Through inheritance, we have received two vacant lots in Huntington Beach, California. The two lots are adjacent to each other. Each lot is about 7,400 sq ft and were each appraised for just under $800K. Nearby homes on similar-sized lots sell for $1.3M to $2.4M. These are custom homes about a mile or so from the ocean. Also there are no other vacant lots in this area.
A good friend who buys, builds, sells, and rents real estate has offered to put up the capital to build a house on one lot. He thinks that he can build a nice house for about $500K and then sell it for about $1.5M. We would then use that capital to build on the second lot. The only downside is that he currently has another project consuming his time and capital. He thinks that it would be at least two or three years before he could work with us.
Although we don't have any experience in real estate other than buying our own home (here in Orange County), we like the idea of developing the property. We live about 20 minutes away from it.
Since we don't have the capital to build, our options are limited. Here is what we are considering:
- 1. Sell both properties as-is and then use the proceeds to get into real estate buying something else.
- 2. Sell one lot and use the proceeds to build on the other lot.
- 3. Other???
So I'm looking for advice and ideas. Thanks!
BTW This is my first post here. I discovered BP through listening to podcasts on Spotify.
@Tim Pau . Hello and welcome. Sounds like you have a good problem to have. Not having capital is not the problem. The lack of knowledge is the main problem. If you are not in a time crunch, just hold onto the lots, pay the property taxes and get educated to make the best decision possible with all the facts. You are right for thinking of developing the property. The question that you will need to ask is "what is the highest and best use of this property for top dollar?" This is the best place to learn OJT in this situation. The guy you spoke to is not the only developer in Orange County. Look for developers here in BP. Seek out contractors, builders and the like. Talk with banks and credit unions to find out their criteria for these type of lending situations. You need to find out what raw land is going for per square foot. Confirm your appraisal that you have at $108/sq ft. Take your time, get educated and have fun learning what to do. If I can help answer any questions just let me know.
@Tim Pau If your land is worth $800k and construction will cost $500k, you only make $200k incremental profit at $1.5M sale. Seems like a lot of uncertainty and forgoing opportunity cost for a small profit, which you both will split.
Is $500k break even cost, or will your friend make margin on the construction?
You’ll have to do the math and run assumptions yourself, but my gut believes you should sell at least one of the lots and invest proceeds elsewhere. Likely best to sell both from an opportunity cost perspective.
Christopher and Allan,
Thanks for the reality check. We are now strongly considering just selling both properties.
@Tim Pau . That is an option as well. Just take your time and make the best decision giving all the facts you have for you and your family. Have fun in the process.
Now we are thinking of selling one of the lots. An older gentleman in our church is a school teacher who has a real estate license. A month or so ago, we asked him about listing both lots. He asked us what price we would like to list them for and for how long. He also said that the commission would be 4%.
Although we know what the properties appraised for, we don't know what we should list them for. Also we don't know if 4% is reasonable? TBH 4% seems like a lot when no open houses or showings are required...but, then again, I'm not in the real estate business.
Because of our previous verbal commitment to have him sell the properties, we'd still like to give him our business. But if you were to be our agent, would you be able to provide additional insight and/or services?
@Tim Pau . Yes sir I can.