Vacant Lot & New Construction - How would you do it?

Question

Still learning the ropes and looking for any advice on my first potential deal.

THE PROJECT...I found a unique vacant lot in Southern California on Zillow... and by "unique" I mean ~1200 sqft total, triangular-shaped, with a misplaced gravel alleyway cutting through the middle of the property.  However, the lot is zoned for residential SFR.  The owner originally listed for $100k and has come down to $95k over the course of about 4 weeks.  Based on some background public records research, I believe the owner is a motivated seller.  Building on the lot would require somewhere between 5-7 variances and there is a chance (per the city's planning department) that building approval may be conditioned on the owner relocating the alleyway to the correct spot.

THE POTENTIAL... I would use the variance/approval risk as leverage to buy the lot for ~$50k.  Earmark another ~50k for the variances.  Estimate construction at a max of ~$200k.  All in at $300k.  Assuming a 2-story "tiny" home with about ~1500 total sqft, I believe the ARV would be somewhere between $500-600k.  The lot backs up to a newly renovated green belt, leading down to a lagoon, in a desirable area.  Nearby a large university, so good rental market.  Hypothetically, total monthly payments on loans would be about the same as rent in this market.  I would live in the home for a few years and then either sell or rent when I'm ready to size up.

THE PROBLEM... I don't graduate law school until May and have virtually no savings.  My total student loan debt is ~$140k, but I've secured a job starting in October 2020 that pays $160k.  I'm worried that the lot will sell, so I've been researching different financing options.  I'm curious what the BP Community has to say about this potential deal.  Any insight on the variance procedures would be extremely appreciated!  I've talked to one of the few lenders from a major bank that does vacant lot loans that then convert to a construction-perm loan, but he claims the rates are locked at ~20% down, 4-5% for 30 years (I can provide more details on specific terms).  Otherwise, it's possible I could raise funds from family/friends -- at least to take the lot off the market at about $50k.  I'm also beginning to look into seller-financing to see if that's something the seller would be open to with a low down payment.  I've heard there is such a thing as a construction-perm FHA loan, but that finding a lender for these is incredibly difficult.  Does anyone have any advice or opinions on this project?  Is it too risky?  Is the risk worth the upside?  How might you structure this deal given my financial situation?

P.S. If anyone has experience/knowledge in this type of deal and is interested, I would be open to partnering up.  Although I'm new, I'm committed to building a real estate investment portfolio and in less than a year's time will be connected with the most influential law firm in the city.

Eric Teran · Answer

@Christopher Cammiso part two of my response. You will have to get a loan only for the lot. Banks consider these risky investments because there is nothing of value on the lot. There are not a lot of banks that do these.

Once you pull a permit you can get a construction to permanent loan. These are more available and you can shop around. Most likely you land loan will be rolled into the construction to permanent loan. The down payment on the land counts towards the down payment of the construction loan. These loans are usually 80% LTV but you can find 90% LTV. Try local banks first and call around. I called over 30 banks before I finally found one when I built my house.

Eric Teran · Answer

@Christopher Cammiso I would do a lot more research on what may be built. I once found a great vacant lot in front of a river but found out it need the counties approval even though it was a build able lot. I called all the council members and three of them gave me a flat out no. I then had a neighborhood meeting and out of the 20 people that showed up 18 opposed my idea. Long story short if it requires public approval you are in for a fight.

Trying to get multiple variances is very complicated and time consuming. Variances allow for public opinion and if you do not have the neighbors, planning/zoning departments, and local politician supporting you then you have an uphill battle.

Have you figured out all the setbacks, lot occupancy, green area ratio, FAR, easements, etc.? I guess the variances may resolve some of these issues but there might be one you overlook. For example, if it borders a Greenbelt a setback might be bigger than a normal setback.

If this property is in Long Beach I think your construction cost is low. Especially if you have to install all the utilities.

I don’t want to be the one given you bad news but I have tried similar projects and I’m an Architect with 20 years of experience.

This is what I suggest you do.

1. find out who would be voting on this variance and call them to get a feeling for their thoughts on these types of developments.

2. Find out if there are neighborhood meetings and go to one explaining your intent. You want to know if they will support you. Always keep them in the loop.

3. Make an offer with it being contingent on you getting a building permit. Ask for a year to go through the process.

4. The seller will not like this idea but you can offer him something called, “right to first refusal.” I think that is what it is called. Let’s say you offer him $60k and need a year to pull the permit. The property can remain on the market and If someone within that time offers them $80k you can match that price and continue your process or he can sell it to that party. I know two developers that have done this successfully. There might be more to it though.

This scenario may cost you money but you won’t have a completely useless property if you can’t pull the permit with all the variances.

Good luck.

Vacant Lot & New Construction - How would you do it?

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