Suggestions on selling a residential vacant lot San Francisco

14 Replies

Hello All,

I have an R2 vacant lot in SF. I had considered building on the lot but I only have limited experience in this area and feel selling it and investing that money would be a less risky option. Thoughts:. 1031, how to derive the asking price, should I do the transaction on an LLC, other options?

Thanks 

@Jimmy Jones , the greatest value of that land is in it's state and entitlement.  You can certainly make more profit by actually building.  But a builder will only make a profit commensurate with their skill and effort.  Not a position you want to be.  Plus it's likely that if you sold now you would qualify for a 1031 exchange and could defer the tax and use it in a purchase of new real estate.  When you become a builder you lose the opportunity to 1031 and your tax structure on the sale goes from maybe 15% to as much as 40%.

If you were a builder I'd say go for it if you want.  But this is probably not one you want OTJ training on.

Sell in the entity its' titled in now, 1031, buy cash producing assets.  Let the deferred tax work for you.

what's the address of this lot?

@dave foster you don't lose your ability to 1031 just because you're a builder. You lose that privilege when that is your primary business, or you've don 2+ transactions and the IRS considers you a dealer.

@jimmy jones  any competent realtor should be able to give you a BPO (Broker Price Opinion) with that info, you could sell, or if you have funds to invest, at least entitle, and get approval to build based on city codes. This will make your land the most valuable before a structure is actually on it. This is exactly what a developer will do if they don't build.

Once entitled, hiring a builder to build on spec could provide you with a sizable return. It's just a question of the delta between the value of the land now, and future value of a completed building, considering time, effort, and risk.

I might be a buyer. Feel free to send me more info

Originally posted by @Amit M. :

what's the address of this lot?

 130 Cuvier st


Originally posted by @Daniel Klein :

@dave foster you don't lose your ability to 1031 just because you're a builder. You lose that privilege when that is your primary business, or you've don 2+ transactions and the IRS considers you a dealer.

@jimmy jones  any competent realtor should be able to give you a BPO (Broker Price Opinion) with that info, you could sell, or if you have funds to invest, at least entitle, and get approval to build based on city codes. This will make your land the most valuable before a structure is actually on it. This is exactly what a developer will do if they don't build.

*********

    @Daniel Klein I am not sure I know if "Entitled" is connected with it's Zoning or not.  I believe it is RH-1 which is defined here for SF

Once entitled, hiring a builder to build on spec could provide you with a sizable return. It's just a question of the delta between the value of the land now, and future value of a completed building, considering time, effort, and risk.

*********

     @Daniel Klein, this make sense.  My guess would be take the max or average sqft in the area and average $/sqft for sale price, then net out rough cost to build and fee's associated leaving the net land value.

I might be a buyer. Feel free to send me more info

Thanks,

SJ

decent location, st. Mary's area of bernal. Your problem is probably what to do with the proceeds, I imagine it's owned outright. Hard to do a 1031 in this market locally. Hard to do a development deal as contractors are charging maximum $$ these days as they have so much business. Plus then you take the risk if you can't sell them from what you want. Probably no less than $300 PSF to build, so if you can do 2 1500 sq ft condos, that's a good $900k construction costs. Should sell for $1000 PSF though (make them architecturally nice, very open,  and very modern; everyone in this market spending big bucks does.) 

I'm guessing the lot is worth $500-600k, maybe more. Always easy to throw it on the market to gauge that. Doesn't even have to sell, just get an idea. Or talk to some good brokers that do development deals. Vanguard  or Brown & Co. does them, to get an idea of lot value. 

Really depends on your goals. Lotsa options...

Thanks Amit, you have some good points. And I will reach out to some brokers, I feel like to build anything nice it's probably around. $400/ft these days.   Why do you feel like a 1031 would be hard?  Due to the prices in the area?   Thx

@Jimmy Jones I meant it’s hard to find a decent exchange property in the Bay Area, as you’re limited by coordinating the buy/exchange timeframe. If you’re buying out of state/area, then maybe easier to achieve. OTOH this is probably not a bad time to sell a lot and get top dollar. 

Let us know what info you get on the lot value, as well as what you decide to do. 

@Daniel Klein   not exactly correct  its about intent  and the rule of thumb is more in the 5 to 7 a year not 2. but if your intention is to build and sell its inventory even if its one.... if your intent is to build and hold  even though it maybe number 20 for the year you can set it up as long term hold.... hold a year is rule of thumb..  @Dave Foster  

@Jay Hinrichs yes, the IRS looks at intent and a few other variables. The IRS looks at each property individually, but I don't see how someone flipping 5-7 homes a years with no other job income, for multiple years could successfully argue "investment" during an audit. There are far more sophisticated exit strategies and business structuring that can be done to keep deferment of income/cap gains intact while being a dealer. Here are the variables: The IRS determines real estate dealer status based on the "intent" of the taxpayer holding or buying the property. The characterization of gain or loss on the sale or exchange of real property turns on whether the property was held "primarily" for sale or investment. The Courts have come up with their top fifteen items that they look for in determining the status:

  • Taxpayer's purpose for acquiring, holding and selling the property
  • Number, frequency and continuity of sales
  • Duration of ownership
  • Time and effort expended by the taxpayer in promoting sales
  • Taxpayer's use of brokers
  • Extent of improvements and subdivision made to facilitate sales
  • Ordinary business of the taxpayer
  • Extent and value of the taxpayer's real estate holdings
  • Extent and nature of the transactions involved
  • Amount of income from sales as compared with the taxpayer's other sources of income
  • Taxpayer's desire to liquidate landholdings unexpectedly obtained
  • Taxpayer's overall reluctance to sell the property
  • Amount of advertising
  • Use of a business office for sales
  • Taxpayer's control over any sales representatives

Of these, the most important issue appears to be the number, frequency, and continuity of sales. In other words: If you sell a lot of property, you might be considered a dealer simply because that appears to be the type of real estate "investing" you do. It is also possible to be treated as a dealer on one property and an investor on another.

In this case, the IRS will look at the taxpayer's intent with that particular property. For example, they will look for sales activities that show that property was held primarily for sale if they are attempting to prove dealer status. These activities would include advertising, "for sale" signs, a sales office, and employment of sales personnel.

@Daniel Klein no argument from me.  just hard to take cap gains when your really a dealer.. although many do it and its only when your audited that its an issue.. 

@Daniel Klein and @Jay Hinrichs , We're all singing off the same page.  Any one can do a 1031 exchange on any property as long as their intent was to hold the property for productive use.  I used the term builder generically to mean someone who builds with the intent of resale.  It doesn't matter whether you are a builder, baker, or candle stick maker, if your intent is primarily to resell a property  then you cannot do a 1031 on that particular property outside of the GTA (Good Till Audited) window. 

Daniels list of the IRS criteria illustrates the point that certain groups are going to have a higher bar to cross if audited.  A builder by trade will have more transactions and so have a harder time proving intent.

This is exactly why many folks to walk both sides of the street will have two entities  set up - one for investment (buy and hold/1031) and one for dealing.

Build cost is prob around $275-300/sf if you manage your own subs, not counting other soft costs. $400/sf and up if you hire a GC.

Other than build cost risk the biggest one for me is the time to get the permit. SF planning and building dept is filled with *** hats and a deep back log. By the time you get thru planning the bull market could be over already.

I’d try to get the entitlement process started bc the land will be worth a lot more once you have that, but if the market starts to soften you punt it.

@jason hsiao you are right there are challenges in sf planning.  I am on two sides of the fence, start the planning to build now and try to hit the top to sell, or start the planning once things become more slow and get into the build as the market goes back into a slump so that the contractors are in a better price range.  It's a long game vs a short game.  What are your thoughts on that?  I am in general into the buy and hold mind set, but I do feel like having two assets in the same city might be bad only based on earthquake and fire risk.

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