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

[Wendell De Guzman]

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:

[Sean Pincus]

@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.