half-way decent lot, and contract out the entire project. Sort of a single lot/house project developer, I guess. Seems like once I have a qualified buyer in place, everything else just becomes a detail.
Once again, if any of this logic has obvious flaws, I’d really appreciate it if you could point it out to me. Also, other than equity partnerships with the sellers, which may be one of the only possibilities, if you know of any creative strategies for capitalizing on any opportunities that I’m not seeing or any other creative ways that a small time newbie builder might be able nudge into this kind of a market, I would also appreciate hearing of them.
Thanks again so much Nancy, for your willingness to share your knowledge.
Best success,
Dan
Dan,
Market conditions always impact rules of thumb. I've found rules of thumb to be effective as quick screening tools and subject to "tweaking" based on my gut feelings. Sounds like in your market builders are working with 30% and not 25%. Using the 2.7AC lot example you provided, I agree that a 20% margin is desirable--particularly where you're dealing with a lot that's already been subdivided.
Since it's a seller's market, I don't know if the seller would be willing to tie up the lot to give you sufficient time to market the total package to the end user. In other words, making closing on the lot contingent upon your receipt of a signed contract from the end user for the house. That, of course, would be ideal as the end user would be in hand. As you indicated, you may have to offer the seller an incentive--some piece of the total package deal. The other alternative (and I don't know that it is an alternative for you) might be to take a parcel that could be subdivided into maybe 2 or 3 lots. If the seller would agree to give you the customary subdivision contingencies, perhaps that would cut out the high competition for individual, separate lots.
Dan
What you are refering to is speculative www.building.There is a lender in Grass Valley who would lend 60% of what you are offering for the lot and additional funds for construction costs.
I believe his Name is Brad Evans Lincoln R/E values are appreciating at a staggering rate.So buyers are in bidding wars for fast turns.
The investors I am working for just sold a teardown in Del Paso for $149,500. It was on the MlS one day!
Mike
Hi Nancy,
Thanks again for taking the time to explain and for the helpful suggestions. I’m glad to hear that there is some flexibility on the rules of thumb. Also, thanks for pointing out the great idea of maybe finding a lot that can be split. That sounds like it may have some possibilities for being more cost effective and avoiding the inflated lot prices here. Given the market here, do you think 20% potential profit would be something a builder might take a flip on? Could you describe the “customary subdivision contingencies” that you also mentioned?
Thanks again so much for explaining.
Hi Mike,
Nice to read you again and thanks for the tips. I know what you mean about those infill lots, too. Del Paso is not the nicest area and basically they paid 150k for the lot and presumably also paid for the tear down. Still, if it was a nice lot with hookups or splitable or maybe zoned for multis, could have been a bargain. Recently, a nice infill lot here in town with utilities sold quickly for 85k, which turned out to be quite reasonable. I was unprepared at the time, but it would have made a nice little project that was almost in line with the 1 to 4 guidelines.
Thanks again,
Dan
Dan,
I define customary subdivision contingencies (buying fully contingent) as including:
1. an upfront feasibility period running 90-120 days from date the contract is fully signed (longer if justified). At the conclusion of the Feas Period, the buyer can terminate and get back any down money (not, of course, expenses incurred for engrg, testing, etc.)
2. the buyer's closing on the property is contingent upon the buyer, at buyer's sole expense, obtaining all federal, state and local approvals, permits, waivers
from the appropriate governmental agencies as are necessary or appropriate, in the buyer's sole judgment, for the subdivision and development of the property into a minimum of _____building lots suitable for construction of _________ of the size and type selected by Purchaser and the construction of required land improvements to the property, all such approvals and permits to be unappealed and unappealable. The approvals would include all permits, approvals and agreements (including escrow, utility, tri-party and development agreements with local governmental authorities) necessary or appropriate to begin construction and sale of homes, excepting only building permits.
3. purchase price is typically stated on a per-approved lot basis. If it's stated as a lump sum, then there may also be a required minimum number of lots. Eg, price is $1mil but the purchase is contingent on the buyer getting no fewer than 10 lots approved.
Nancy
Hi Nancy,
Thanks again for all the useful information. In fact, as it turns out, I ran into an old friend whose parents own 10 acres of prime lake front property in a nice area not too far from here. They already looked into the costs for subdividing it into 4 2.5 acre lots, but they don’t want to do it, due to the expense and perceived risk, so they just want to sell it. Not listed yet, and I don’t know yet what they want for it yet either, but I’m working with my friend to see if I can somehow get it under contract and make a run at maybe trying to flip it if nothing else.
I’m not sure I’m ready to put your detailed notes into practice just yet, but at least I have an idea about how those contingencies work. Plus, my friend’s son has an RE license and wants to be a developer. Go figure. Must be opportunity here somewhere.
Any ideas how I could locate local developers/builders? If I just march right into the local real estate office and tell them I have 10 acres subdividable into 4 lots that I want to sell, I’m sure they will know, but won’t I pretty much have to pay commissions on it at that point? Oh well, maybe there is enough in it and maybe the son can list it. Do realtors have to pay to list on the mls? Funny how I would hear of that right after your note, though.
Thanks again for your helpfulness.
Dan
Dan,
There are a couple of ways to find local bulders who might be buyers (assignees) for the property. See who is building what in the area. You can find this out from reading the RE trade publications, magazines & newspapers. You can also go to the municipality and ask for the list of properties that are in the subdivision approval process. Contact RE attorneys and appraisers in your area.
Hi Nancy,
Thanks so much again for the helpful suggestions. Those are all really good possibilities that I wouldn’t have thought of and I’m investigating them. I appreciate your replies and sorry my response was delayed.
Thanks again,
Dan
[Post deleted for violating Forum Rule #2]
Nancy Chadwick
Moderator[ Edited by NancyChadwick on Date 05/16/2004 ]