Purchasing Land with Demo House + Tenants - how to negotiate

6 Replies

I am in the process of making my first real estate purchase with my parents and its not a simple one - it is a lot in the town I want to live in with a house on it that's a demo. Despite the condition of the house, there are tenants living in it (they have been given 30 day notice), and also there are two trailers on the property in which there are also tenants (they have been given 90 days notice per idaho law for people renting space to park their trailers). We are in a dual agency representation with the real estate agent and she was pretty forthright about how she valued the property - it is basically based on one lot comp in the same town from april, she multiplied that x2 (the lot is a bit over twice the size of the other lot that sold recently) - there have been no sales of land since then and the closest one before that was a full year ago. Lots rarely go up in town and there are even very few houses on the market - it is also one of the original sized .5 acre in city limits lots which are rare now. Additionally, the lot is splittable into 2, 3, OR a "cottage court", which allow up to 8 buildings on the property (this is all confirmed with the city and I consulted with a friend of mine who is an engineer and has drawn up several of these cottage courts and says its feasible). 

The intention for the property is a primary residence for myself and my parents first - so we will at least be splitting the lot in 2  (which will allow a house and guest house on each lot), but also carefully considering splitting into 3 or the cottage court possibility. My goal is reduce my living expenses with a rental/airbnb eventually (after house is built for my parents) and several rentals would be pretty great also I think. I was a carpenter for several years and enjoy getting my hands dirty - the plan is to be the owner/builder, sub out a fair amount of the construction, but add value by doing a fair amount of the planning and some of the building myself. I have a friend who is an engineer who will do the work affordably and another friend who is an architect who says he will help also. I also have a few friends with building skills and unemployed and up to help. 

Here are some of the questions I have: I am concerned about the house and how to value it in the negotiations - in our offer we cut the value put on the house (10k) completely off and we are now under contract. What i'm wondering is if it makes sense to try to negotiate the cost of DEMO against the value of the property - my plan is to sink a few thousand bucks and a few weeks of work into the house and live in it while working on the site plan and building out the second house for my parents. My living standards aren't that high and i'm fine living in a POS for a while to get this off the ground. I am concerned about the cost of DEMO and whether I will even be granted a permit to do that myself as the house is from 1940 and more than likely has lead in it. The trailers and tenants have also been a bit of an issue - the seller has now put 8k in escrow that says they are responsible for the removal of the trailers by the end of the 90 days (60 days of which we will be the owners as we close early next month) or we get the money. The trailer tenants are really not paying much, so to us it's not really a benefit to have them as we'd like to take control of all the land sooner rather than later. 

Thoughts? Questions? Hopefully that wasn't too convoluted, I never go the easy way :)

I would not try to reduce your bid by the demo cost as it could cost you the entire deal.  The demo cost you should consider part of your our investment / improvement cost.   Its like asking the owner to fund your new project. 

Well, it would be good time to get DEMO quotes and see if the city will give you a demo permit to do it yourself (they may want to test for lead.asbestos but even there you could just subcontract that part) and do the rest yourself if you have access to equipment and disposal facility

AS for what to do with this land, it seems you can put 8 units on it cottage style? Why not do that and find another lot to hack later after this project? I get it that you want to build a compound for yourself and your parents but unless it has to be specifically that lot in that city, being able to build 8 units is a pretty rare opportunity, wouldn't you agree....

Again , I am just spit-ballling since you need to look at the numbers like construction cost per sq ft and prospective rental income.

Originally posted by @Jim Adrian :

I would not try to reduce your bid by the demo cost as it could cost you the entire deal.  The demo cost you should consider part of your our investment / improvement cost.   Its like asking the owner to fund your new project. 

This doesn't make sense to me - they based their listing on the value of clear land comps...here is a piece of land that has costs associated with it that a clear piece of land does not. I have a buddy who got an amazing deal on a piece of land that was absolutely covered in junk - he got the deal because nobody wanted to deal with the junk and it cost him a substantial amount of money and effort to clear it - he didn't pay what it would have cost if it was a clear lot. If the land is worth 130k based on land comps, and it costs me 20k to remove the junk thats on it (i.e. the house and potentially two decrepit trailers on it), its going to cost me 150k to get to a clean slate - I think its overvalued at that - I really don't understand how its asking the owner to fund my project. Please explain. 

Originally posted by @Vinay H. :

Well, it would be good time to get DEMO quotes and see if the city will give you a demo permit to do it yourself (they may want to test for lead.asbestos but even there you could just subcontract that part) and do the rest yourself if you have access to equipment and disposal facility

AS for what to do with this land, it seems you can put 8 units on it cottage style? Why not do that and find another lot to hack later after this project? I get it that you want to build a compound for yourself and your parents but unless it has to be specifically that lot in that city, being able to build 8 units is a pretty rare opportunity, wouldn't you agree....

Again , I am just spit-ballling since you need to look at the numbers like construction cost per sq ft and prospective rental income.

 Yah, you're right, it is a pretty rare opportunity. I am going back and forth on it honestly. Part of it is how I present it to my parents as well and that would be a much more expensive development project than one house for myself and them. What do you think about the possibility of doing it in stages - splitting it into 8 but building one or two with the possibility of finishing the build out down the road while figuring out how to actually fund the project. The increased cost would be  planning and engineering the project to take 8 which would be a wasted cost if we don't end up going that direction, but it may be worth it to keep the door open for that possibility. Thanks for your help.