Thinking like a Builder: Part 1
If you understand how residential builders make their buying decisions, you will be likelier to achieve success in buying and flipping land. Some builders search for property strictly by geographic area. Others search for parcels that would enable them to reach particular buyer submarkets, such as housing type, price range, lifestyle and age group. Either way, builders begin by casting the net into their areas or markets of choice and sifting through potential acquisition candidates. They often have to pick through dozens of properties before they find one they think they can develop profitably and frequently spend varying amounts of time, effort and money collecting information before they even know if the parcel will work. Their due diligence focuses on obtaining answers to five fundamental but critical questions.
What can I build
How many can I build
What can I sell them for
How long will it take to sell them
What are the costs
These questions collectively define economic feasibility and influence every decision builders make, from their initial contact with the property, during contract negotiation with the seller, subdivision approval, the day of closing and beyond.
The value of development property is relative not only to the value of the end product, but also hard and soft costs, that is, site improvements costs and the expenses that will have to be incurred during the approval process. Residential builders and developers do their income and expense projections for properties on a per lot and not a per acre basis because profitability is a function of how the property can be used and not the number of acres in it. Accordingly, for all practical purposes, the parcel's overall size is a meaningless number in the builder's determination of property value.
I will keep my comments about the article for the time I finish reading your Part 2 but for now, I do have some questions and they are as follow:
1) How do you know what should you pay for a lot or per lot on which you can build $500,000 house?
Basically, if the city allows you to build 4 houses on an acre and you have a 10 acres lot in an aria where the houses are selling for $500,000 each, you can build 40 houses. Now, the cost of labor and the permits and other holding time cost, etc. would take a toll but you should still know how much should you have the lot costing you in proportion with other costs and profit/s in order to be safe. Is there some kind of formula developed, which tells you how much should you pay for the land, how much should be your labor, material, permits and the profit after all in percentage?
2) Would you say that I have a safe deal on the table if I am going to pay $200k for a 0.3 acres flat lot with ocean view on which I can build a SFR 4/3 and sell it for about a 1 mill and maybe even more?
To lot had once a house siting on with no traditional foundation (flat about 2" tick concrete poured on the ground flat like we do driveways) but the same house got knocked down as being unsafe after being damaged in earthquake a decade ago. Based on my survey of the swimming pool aria, which was not removed, the damage wasn't severe. Th cracks are barely 1/4in to an inch wide and long as much as the lent of the structure or less.
Alex
Alex, a 10AC property is not going to yield 40 quarter-acre lots. You have to deduct at least 25% to take into account land area lost to development (new streets, etc.) as well as physical features (slopes, irregular shape, etc.). This means out of 10AC, and deducting only 25%, you would have 326,700 SF of land area available for subdivision development.
In my experience, builders take the projected sale value of new home on its lot x 25% minus the cost of installing site improvements (streets, curbing, sidewalks--not sticks and bricks cost) to estimate land value.
If you apply the above to the deal you are considering, you should be able to tell if it makes economic sense.
Nancy,
My only cost will be to clean the ground and build the home. Under the most expensive estimate that calls for $120 per sft, I would still be more then OK/ The reason I asked the question is to cover the chance that I missed something.
My number 2 question pertains to a single lot on which ones was a house so the street, power and water are there. In fact, even a gate
Alex
Hmm, that sound like the land owner would have to pay me to take the land(?):
$1,000,000 (Finish product) x 0.25 = $250,000
$250,000 - $500,000 (sticks and bricks) = - $250,000
I know I got something wrong but if I am not, I am planing to send about 100 offers a day to do ask owners to pay me to get their land. Just kidding. Which part I didn't understand correct?