HELP! I know ZERO about new construction - If you have a piece of land suitable for 10 townhomes...

14 Replies

I have not done new construction so I need the help of developers out there.

I have this piece of land suitable for development of 10 townhomes. Each townhome in this nice suburb of Chicago can be sold for $650K or even more. I can get the land for $1.1M. I don't know...

1) the cost of developing the land
There is an old house that sits on one part of the land so I assume it has utilities/sewer lines

2) the cost of the building - for high end townhomes, should I use $100/square feet or is that too low

3) what will be a typical ROI that you will say "Yes, this project is worth it." If I assume $120/sqft as total cost of developing the land and the building, I have a 37% ROI. Is that good enough to take on this risk?

4) what other things should I consider?

Here's a schematic of the site plan:

@Wendell De Guzman  Are the two existing structures on neighboring lots? Do you already own the land?

If you've never done development before, I'd suggest you find a developer/builder in your area and see if they would be interested in doing some type of a joint venture with you, or find out what they'd charge you to work with you on managing the project, and consulting. Though it's not a big project per se, and seems pretty simple and straightforward for someone with experience, for someone with no experience, if you miss something, it could end up costing you a lot of your profit. 

You will need to check and find out what all the costs to develop will be (plans, engineering, installation of utilities, school fees, permit fees, are there any other fees related to the project such as traffic impact fees, etc.? Here in California you can get hit with traffic impact fees, environmental mitigation, park fees, etc. so you want to know exactly what is going to be required. 

Sorry I couldn't be more help, but I don't know squat about Illinois. 

Hi Wendell:

We have done a dozen or so flip deals but we are actually embarking on our first modular home/raw land deal. You might want to team up with a modular company out by you.  We are from NJ, and to put a modular on a piece of raw land is cheaper out here than building new.  Since this is our first modular deal, we hired a guy who has done a lot of modular homes as a consultant.  We wanted to minimize the mistakes so we thought this would be a good strategy. 

We are new to the game too!  Good luck!!

Liz

Liz - I have a hunch putting a modular town house on the property in a nice suburb of Chicago would not fetch the 650k+ per unit the OP mentioned.

The numbers look good to me I would jump all over this opportunity-- a partnership with a GC in the area that you can get a solid referral from and has a good reputation for honesty and integrity. A track record for success.

Wendell- it seems as if your are a bit farther along then deciding to purchase the property if you have a site plan developed already.

On second thought I am not sure I like this proposed development. The way the property would be sandwich between two older MF units. I just looked at arial views. Do you think this area can support this level of investment? Property sold for 370k a couple years back-- is there another parcel other than 2107? I am not getting how you got to $1.1m in land.

Originally posted by @Mark D.:

On second thought I am not sure I like this proposed development. The way the property would be sandwich between two older MF units. I just looked at arial views. Do you think this area can support this level of investment? Property sold for 370k a couple years back-- is there another parcel other than 2107? I am not getting how you got to $1.1m in land.

 That's a good point Mark (on the property being sandwhiched between 2 MFs). Yes - there are several parcels - 2103 to 2107. That's why the land is $1.1M.

@Wendell De Guzman  

  How big of units do you have to build to garner 650k each... If they have to be 4,000 sq ft then no the deal is not all that great but if they are less than 3,000 then of course it a nice deal that I am sure a builder would pick up as long as there is no other hair on it like Karen suggests or that the market won't really support it because of neighborhing influences like Mark Suggest... If I had the same set up in PDX it would be not only a home run but a grand slam.. And of course with our competition here for dirt it would only happen if it never hit the open market

Thanks @Jay Hinrichs !

The size per unit based on the plan is 2,905 sq ft. Can you please elaborate why less than 3,000 sqft it will be a good deal and if it's more than 4,000 I should stay away from it? Is it because of the higher cost of building the units at 4,000 sqft? Is there something magical with the square footage being less than 3,000? 

@Wendell De Guzman  

  Just simple math Wendell based on your numbers.

your in the dirt 110  each

you say you can build for 100 a foot

so 4k sq ft that would be 400k plus 100k for the lot plus carry cost ut oh cost real estate fees tax and insurance your probably looking at Hi to mid 500's investment so 50 to 75k profit per maybe a little more.. NOt bad but can be risky at that price range if your stuck with them

If its 3k sq feet take 100k off your all in and your at 150 to 175k per and that is a smoking deal I would do any day of the week.. especially if you can get bank financing for your vertical with say 20% down.

@Wendell De Guzman  

  take one a few years to make that amount of profit on rental properties  one month at a time :)  good luck with it.

Originally posted by @Jay Hinrichs:

@Wendell De Guzman 

  Just simple math Wendell based on your numbers.

your in the dirt 110  each

you say you can build for 100 a foot

so 4k sq ft that would be 400k plus 100k for the lot plus carry cost ut oh cost real estate fees tax and insurance your probably looking at Hi to mid 500's investment so 50 to 75k profit per maybe a little more.. NOt bad but can be risky at that price range if your stuck with them

If its 3k sq feet take 100k off your all in and your at 150 to 175k per and that is a smoking deal I would do any day of the week.. especially if you can get bank financing for your vertical with say 20% down.

 Thanks Jay. Makes sense! I think I have a smoking deal here. I need to partner up with a developer then...

@Wendell De Guzman

Most residential home builders want a Direct Profit of 24% or more to make it a good deal. 

Direct Profit = X / Land Cost + Hard Cost + Soft Cost (the only variable is the amount of profit in dollars and cents). 
- Land Costs = $1,100,000
- Hard Costs = $3,486,000 ($120 PSF)
- Soft Costs = $600,000 (approximately) ($20 PSF)

TOTAL = $5,186,000 * 24% = $1,296,500 or $129,650 per house. 

You are going to build it for $518,600 and sell for $650,000 which is more then the $129,650 so you're above 24% DP. -- Check so far a good deal

Things to keep in mind
1. Hard costs can go up considerably if you have to blast rock for foundations and haul massive amounts of dirt. I have accounted for this in my above analysis (typically a production style house can be built for $60 PSF).
2. Interest Reserve on the construction loan if it takes you longer then 18 months to build all the houses can run costs rampant
3. Make sure you set the houses properly (proper grading can make or break a development)

Ways to make additional revenue

1. LLC as a General Contractor and build in General Conditions into the Proforma (and the bank loan). This way you can generate revenue monthly to pay bills and live while working on the project.

@Sean Pincus  

  Sean wish it was that good out here in Portlandia  24% is rare.. 10 to 15% is customary

I just hit a 20%  and I have bouncing off the roof with Joy !!  closes Friday

@Wendell De Guzman  just drove past this the other day. There is definitely value in being next to the school. 

$100-120psf does seem kind of low. Is it going to be frame with brick facing? or block with facing? i was thinking 175$ is more reasonable if you are going to have premium finishes (granite, subzero) etc. to justify the $650k+ retail tag. 

Good landscaping would add a lot of value. (hide the neighbors)

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