How long do you hold lots before building starts?

14 Replies

Ok, this is a newbie question but here goes:

Do builders carry an inventory of vacant lots and how long do they hold them before building starts?  If not, who do they get the lots from when they are building spec houses?

I come across a number of below market value lots while looking for other opportunities and am wondering who would be the most interested in them.

Thanks!

Roy

Builders look at a lot of different criteria when they are considering building spec houses. What is the local real estate market like? Are the lots located in an area with high demand? What are the comps for the area for completed homes? How much inventory is there already on the market in the neighborhood? What are rents in the area? (high or low) Can lots be purchased for a price where it makes sense financially to build? 

If a developer/builder finds lots that make sense, they'll buy them, if they don't, they won't. If you're coming across a bunch of lots below market value, that probably means there's not a demand for housing yet and builders are waiting for the market to tighten. Somewhere in between is where they want to buy the lots! 

Where we build we may have a lot empty for about 3 months before we start to build.  It generally looks like this:

Day 1 - Under contract

Day 30 - Due diligence complete, money raise under way possibly complete, start designs

Day 60 - Close lot purchase with equity. Designs complete, submit to City of Austin, start loan review process

Day 90 - Permit ready - this can swing anywhere from 30 to 180 days depending on how crazy the city is.  When everything is operating normally, 4 weeks is average.  Historic reviews, reviewers on holiday, and politics can increase this amount by 2-10 fold.

Day 100 - Close the construction loan

Day 101 - Grade the lot, start construction.

So on an average deal from contract to start is usually 90-100 days.  This only applies to our projects in Travis county, Texas and our experience level.  I'm sure other folks can move faster if they have faster designers or are willing to purchase sooner with less due diligence.  So your mileage may vary.

@Karen Margrave  undefined

We buy at multiple tax sales every month and there are many vacant lots that go un-sold in all areas of Texas.  Typically these lots are two years from development due to title policy issues.  

Trying to figure out if it makes sense to buy and hold these.  You have given me much to start that research.

THANKS! 

@John Blackman  

Sounds like you only buy the lot when you are ready to begin the process.  How do you source them?

Thanks for the information.

I'm wondering on your assumption that a lot is below market value, that may be if the owner is in a distressed situation, most likely, as Karen eluded to, that may be the market value, what you agree to pay.

Here, new lots will carry a break ground date, generally 1 year from closing.

In Texas weather is not a big factor, at least as much as it is in northern areas, you might hold 90 days (or more) before getting below the frost line to pour!

How long you hold may be examined from the market demand and the expected final sale, work backwards to your buy date, if the market is hotter, you might buy and hold to avoid market risks. If it's like some here in rural areas, there may be little market risk, a letter of inquiry or intent may all you need, right of first refusal can be had on a handshake (almost). So, why hold it?

 Developer-builder, some are holding lots from under performing developments for 20+ years! :)

around here it isnt uncommon for a builder to have lots for a 2 year supply. Hit up the builders but they will want a steal. BTW @Roy Oliphant  http://taxtitleservices.com/ they will insure over our tax deeds here. Expensive but save 6-9 months. Last year I bought a lot for about 1500 at tax sale should be worth about 25k, but couldn't get a builder to buy it for 10k, they are mostly waiting till the spring over here. I will probably just build a house and sell it, as I am a licensed builder as well, good winter project.

@John Blackman  So that's the time frame for your grading permits, how long does it take you to have a building permit in hand from time of applying? 

@Roy Oliphant  I don't know anything about Texas, but here in California you want to have a pretty good idea what's going on as far as any geographical issues with the land. If it's a flat lot in established area, with utilities available, that's great. If it's on a grade of any kind, you want to see soils testing and have some idea of engineering that will be required. Also, some areas, say like Huntington Beach, have parcels that have oil drilling on them! Sometimes a free lot is too expensive, if it costs a fortune to develop it and the end values won't cover the cost of development/construction. On the other hand, some of these really high end areas they have lots for sale for $29,000,000! Crazy!  

@Bill Gulley  

These lots are mostly in established neighborhoods and either left overs or tear downs from disaster or neglect.  Texas has very few areas where there are geological or topographical issues; flat spaces everywhere.  Of course, we do have many areas with soil issues (clay or loam) and directional drilling seems to be causing measurable seismic activity but no damage.

Thanks, again!

@Karen Margrave  

 The city is currently averaging 4-5 weeks from permit drop off to permit in hand.  That assumes one round of comments that can be successfully addressed.  If there are any hiccups at all (Historic, multiple rounds of comments, City changes their requirements) this can go up to 6, 8 weeks.  Our worst has been 1 year of permitting before we could start.

This can be different from builder to builder. It also depends if the builder is a developer or just buys developed lots. It also can depend on cash flow and their specific business plan. 

At my previous job, we were developers and builders. At one time we had over 150 lots developed, and another 60 acres or more that we owned but hadn't developed yet. 

Me personally, just starting out, I just bought 3 lots here adjacent to one another. I close on them in a couple of weeks and will be able to start immediately. My homes will be spec, and I will stagger the start of them (30-60 days apart), when the first one goes under contract, I will purchase another lot. My goal is to always have a home ready to buy, I may need to increase to 4-6 lots in order to do so, we'll see how 2015 rides out. 

In my Town it takes 2 weeks or less to get building permits, maybe it helps that I sit on the Planning and Zoning Board, but we are a small beach town. Permits to create a subdivision is a whole other ball game, 6-12mos depending on the size/scope. 

@Jay Hinrichs  that really is a shame, who knows what could happen in 1-2yrs with the market? I'm scared of 6-12 mos! LOL

its crazy hearing some of the wait times to get a shovel in the ground! In CT its only a couple weeks provided there are no issues at hand

Originally posted by @Keith Bloemendaal :

This can be different from builder to builder. It also depends if the builder is a developer or just buys developed lots. It also can depend on cash flow and their specific business plan. 

At my previous job, we were developers and builders. At one time we had over 150 lots developed, and another 60 acres or more that we owned but hadn't developed yet. 

Me personally, just starting out, I just bought 3 lots here adjacent to one another. I close on them in a couple of weeks and will be able to start immediately. My homes will be spec, and I will stagger the start of them (30-60 days apart), when the first one goes under contract, I will purchase another lot. My goal is to always have a home ready to buy, I may need to increase to 4-6 lots in order to do so, we'll see how 2015 rides out. 

In my Town it takes 2 weeks or less to get building permits, maybe it helps that I sit on the Planning and Zoning Board, but we are a small beach town. Permits to create a subdivision is a whole other ball game, 6-12mos depending on the size/scope. 

 This is a great strategy. Keep your homes rolling so you always finish one and hopefully have a buyer lined up at time of completion. Are you buying turn key developed lots?

Originally posted by @Danny Day :

 This is a great strategy. Keep your homes rolling so you always finish one and hopefully have a buyer lined up at time of completion. Are you buying turn key developed lots?

 The lots are developed by the city and one family owns most of them, I just go to them when I am ready and make offers. So, yes, the infrastructure is there and I just buy, survey, and clear. 

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