Thanks to BP, I have finally become a REI- exciting but lots to learn!
Just bought at auction for $~212K a 1940's SFH 1800 sqft 3/2 with a pool (ok, currently a frog pond) on a double lot that could be rehabbed and then held and rented, or flipped. It's in a multifamily zoned area, can rent for > 90 days (no ST vacation rentals) in a superb location in downtown Dunedin FL (voted most walkable small town in US or something like that.)
Two major choices- I am still trying to figure out which would be more profitable, but need help figuring out the numbers on option 2. well, on option 1, as well, but that will be a separate post!
1) FLIP or REHAB AND RENT OUT: Currently in for 215k, need 20k mold remediation then about 85K-100K rehab, might be able to sell for $350-390K. For a bit more rehab, could turn it into a 2/1 with an attached 1/1, and even reno the garage for another 1/1, with good rents over the winter months.
2) SCRAPE AND BUILD: On the other hand, I approached a high quality local developer who proposes we do a JV- I bring the land, he brings his reputation, expertise and oversight of the development and construction, and clients- he has several would-be buyers looking to build in the area. I would get "market value" for my land, he would develop the 3 houses that can legally be built, adding 18% onto the building costs as his GC/developer fee, and then we would split any profits over that.
We don't see eye to eye on what the "market value" of the land would be- he says it's what I bought the place at auction for, i.e. $212K. I say it's what it would fetch on the market, but there really aren't many comps except on the other end of my block where someone demo'ed a house (anticipating later construction) on a same-sized double lot (102x134) but their cross street is a quiet street, and mine is busy. Their 2 empty lots are valued by the county appraiser's office at @139,077 each (with an adjustment of 1.01) and mine is valued at $230,868 (with a .84 adjustment probably because of the busy street and more setbacks). The "just market value" of their land is then listed at $250K (the county defines JMV as "The price at which a property, if offered for sale in the open market, with a reasonable time for the seller to find a purchaser, would transfer for cash or its equivalent, under prevailing market conditions between parties who have knowledge of the uses to which the property may be put, both seeking to maximize their gains and neither being in a position to take advantage of the exigencies of the other.")
I am very interested in learning by participating in this deal but I don't know whether i am getting screwed through 1) him assessing my basis too low by valuing it at 212 instead of 250k and 2) the terms of the overall deal.
I am leaning towards doing the JV since there are other places where I can learn about rehabbing and renting, or flipping, but this property offers a great opportunity to participate in a development with a high quality experienced guy who is very well connected.
Should I just take his terms, or push back?
he wants to build 3 houses where there is currently 1?
i'm no genius, but at $212k, with $20k in mold remediation and up to $100k in rehab, that totals $332k. What if you sell it on the low end at $350k? seems like a lot of risk to me. And you live in Maryland, not in FL?
See if he will split the difference, or if not, structure it so its $212k, he builds plus the 18% then have it be so the first X amount of dollars above land and his costs come back to you then split it 50/50 afterwards.
who gets the vertical construction loan ? that's a big component.. or is this an all cash deal. your subordinating your interest I suspect.. so if you look at up side its great.. down side could be pretty traumatic is there is issues.. need to make sure this developer is the Gold standard. Other wise if its your money and your vertical loan then you could find many builders you would just hire on a fee basis.
Jared, the zoning/development people have said we can build three houses there, and you are right, it might be risky to pour a lot of money in and not be able to sell the current house high enough. And yes, I live in Maryland but mostly in Africa which makes a reno even more complicated, as v. demo-ing and letting the developer do the rest.
Chris, I like your suggestion about splitting the difference.
Jay, the construction would be paid for by the people who are commissioning the houses, which is good because this way we don't have to put up any more money. He is really well regarded so I feel comfortable with him, but my lawyer advised me to "beat him up a bit" on price. I think I am getting close to pulling the trigger- how fun is this!
thanks again for your inputs- I have learned so much from all you BP experts!
sounds like your there did your lawyer also council you on the risks you run subordinating your interest behind a construction loan.. and that you could be wiped out completely if the market went against you and or the builder got in trouble through the process.
these are not likely to happen.. but lawyers should be talking about what ifs not coaching you on what a good price is..
if for some reason your developer defaulted on his construction loans do you have the wherewhal to cure ? or would you be stuck.. this is what your lawyer should be advising you on.. Vetting the developer getting financial info from them that you can verify. etc etc.
good luck with it.
wow, lots to think about. I don't think the developer or I will be getting the construction loans, but maybe I am wrong.
what would be a good thing to read about doing a JV like this?
Thanks for all the suggestions and ideas.
well some one has to pay to build the homes.. if it is not you and not the developer then it would be the end user ? either way your likely to be in a subordinated position.
and if you don't know the answers to the questions then you need to find out.. This is what your attorney should be focusing on ( IE the protection of your equity) and the structure.
Not so much how much you get paid.
you are right, @Jay Hinrichs , I need to better understand the structuring of the deal. The end users/buyers of the homes would pay for the house construction, and most in our area are cash buyers. But I will ask my attorney about what you mention (protection of my equity) and subordinated position.
thanks very much for your input!
I understand the buyers are cash buyers but that's for a finish product... who puts up the construction money.. your talking a significant sum. Is it you.. .is it the builder out of pocket.. are you getting a construction loan yourself.. or are you selling the lots to the builder on contract with no money down and then subordinating your contract to his construction loan.
I think the last sentence is what is probably happening or the builder would like you to do.
Any way. these work great when your in a great market.. if you have a problem unless you have the funds to cure his loan and or step in and build.. you can get wiped out completely. now that's just worse case.. but something you need to know about.
Subordination works for those that can step in in the event of default.. for passive investors its what I would consider a fairly risky play..
goodness i don't even really know what many of these terms mean but I think you are saying if he gets a construction loan to build the houses and then he backs out or disappears, can i cover the costs of construction? I do think I could step in, in case of default, since i have other reserves, but lord I think I have to run through all this with my lawyer. Several times. I thought I was going to put up the land, the buyers would pay for construction costs, the developer would charge them an 18% fee on the construction cost, and then somewhere in there there would be some profit. I guess I really don't understand how it works!! back to the developer for more explanations and to my lawyer.
Is there somewhere that explains all the different ways to do a JV development? an article or a book? This developer is well-known and well-respected in our small town, so I am not as freaked out as I would be if I were dealing with a complete stranger, but the more you mention stuff the more I realize i have no idea what I am doing......thanks for trying to educate me!
No problem... your on the right track and you grasp the concept fine.
You may find buyers that pay for the construction out of pocket and if you do then you have hit a gold mine of a deal... you remain the owner of the property and someone else pays to build a home on it... but that likely won't happen.
Your lawyer now that your armed with a few basic questions will I am sure help you through it. here is your list
1. to do this deal am I subordinating my land to a construction loan ? yes or no.
2. is the developer getting the construction loan ? yes or no
3. is the developer expecting me to get the construction loan ? yes or no
4. If a end buyer puts up the cash to build will I be deeding the land to them and taking back a mortgage to secure my equity?
5. Or if an end buyer is putting up the money will they just cash me out on the front end ( most likely scenario if you have a cash buyer) yes or no.
Just go through this list and then ask him or her the pro's and con's of each and what your risk factors are.. If your subordinating and want UP side past the value of the lot for darn sure.
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Ps report back and let me know how it went and what they are proposing I would be curious on this one !! best of luck I am sure it will all work out to be a win win for all
wow thank you SOO much for this. I am going to look up some of these terms but I will definitely let you know how it works out. I am about to write up my experience getting insurance for my short term vacation rental property (that we just started renting out on AirBnB/VRBO) to start to pay back some for all the amazing input and help I have gotten from the BP community!
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