Negotiating Purchase of Vacant Lot in Bay Area tomorrow. Advice?

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Going to try to negotiate the purchase of vacant lot tomorrow. Any advice?

I’m meeting the owner of a vacant lot tomorrow to try to negotiate the purchase of a vacant lot in the San Francisco Bay Area. It’s a killer price, flat, infill, never built on, and I already checked with the planning dept on what I can build on it.

Part of the neighbor’s overhang from what looks to be an illegal unit in their backyard is hanging over the lot. Their cars were also on the lot when I first saw it. The seller said he is getting a survey, installing a fence, and ensuring it will be delivered with no encroachments.

I was going to offer him some “hard” deposit, w/ a negotiated price & close date from when he delivers on the following contingencies:

Lot delivered free of encroachments
Lot delivered free of any liens or encumbrances
Survey reveals no different circumstances that would change “buildability” from current buyer and seller knowledge about lot location and size, coupled with instructions/conversation with planning dept.
Will do transfer through escrow, and get ALTA policy.

Any other tips? Should I get the neighbors whose encroachments were on the property for so long to acknowledge they have no rights? (Not sure how long they have used it, and don’t know much about adverse possession..)

I wasn’t planning on getting a soil test right now, as the risk looks low in this infill lot surrounded by similar size structures to what I can build, and the lot is cheap if I close quickly..

Any other advice?

I don’t plan on building now, but it’s a few blocks down from an existing rental, and the government will be spending a lot of money improving the area nearby. So I plan to hold for future development (unknown date). Can pay property taxes out of pocket..

Thanks already to @Jay Hin 

@Jay Hinrichs  undefined, @Minh Le  , @Kyle Zaylor  , and @Shiloe B.  on some tips..

Overflow tent sites for the Summit then, huh?

Originally posted by @Troy Fisher :

Overflow tent sites for the Summit then, huh?

 I met someone who builds yurts the other day at a tiny home meetup. So we'll see lol. It's really for future development. Might something end up there in the interim..? Not like I'm going to be down there supervising the thing all day long..

Awesome. You are taking this great liabilty off his plate. Fence maintenance, insurance, lawsuits, code violations, squatters, floods, dirt, mud, trash, illegal dumpers, property infringers ...what a pain:)

@J. Martin  Seems risky if you aren't going to be building soon and receive a return on your investment.  Would the capital you plan on investing into this property generate a better return immediately somewhere else? What will the cashflow be on this lot?  Maybe you should just flip the lot?

Unless your cashflow from your other properties covers the lot expense or you have a endless supply of cash I would be cautious.  Who knows what the market might do tomorrow.


Frank

Originally posted by @Matt R. :

Awesome. You are taking this great liabilty off his plate. Fence maintenance, insurance, lawsuits, code violations, squatters, floods, dirt, mud, trash, illegal dumpers, property infringers ...what a pain:)

 Yes, I am taking some headaches off, but not too much. Good points to think about though..

Fence maintenance,

>Fence is in good condition on 3 sides, and he is building the 4th before deliver..

insurance, lawsuits,

>Will be under my umbrella; doesn't cost much for dirt w/ fence around it.

code violations,

> Checked with city. No code violations today.

squatters,

> Possible. besides calling sheriff to remove them, something else I should be diligent about?

floods, dirt, mud,

> Not sure if I quite understand..? There is rain sometimes, but the lot is flat, and there is drainage in the street (infill). What should I be worried about regarding floods, dirt, and mud..?

trash, illegal dumpers,

> possible. fence is pretty high (6.5 ft.?), so it seems harder to dump heavy items. I usually see trash on lots w/ lower fences....

property infringers ...what a pain:)

> Is this regarding the neighbors? One of my contingencies is delivering the lot free of encroachments. If people go on it later, I'll have the police remove them. I have a rental a few blocks away, so I'll have my handyman cruise by at least once a month or so...

I appreciate all the warnings. Good to know the other things I might have to deal with.. This is my perception of those issues so far.

Originally posted by @Frank R.:

@J Martin Seems risky if you aren't going to be building soon and receive a return on your investment.  Would the capital you plan on investing into this property generate a better return immediately somewhere else? What will the cashflow be on this lot?  Maybe you should just flip the lot?

Unless your cashflow from your other properties covers the lot expense or you have a endless supply of cash I would be cautious.  Who knows what the market might do tomorrow.


Frank

 Hi Frank, thanks for the words of caution. You are spot on that my biggest consideration is how efficiently/effectively I'm using the capital. The future returns are hard to estimate w/o building today, but the lot costs less than my last vacation, (yes, I can cover the holding costs with a fraction of one property's net income) and again, I have a rental a few blocks away -

So the cost is almost like buying an option on the future development of the lot, but I'm buying the lot itself, in my mind. I thought about just putting it up on the market afterwards (currently off market) - and if I get a high enough price, I just may... But my main goal is to hold onto it for future development in an area I have rentals, and the city will be spending a lot of money...

There may be no cash flow in the interim from the lot (although I'm potentially considering a tiny house experiment.. )

I don't exactly have a deal to put the money in right now, but I'm sure something will pop up in the next 3-6 months. This could be a home run for the long term, but more speculative and less certain when the payoff comes. But low enough price point to make it worth the cash..

It's less than $20k... which is crazy in the Bay Area...

Right on J. I was just rattling off some ammo for negotiations.  Infill is where the smart money is these days. Good luck.

Be patient.  The odds that a guy who is going to sell you a lot for under $20K is going to pay to have a survey done ($2-3K?) build you a fence ($1-2K?) and have some beef with the neighbors about cars and a deck within 1-2 months are very low.   All of that stuff will take months. 

Be careful with the neighbor issue.  If they are the least bit on the ball, they have the potential to slow down or gum up the development process.  Don't go in with guns blazing about encroachments on a vacant lot they have lived next to for years.  You need to be very low key and very cool if you are going to try to build something.  

Why are you buying a lot that will sell for 20K?  I thought you bought higher cash-on-cash return buildings in marginal neighborhoods that you put a lot of sweat equity into?  It's unusual to put money into new construction in marginal neighborhoods, unless the gentrification pendulum is really starting to swing.  I can almost guarantee it will cost way more to build than buy in a neighborhood where you can get a lot for 20K.

What's your time horizon?

What are you going to build?

How much will it cost to build?  

What will it sell for once it is built?

If you hold it, what will the implied cap rate be on your cost to build?

How much are development fees for what you want to build?

Even if you aren't going to build yourself, you should know if you expect to sell the lot to someone who will.  

The cost of the dirt is (often) a tiny percentage of the overall cost of a project.  Don't let the small numbers convince you that it's a good deal.    

I would say buy it if you get it for $20K or under. Its pocket change compared to what you own and consider this a lottery ticket. Heck, I lost more than that on my call options this past week :)

20K sounds too good to be true.  Sounds like you have a plan.  


Frank

@J. Martin  

  • Where in the bay area is the lot?
  • What size is the lot? What is it zoned? 
  • What zoning does the general plan call for? What are all the setbacks, etc.? (sidewalks, landscaping, fence, etc.?
  • Did you ask the Planning Department about the overhang from the neighbors? 
  • What is the price they're selling for? 
  • Why are they selling so cheap? 

"I can almost guarantee it will cost way more to build than buy in a neighborhood where you can get a lot for 20K."

Ditto. 

That price smells very low for the Bay area.  Make sure there are no public utility easements on it.  There is a lot across the street from one of my projects I would love to buy but it has a public utility easement right through the center that isn't going away, so it's not developable.

Make sure you check your title policy very carefully and that you can get all of the utilities to this lot.  Was it ever a part of a larger lot?  If it's a half lot, your utility access may be through another lot which will require an easement.

Tread carefully.

@John Blackman  , @Karen Margrave  , @Tom V.  , and @Amit M.  ,

All good questions/points.

First, my motivation:

1) I own rentals in the neighborhood already, has been improving dramatically over decades (but still E Oakland), and great to be able to have control of a lot on the cheap to build a rental in the future. It's essentially an "option" on future development. When lots cannot be built today, their prices drop dramatically. When they are buildable or perceived to be buildable in the near future, that price increases dramatically. So no, I am not looking for a development project right now. It's an option for the future..

2) City & Fed govt spending about $200MM improving the corridor and adding excellent transit a block and a half from property

3) More volatile price - Land prices are volatile. I believe we are at the cheap part of the cycle for land in this area. It is about as low as it can get. It's like going into a time machine back into the crisis and buying up lots for cheap in an area that everyone is overly bearish on, but you know it well enough to (think you) know its potential

4) Everyone else is super bearish on it. There's no way this thing is worth it. But I think I'm really going to be kicking myself in the *** in 5 years if I don't buy it now.

5) It's so cheap, and the holding costs are so low, it will cost less than the last vacation I had, and the annual holding costs are less than 1/2 month of one unit's revenue that I own.. I could skip one fun night out at the bar each month to pay the property taxes.

sidenote: Possible experimental living project location in interim

1) Would definitely be cheaper to buy existing structure than build today. That's why the lot is so cheap. As I described above, it's more of an option on future development, for a very reasonable price. Speculative? Yes. Development project w/ known returns like Karen's project? No.

2) Lot details. East Oakland. Flat lot. Infill. 98% built. Pretty nice neighbors. A hair under 3000 sq ft. Can build about 1,600 sq ft house, w/ about 650 sq ft accessory unit (and have some plans about how the house is set up for maximum utility - IN THE FUTURE) Not for today.. It's RM-3. Only 3 foot setbacks needed on each side, and 25 ft wide lot, so 19 ft wide structure. Several lots in area w/ same size and build. This is totally acceptable for area. There HAS been new construction in the area over the last couple years - mostly owner-occupants. (Yes, in deep East Oakland, folks! I have personally watched it in the 90th avenues just below this..)

Did neighborhood recon today talking to everyone, and met an elderly woman that knew the neighbors who USED TO HAVE A HOUSE ON THIS LOT. I am convinced she is correct. She said it sat on the back of the lot. Then it got abandoned after someone passed away, and eventually got bulldozed. So it looks like the utilities should be on the lot. Not sure if can use same ones from 60's?

3) Did not talk to planning about overhang. Seller already spoke with them and dealing with it allegedly. Will be speaking with them myself. I did talk to them about the structure, and they said should be good to go.

4) John Blackman, thanks for reminder on easements. I will be checking, and  plan on getting plat/survey & ALTA. Because there was a house there before, I assume it should be OK, but could differ today from then... This will be included in the contingency.. Anything that prevents buildability that we know today..

Originally posted by @John Blackman :

That price smells very low for the Bay area.  Make sure there are no public utility easements on it.  There is a lot across the street from one of my projects I would love to buy but it has a public utility easement right through the center that isn't going away, so it's not developable.

Make sure you check your title policy very carefully and that you can get all of the utilities to this lot.  Was it ever a part of a larger lot?  If it's a half lot, your utility access may be through another lot which will require an easement.

Tread carefully.

 Thanks for the warning, and I will definitely be checking the easements. I want to make sure I get the lot delivered buildable, w/ no encroachments (or easements that prevent the build), and delivered free & clear of liens & encumbrances, and know what piece of land I'm getting and what's on it (survey).

Maybe it's too good to be true?.. But the low price is really in the higher cost to build relative to current prices for marginal existing buildings in the neighborhood, it appears so far. Haven't run into anything that says otherwise.

I will check all these things. Thanks again everyone for the tips.

Originally posted by @Tom V. :

Contrast your lot with the one @Karen Margrave bought in Capistrano Beach for 325K.  

http://www.biggerpockets.com/forums/522/topics/152...

She paid much more but has (I would venture) a much better, safer, more profitable investment than your $20K lot.  

 I WISH I had the, knowledge, capital, connections, development experience, and borrowing capacity that @Karen Margrave has. I'm sure she's going to make a great return, and I'm totally stoked for her.

I would guarantee her return is much more safe (and can actually be calculated today!). This is a hold for future development play. Not a current build. So it is much more speculative w/ many more unknowns.

The real question for lots for future development when I see them is >

How long will it take before it becomes buildable based on other rents & prices..? I think that could be a few short years. Based on overflow from nearby areas, govt money spent on improved transit & beautification in adjacent areas, everything being 2-10X more expensive.. A rising tide. And again, a bit of a speculative "option" play..

My motivations, knowledge, and capacity are much different than hers. And the cost of making that gamble is much different also. Again, more of an option play.

In regards to implied cap rate, I'll put the numbers below..

THE NUMBERS>>>>

7% cap at $160-$190/sq ft total cost TODAY - ballpark

Again, I do not intend to develop it at this time, but I comfortably believe I could get a total of $3k/mo in gross rents in today's market for what I intend to build, totaling about 2000 sq ft of average quality materials and finishes (rental quality). I would have tenant pay all utilities, and w/ newer construction, could probably get away w/ 35-45% expense ratio..

This would imply from about $22k to $27K in annual net income before any financing. w/ a 7% cap rate (picked out of thin air, go ahead and pick and calculated your own..), this would support a total cost of about $320-$380K, or $160-$190/sq ft. The lot, today, would cost about $6-8/sq ft of the building area, based on current estimate lot purchase price and planned 2000 sq ft of overall livable space.

Originally posted by @Frank R.:

20K sounds too good to be true.  Sounds like you have a plan.  


Frank

 I have a joke that I like about things being "too good to be true", efficient market theory..:

AN OPTOMETRIST AND AN ECONOMIST ARE WALKING DOWN THE STREET AND THE OPTOMETRIST SEES A $100 BILL ON THE SIDEWALK. HE GOES TO PICK IT UP, AND THE ECONOMIST STOPS HIM AND SAYS:

"DON'T WASTE YOUR TIME. IF THERE WERE REALLY A $100 BILL ON THE STREET, SOMEONE WOULD HAVE ALREADY PICKED IT UP."

hahahahha

I think it could be a deal based on my perception of the area. It is speculative. But it is at a low enough price point that I can afford to speculate on it a little. At least I can take my lumps on a manageable size project.

AND WITH ALL OF EVERYONE'S HELP ON BP, I'LL AT LEAST UNDERSTAND THE RISKS AND COSTS I'M TAKING ON IF I BUY THIS LOT. THANKS EVERYONE!!!!

For crying out loud, just buy the lot. You're a sophisticated investor and I doubt if the risk would cause you personal hardship. 

This play is well thought out. I, too, see it as an option on future progress. If you're not really a builder/developer, then you can watch the local market and become an insider to the neighborhood. 

What do you see your exit plan price point to be on your investment?

What are your school fees and water connection fees and utility fees?  Is there an existing meter?  A sewer connection?  A gas connection?  You can call the utilities and find out for free. 

Who told you you could build for $175 per foot?  That sounds low.  It sounds like your contractor would need to keep this job site buttoned up very well.  That adds costs.  

Why would you build two structures (accessory unit + main house)  Are those independent structures or on the same foundation?   I am surprised you think you could only build a 1600sf house.  What's the height limit?  You should think "up" if you want a multifamily.  I would have guessed 2,500sf easy.  

There is no nobility in building to hold.   If it is an improving neighborhood you will command a better price for building to sell.  What are the comps for the for-sale market?  

Are there design guidelines?  

You seem to be a guy who takes pride in saving money and spending frugally and spending smart and that is great.  That is fantastic.  That is inconsistent with buying a lot on hopes and gut feel.  Maybe the outlay isn't huge, but I guarantee you will find another deal in the next 6 months that seems like an equally exciting investment for that twenty grand.    Land can be like a roach motel, easy to check in but....   

Also, when you spend the next 25K on plans and entitlements (before you have dug a shovelful of construction dirt) and you decide then you want to sell, you are probably not getting all of that 25K back in a sale price on the open market.  

You also, it sounds, already have a boatload of personal portfolio exposure to this neighborhood.  If the area improves you will make money anyway.  Does it make sense to diversify into another market or investment type?

I am not trying to dissuade you here - I have been going through this for the past 3 years in Sacramento with a bare lot I bought and am subdividing.  There are lots more questions to answer if you are going to build instead of buy.

Sometimes you do just find a cherry deal now and then.  About 1 in 10 of my deals are just really good.  So don't let the feedback scare you off, just make sure the lot really is buildable and count up all of the expenses and add 10%.

It's just that sometimes lots are cheap for a reason and someone else has been through the headache that you don't know about yet.  If you can get it under contract to close with permits, that would be the best option, although it sounds like you want to sit on it for a while so that is not likely to work.

Also, since the land is so inexpensive, your construction loan will only cover 80% LTC at best, so you will need to bring more cash to the table to get the construction started.

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