land development, I feel I'm sitting on gold mine

23 Replies

I'm sitting on two parcels of land...16 acres residential and 11 acres commercial with 8 acres in between that my 20 unit apartments sit on. We're in the middle of a remodel on the apartments which is where our attention has been focused. Recently we were approached with a cash offer on the 16 acre parcel. The land isn't on the market currently and this potential buyer just inquired through a family member he was acquainted with. We had an appraisal 1.5 years ago that valued it at 220k and this was before google announced plans of a $600M expansion to their data center located near this property. If I know how to devolve it I would! Where does someone with no knowledge start? It's the only available land of its size inside city limits with all utilities available. I just believe the 200k cash offer is waaaay to low.
Lol, can't figure out how to edit my post through the App! It should have said "if I knew how to develop it I would"....,

Without any more knowledge than what’s contained in your post it’s an envious position to be in and there are a wealth of options available to you ranging from a joint venture to self performing on a new development to long term hold.

The only people who will be able to accurately answer your question are a licensed appraiser or a broker(s) who specializes in land or commercial/residential properties. Apps raiders are going to give you a straight over tackle value whereas the brokers will often incorporate more intuition based on their knowledge of current state of the market. For example: an appraiser will not take into consideration googles announcement, only sale comps and competing properties.

Often times the correct answer is a mix of both inputs.

All that said $200k sounds low and I don’t think anybody here would recommend taking any action before at least getting an appraisal.

Are they separate legal parcels?  If not, the land needs to be subdivided. 

You would be wise to obtain a Phase I Environmental Site Assessment to learn if there are any problems which will need to be addressed.  The cost should only be $1,000 to $2,500. 

What recent sales have occurred in the area?

What does the Assessor think each parcel is worth?

Develop it for what ???  apartment dirt in most cities sells for 5 to 10k a door ..

@Tab Teehee   what you are feeling is what typically every land owner feels. Land is always money draining exercise since no cash flow and only cash out.  Even if its a gold mine, land cost is usually very small compare to overall project thus profit margin is low as well. In other words, gold mine is mostly for builder since they are taking the biggest risk and land owner get the least since they have least skin in the game. 

If you believe that holding cost will supersede cost increase then hold and if marginal or lower then sell.   

New construction price 

(-) selling cost (set by market)

(-) Construction Cost (set by market)

(-) Financing Cost (set by market)

-------------------------

(=) Builder Profit Margin 

(-) Cost of development (i.e replat, civil, architecture, city permit , utility, roads etc)   (set by market)

(-) Cost of financing  (set by market)

---------------------------------

(=) Developer Profit Margin 

(-) Acquisition Cost for land owner (variable) 

------------------------------

(=) Profit for Land owner  (==< this is where you are in the value chain ) 

Look like you know construction cost for new dev and you can plug that in to get a ball park range of price and negotiate off that. Good luck

I guess I'd be willing to be involved in the "risk" as for as a partnership that involved developing the land. The two parcels are separate, and taxed separately. This was a block of land my Father in law purchased 50 years ago, built the apartments on some of the land and had plans for developing the rest until health issues got in the way. Should I approach some local builders? I just don't know where to start? This is such a unique piece of property! Local realtors seem a bit clueless in regards to its value and marketing, and some of large commercial brokers i've talked too, never bother to get back with me. I feel like listing by owner would a waste of time. Ugh!
@Tab Teehee I would say the best use for the 16 acres would be a residential development of single family homes. This has been nothing but rural pasture land all its life so I doubt any environmental concerns exist.

@Tab Teehee  

DO NOT sell the land.

DO NOT contact local contractors. 

DO contact a local (ish) Architect. 

The reasons I say this are:
1) - If you are not hurting for money holding onto that land will only help you in the long run. That person contacting you is hoping to take advantage of getting into the market before Google comes in and is offer WAY cheaper than its worth. Even if you decide developing it is not something you want to do the value will only increase as housing damnd increases because of the new jobs.

2) - Do not go to a contract and start talking to them. Nothing against contractors but they only have their bottom dollar in mind. Its just how that industry runs. They will try to convince you to either spend as much as possible or as little as possible. Either way, they make a killing and you get a sub par product. You only have to look at the nearest mass produced sub division that is developed and built by a contractor to know exactly what I'm talking about. 

3)  - Shop around and find a somewhat local architecture firm and start talking to them. There are two reasons you want to do this. One is that they will know FAR more about the local codes and regulations than a contractor as well as knowing how to design something that is reasonable priced but looks high quality. This will be able to get you the best design possible. Second is unless you go single family sub-division or a bunch of 4-plexs you will HAVE to hire an architect anyway. That's because anything over 4 units will require you to follow the IBC (International Building Code) and require an Architects seal. This could vary some between states, I'm in WA, but I'm pretty positive on this. Architects also act as a mediator between you and the contractor and since you hired them they keep your interests a priority.  

Disclaimer I am an architect out in WA state so I will call out the somewhat bias-ness of my post now. The office I'm at is currently working on several apartment developments right now. One project being an 84 unit complex on 5 acres. I wont go into detail on that or more of why you should hire an architect unless you want me to. Feel free to PM me or just keep the conversation going here.

I will add that financing a new build is very different than buying a building. Make sure you really understand the differences and the requirements before you just jump in. Not that its not worth it just that its different.

Originally posted by @Nik Moushon :

@Tab Teehee  

DO NOT sell the land.

DO NOT contact local contractors. 

DO contact a local (ish) Architect. 

The reasons I say this are:
1) - If you are not hurting for money holding onto that land will only help you in the long run. That person contacting you is hoping to take advantage of getting into the market before Google comes in and is offer WAY cheaper than its worth. Even if you decide developing it is not something you want to do the value will only increase as housing damnd increases because of the new jobs.

2) - Do not go to a contract and start talking to them. Nothing against contractors but they only have their bottom dollar in mind. Its just how that industry runs. They will try to convince you to either spend as much as possible or as little as possible. Either way, they make a killing and you get a sub par product. You only have to look at the nearest mass produced sub division that is developed and built by a contractor to know exactly what I'm talking about. 

3)  - Shop around and find a somewhat local architecture firm and start talking to them. There are two reasons you want to do this. One is that they will know FAR more about the local codes and regulations than a contractor as well as knowing how to design something that is reasonable priced but looks high quality. This will be able to get you the best design possible. Second is unless you go single family sub-division or a bunch of 4-plexs you will HAVE to hire an architect anyway. That's because anything over 4 units will require you to follow the IBC (International Building Code) and require an Architects seal. This could vary some between states, I'm in WA, but I'm pretty positive on this. Architects also act as a mediator between you and the contractor and since you hired them they keep your interests a priority.  

Disclaimer I am an architect out in WA state so I will call out the somewhat bias-ness of my post now. The office I'm at is currently working on several apartment developments right now. One project being an 84 unit complex on 5 acres. I wont go into detail on that or more of why you should hire an architect unless you want me to. Feel free to PM me or just keep the conversation going here.

I will add that financing a new build is very different than buying a building. Make sure you really understand the differences and the requirements before you just jump in. Not that its not worth it just that its different.

 financing a project t of that magnitude without prior experience and lot so cash Is not only hard but IMPOSSIBLE. 

Originally posted by @Jay Hinrichs:
Originally posted by @Nik Moushon:

@Tab Teehee  

DO NOT sell the land.

DO NOT contact local contractors. 

DO contact a local (ish) Architect. 

The reasons I say this are:
1) - If you are not hurting for money holding onto that land will only help you in the long run. That person contacting you is hoping to take advantage of getting into the market before Google comes in and is offer WAY cheaper than its worth. Even if you decide developing it is not something you want to do the value will only increase as housing damnd increases because of the new jobs.

2) - Do not go to a contract and start talking to them. Nothing against contractors but they only have their bottom dollar in mind. Its just how that industry runs. They will try to convince you to either spend as much as possible or as little as possible. Either way, they make a killing and you get a sub par product. You only have to look at the nearest mass produced sub division that is developed and built by a contractor to know exactly what I'm talking about. 

3)  - Shop around and find a somewhat local architecture firm and start talking to them. There are two reasons you want to do this. One is that they will know FAR more about the local codes and regulations than a contractor as well as knowing how to design something that is reasonable priced but looks high quality. This will be able to get you the best design possible. Second is unless you go single family sub-division or a bunch of 4-plexs you will HAVE to hire an architect anyway. That's because anything over 4 units will require you to follow the IBC (International Building Code) and require an Architects seal. This could vary some between states, I'm in WA, but I'm pretty positive on this. Architects also act as a mediator between you and the contractor and since you hired them they keep your interests a priority.  

Disclaimer I am an architect out in WA state so I will call out the somewhat bias-ness of my post now. The office I'm at is currently working on several apartment developments right now. One project being an 84 unit complex on 5 acres. I wont go into detail on that or more of why you should hire an architect unless you want me to. Feel free to PM me or just keep the conversation going here.

I will add that financing a new build is very different than buying a building. Make sure you really understand the differences and the requirements before you just jump in. Not that its not worth it just that its different.

 financing a project t of that magnitude without prior experience and lot so cash Is not only hard but IMPOSSIBLE. 

also the biggest profit with the least risk is YOU those that owned land for 50 years and sell to developers.. NO risk cash out 1031 into some income property and call It a day.. ZERO risk all upside..  I am buying a 34 acre tract in Oregon closing in Dec.. for 7.4 million cash / well I am getting some financing of course.. but the owner bought it 40 years or so ago.. for probably less than 50k.. no need to be a developer its one and done for him  we are peeling off 5 acres for senior living I have it pre sold for 2.2 million cash.. and then I will build 90 homes on the balance of it.. but it makes sense our MAI came back and lots are worth 140k each .. but we have to pay 30k each to develop those of course but still nice margin just on the dirt.. and then we go vertical and make some really big money.. 

So if you want to do anything get with some local commercial brokers or new home brokers and figure out what lots are worth then reverse engineer what the value is..  I just funded a 54 lot deal for a developer in Orlando last Sept.. and he paid 800k for the dirt just to give you a rough idea and that's without entitilements..  DR will buy the finished lots..  

Originally posted by @Jay Hinrichs :

 financing a project t of that magnitude without prior experience and lot so cash Is not only hard but IMPOSSIBLE. 

I would disagree with you only because the 84 unit development I mentioned above is doing just that. Owners got family land. Had not special financing of any kind. They just went around to the local banks and started shopping. At first, it was hard to get the banks to take them seriously but now they 3 banks fighting over them to get the loan. I'm not privy to all their financial details so I can't really go into it much more than that. I do know that they do have enough money of their own to pay all the Arch fees without a loan so I'm sure plenty of cash is needed up front aside from the downpayment (which land value counts towards also). Developing any site for new builds is no easy task for sure and not for the faint of heart. But you dont have to be filthy rich with lots of cash to do it...though lots of cash never hurts lol.

Originally posted by @Nik Moushon :
Originally posted by @Jay Hinrichs:

 financing a project t of that magnitude without prior experience and lot so cash Is not only hard but IMPOSSIBLE. 

I would disagree with you only because the 84 unit development I mentioned above is doing just that. Owners got family land. Had not special financing of any kind. They just went around to the local banks and started shopping. At first, it was hard to get the banks to take them seriously but now they 3 banks fighting over them to get the loan. I'm not privy to all their financial details so I can't really go into it much more than that. I do know that they do have enough money of their own to pay all the Arch fees without a loan so I'm sure plenty of cash is needed up front aside from the downpayment (which land value counts towards also). Developing any site for new builds is no easy task for sure and not for the faint of heart. But you dont have to be filthy rich with lots of cash to do it...though lots of cash never hurts lol.

they had to find a deep pocket partner and one with experience banks simply don't make large multi family loans based on land value and no experience..  

@Tab Teehee

A lot of good info here!  Another thing to note about talking to the an architect is they do Master Plans.  They may call in a urban planner to assist but they can come up with ideas for you.  This helps paint the picture of the possibilities that can be done.  They can put a cost to this.  This master plan is like a road map or site concepts.  The architect will create colored site plans and some renderings of what the buildings may look like.  These things are helpful to market to the banks for funding and other investors.    If you decide not to sale the land which is too early to do this then every option will require an architect.   At the very least go chat with architect for an hour even if its cost you $200.  Its money well spent! 

Originally posted by @Jay Hinrichs :
Originally posted by @Nik Moushon:
Originally posted by @Jay Hinrichs:

 financing a project t of that magnitude without prior experience and lot so cash Is not only hard but IMPOSSIBLE. 

I would disagree with you only because the 84 unit development I mentioned above is doing just that. Owners got family land. Had not special financing of any kind. They just went around to the local banks and started shopping. At first, it was hard to get the banks to take them seriously but now they 3 banks fighting over them to get the loan. I'm not privy to all their financial details so I can't really go into it much more than that. I do know that they do have enough money of their own to pay all the Arch fees without a loan so I'm sure plenty of cash is needed up front aside from the downpayment (which land value counts towards also). Developing any site for new builds is no easy task for sure and not for the faint of heart. But you dont have to be filthy rich with lots of cash to do it...though lots of cash never hurts lol.

they had to find a deep pocket partner and one with experience banks simply don't make large multi family loans based on land value and no experience..  

 Nope. No partners of any kind. I know they have money through inheritance and their own but seriously no partners and no experience in MF. They did manage their own house build but thats it.  I know this is a rarity and not the norm but if you push hard enough and show your due diligence its possible. Just do go expecting it.

Originally posted by @Nik Moushon :
Originally posted by @Jay Hinrichs:
Originally posted by @Nik Moushon:
Originally posted by @Jay Hinrichs:

 financing a project t of that magnitude without prior experience and lot so cash Is not only hard but IMPOSSIBLE. 

I would disagree with you only because the 84 unit development I mentioned above is doing just that. Owners got family land. Had not special financing of any kind. They just went around to the local banks and started shopping. At first, it was hard to get the banks to take them seriously but now they 3 banks fighting over them to get the loan. I'm not privy to all their financial details so I can't really go into it much more than that. I do know that they do have enough money of their own to pay all the Arch fees without a loan so I'm sure plenty of cash is needed up front aside from the downpayment (which land value counts towards also). Developing any site for new builds is no easy task for sure and not for the faint of heart. But you dont have to be filthy rich with lots of cash to do it...though lots of cash never hurts lol.

they had to find a deep pocket partner and one with experience banks simply don't make large multi family loans based on land value and no experience..  

 Nope. No partners of any kind. I know they have money through inheritance and their own but seriously no partners and no experience in MF. They did manage their own house build but thats it.  I know this is a rarity and not the norm but if you push hard enough and show your due diligence its possible. Just do go expecting it.

 its an outlier for sure then.. and the GC they are hiring is probably very well known and they have a lot of liquidity..  but most don't have it all ..  I worked on a few bigger multi developments here in PDX and I got to think the lending is the same as in Apple country..  and the cash requirements were HUGE and experience important.. to mandatory..   But you never know..  and a few million in cash in a bank can change those dynamics a ton.. 

Originally posted by @Jay Hinrichs :
Originally posted by @Nik Moushon:
Originally posted by @Jay Hinrichs:
Originally posted by @Nik Moushon:
Originally posted by @Jay Hinrichs:

 financing a project t of that magnitude without prior experience and lot so cash Is not only hard but IMPOSSIBLE. 

I would disagree with you only because the 84 unit development I mentioned above is doing just that. Owners got family land. Had not special financing of any kind. They just went around to the local banks and started shopping. At first, it was hard to get the banks to take them seriously but now they 3 banks fighting over them to get the loan. I'm not privy to all their financial details so I can't really go into it much more than that. I do know that they do have enough money of their own to pay all the Arch fees without a loan so I'm sure plenty of cash is needed up front aside from the downpayment (which land value counts towards also). Developing any site for new builds is no easy task for sure and not for the faint of heart. But you dont have to be filthy rich with lots of cash to do it...though lots of cash never hurts lol.

they had to find a deep pocket partner and one with experience banks simply don't make large multi family loans based on land value and no experience..  

 Nope. No partners of any kind. I know they have money through inheritance and their own but seriously no partners and no experience in MF. They did manage their own house build but thats it.  I know this is a rarity and not the norm but if you push hard enough and show your due diligence its possible. Just do go expecting it.

 its an outlier for sure then.. and the GC they are hiring is probably very well known and they have a lot of liquidity..  but most don't have it all ..  I worked on a few bigger multi developments here in PDX and I got to think the lending is the same as in Apple country..  and the cash requirements were HUGE and experience important.. to mandatory..   But you never know..  and a few million in cash in a bank can change those dynamics a ton.. 

Absolutely. They did have somewhere in the 18-20% cash of construction loan. And for the 8 figure budget thats not a small chunk of change. Plus their land value is also a sizable part of their lending weight. What also helped was they are doing 12-plex buildings instead of one large building and doing it in phases. So they don't have to take out the entirety of the total project construction loan at once. As the buildings get built and occupied (we have a 1% vacancy rate here so they will be rented out before they are even finished) that equity also get factored into the remain loan as well.  I should've made this clear earlier, sorry about that. 

Originally posted by @Nik Moushon :
Originally posted by @Jay Hinrichs:
Originally posted by @Nik Moushon:
Originally posted by @Jay Hinrichs:
Originally posted by @Nik Moushon:
Originally posted by @Jay Hinrichs:

 financing a project t of that magnitude without prior experience and lot so cash Is not only hard but IMPOSSIBLE. 

I would disagree with you only because the 84 unit development I mentioned above is doing just that. Owners got family land. Had not special financing of any kind. They just went around to the local banks and started shopping. At first, it was hard to get the banks to take them seriously but now they 3 banks fighting over them to get the loan. I'm not privy to all their financial details so I can't really go into it much more than that. I do know that they do have enough money of their own to pay all the Arch fees without a loan so I'm sure plenty of cash is needed up front aside from the downpayment (which land value counts towards also). Developing any site for new builds is no easy task for sure and not for the faint of heart. But you dont have to be filthy rich with lots of cash to do it...though lots of cash never hurts lol.

they had to find a deep pocket partner and one with experience banks simply don't make large multi family loans based on land value and no experience..  

 Nope. No partners of any kind. I know they have money through inheritance and their own but seriously no partners and no experience in MF. They did manage their own house build but thats it.  I know this is a rarity and not the norm but if you push hard enough and show your due diligence its possible. Just do go expecting it.

 its an outlier for sure then.. and the GC they are hiring is probably very well known and they have a lot of liquidity..  but most don't have it all ..  I worked on a few bigger multi developments here in PDX and I got to think the lending is the same as in Apple country..  and the cash requirements were HUGE and experience important.. to mandatory..   But you never know..  and a few million in cash in a bank can change those dynamics a ton.. 

Absolutely. They did have somewhere in the 18-20% cash of construction loan. And for the 8 figure budget thats not a small chunk of change. Plus their land value is also a sizable part of their lending weight. What also helped was they are doing 12-plex buildings instead of one large building and doing it in phases. So they don't have to take out the entirety of the total project construction loan at once. As the buildings get built and occupied (we have a 1% vacancy rate here so they will be rented out before they are even finished) that equity also get factored into the remain loan as well.  I should've made this clear earlier, sorry about that. 

YES major difference doing this in phase's with that type of liquidity that makes sense.. but someone with no experience going out and trying to finance a build of 84 units on the west coast which is easy a 6 to 8 million dollar loan.. that's a tough one..  

@Tab Teehee What a great position to be in, good for you Tab! Always wise to engage with other members of the community to get a feel for the best course of action. I agree with several others here, speaking to an architect or maybe city planners who can give you a better idea of whats to come in the next few years. It sounds as if you could potentially be sitting on a gold mine.

The way that you devolve it is to determine the highest and best use of the property, which is a conversation in and of itself. By understanding the best use of the property, you can figure out the alternative development scenarios for the use or uses that are associated with the development plan. For example, if part of the property can be used for retail and the balance for multifamily, you have a starting point to work from. Which leads to a series of additional steps, like annexation, zoning, densities, utilities (water, sewer, electric) and entitlements.

A real estate developer is your best bet as a resource to conduct the initial due diligence and go into a deeper dive to define the project or projects best suited for the property. 

Using the retail/MF example, to determine the value of the land for each element, you would need to figure out how many sq. ft. of what type of retail, which would define the land value (per acre or square foot) that could be supported which will be determined by the rents that would be generated against their capitalized value. Deducting all defined project cost (including a developer profit) BUT NOT land value will produce the land value of the retail piece. Retail land is normally developed to a 3:1 ratio with each sf under roof using 3 sf of parking, driveways and open space. So a 5 acre piece would allow for a 50,000 sf retail center: 43,560 sf in an acre rounded to 40,000 sf land per acre = 10,000 / acre under roof and 30,000 sf / acre of land to serve it. Therefore, 5 acres will yield a 50,000 sf center (10,000 sf / acre under roof x 5 acres) with a residual site area of 150,000 sf (30,000 sf / acre x 5 acres).

The value of the MF can be established in much the same way noted above. The density (say 10 acres at 20 units / acre) would produce a unit count of 200 units. Once you know this you can run the same drill as applied to the retail. Determine NOI/Cap Rate = Project Value - all cost BUT land including a developer profit = the land value that can be supported by the proposed MF project.

Architects, engineers, contractors and realtors are all great resources that have their time and place. They are crucial to gathering the data needed find land value, which is a piece of total value, which requires and uses information from the team members noted above. Going to any one or combination of these folks will, in my opinion serve to frustrate rather than inform you. To understand the value of your land on empirical basis, you need to understand the "Whole" (the project) in order to understand the "Part(s)" (land value).

A closing observation: the value of your land can and should be understood and viewed in relative terms. Land values increase based on how far up the chain it has moved in regard to its current posture versus its perceived highest and best. If the land needs to be annexed from a county into a city or town and you get that done, its value has increased. Obtaining zoning, getting approval for site uses and densities are all ways to realize increase land value.

Once and if a property has some or all the the approvals needed to permit, build and operate the project(s) that reflect the highest best use, it has a much higher value than before these entitlements were in defined and in place. 

The value of your land is directly tied to understanding is best uses and the value (cost) of the land that those uses can support. The value of your land will increase each time its use and permitting has been advanced. You can sell it at anytime during the entitlement process at it ever increasing value. You could also choose to JV with a developer using all or part of its value to become a part owner in the entity that acquires the land. This too is another conversation of its own

Hope this helped to describe a process to devolve value. Please let me know if I can be of any help to you in executing any of this.