Newbie Question: Best strategy to sell this high end "tear down"
Darien, CT · Member since 2014 · 27 posts · 5 votes
Hello,
I am selling a property, that is a either a tear down or 100% renovation in a high end neighborhood. Here are the general stats:
- Land Value: $1.3M
- Property value: $250k
- SQ Footage: 3500
- General price per square footage in the neighborhood: ~$700
- This house at like new condition rough value: 3500*750 = $2.6M
I am considering working with an agent. Its August and well past the spring market. We are in the Northeast and winter is an issue for construction.
To maximize the sales price of this house, we could a) work with an agent or b) sell to a builder. Seller financing is an option. I personally feel too much money is left behind with an agent and time of year.
What would you do in my situation? Thanks!
Alex
Dont sell,
Dont sell,
Well said Brian. I own a real estate company in the Chicago area specializing in land and tear downs such as yours. If you sell direct to a builder they will purchase at a "wholesale" price to cover their holding costs and risk. You are better off finding a builder to help you build a spec project. The eventual listing agent should have new construction experience.
No "smart" builder is going to carry materials and labor until sale without being on title with ownership interest in the property
Sell the property if you have no building experience or develop it yourself.
Dont sell,
No reputable builder is going to agree to this.
I am a big believer in JVs with Builders and Home Owners.
It is all in how you sell it and structure the deal.
Maybe @Bill Gulley
can chime in.
Hello,
I am selling a property, that is a either a tear down or 100% renovation in a high end neighborhood. Here are the general stats:
- Land Value: $1.3M
- Property value: $250k
- SQ Footage: 3500
- General price per square footage in the neighborhood: ~$700
- This house at like new condition rough value: 3500*750 = $2.6M
I am considering working with an agent. Its August and well past the spring market. We are in the Northeast and winter is an issue for construction.
To maximize the sales price of this house, we could a) work with an agent or b) sell to a builder. Seller financing is an option. I personally feel too much money is left behind with an agent and time of year.
What would you do in my situation? Thanks!
Alex
Alex - out of curiosity what town is this in? We do a lot of construction in the Fairfield/Westport area although paying 1.3 for a lot is a bit out of our target market....think your best bet is to get a site survey(esp if you have wetland issues) and throw it on craigslist....this is a great time of the year to buy a lot in preparation for the spring market.
Wow, 1.3M lot on Craig's list? Must be a different Craig's list than we have down here!
Not sure how you got your valuations, but a lot or land shouldn't exceed 20-25% of the home price, but then, you're not really looking for an end buyer with 10% down getting a Fannie Mae loan either.
How much land is there?
I'd begin by seeking the broker-owner of the of the brokerage that lists and sells the greatest number of luxury homes. The broker owner can cut the best deal as to commissions.
It would not surprise me if that broker had a partnership arrangement with a luxury home builder, maybe more than one.
Who is going to pay for the tear down?
Simply from a building code point, a rehab will be easier than new construction, but your list of contracts might be much shorter and total rehabs compared to new construction will take longer costing you more in labor and contractor's fees, I'd bet on that. Consider it both ways with the cost of the tear down.
The age of the house is a big factor as to hazardous materials, asbestos and lead remediation means much higher costs of a tear down.
If a contractor has no skin in the game, I'd bet too that the project will take even longer.
And, what is a 100% rehab, are you saying tear it all down leaving a wall to call it a rehab?
What do you have to contribute to a JV other than the property? Homeowner JV's are usually with contractors or investors short on cash or only getting in on the improvement side, they have to have some motivation as well. Why would a luxury home builder or upper end broker want to partner beyond the current value of the property?
Most likely, they will make (or get) an offer and move you out of the way, IMO. I would because the homeowner doesn't add value past subordinating the lot. They can do that at an agreed price and close prior to their sale sticking you with holding costs. Title isn't really that great of a factor for a licensed contractor, they have the option of using liens that can take priority over mortgage liens, the risk is built into their pricing to enforce the contract and secure their money. The value the owner provides is the buyer's/contractor's cost of money.
You could seller finance to a contractor and subordinate your loan to a construction lender, hope you have faith in the contractor taking a back seat to a larger first mortgage, or you have assets to cover yourself.
Also, as to lots in a higher end subdivision or area, the neighbors are prime prospects, some people are funny about what gets built next door or who moves in, so if they have the money and don't want to move, they might just buy it.
I'm considering doing that with one of my properties, just buy the place next door, it's why I haven't rehabbed it yet.
Don't forget word of mouth works pretty well in luxury sales.
Post some pics, get better valuations, holding time in that price range (?). If you're dried in, I don't see weather being a big issue. :)
Hi @Alex Cotter okay that's 1.3M if it's not good to post on Craigslist have you thought about other options like listing it on Zinksy?
Dont sell,
In general I really like this advice for an investment. If you do want to just cash out of the land I'd interview agents who KNOW HOW TO SELL LAND TO DEVELOPERS. The agent should be able to answer basic questions about zoning issues, potential survey issues (here we have to worry about Live Oak Trees, not sure what local issues you might have).
Here in Tampa there are only about 4 who do it reliably/consistently.
Also- Here in Florida the highest Land-ARV I would be able to get you is roughly 33%. Sounds like you are trying to do 50%, which I doubt is reasonable. Unless 5m homes are selling like hotcakes?
Also- Here in Florida the highest Land-ARV I would be able to get you is roughly 33%. Sounds like you are trying to do 50%, which I doubt is reasonable. Unless 5m homes are selling like hotcakes?
I am sorry but I don't understand what you are saying. "Land-ARV" (I tried to look it up before asking). If I owned land valued at $10, I would need to have a $20 house on that property to have a 33% Land-ARV?
If I understand correctly what you are saying above, the ratio of value of land to building is just alot different out here. My numbers above are based on the tax assessment, which isn't perfect but doesn't materially steer the scope of the conversation. 1/2 acre lots in prime areas are in the 400-600K range (maybe 1.5-3M on the water), many of these have 1930's houses on them that might appraise at $200K.
Hi Alex,
Builders in Tampa, and from what I understand in most of the U.S. right now are purchasing property at a maximum of 1/3 of what the ARV would be.
So for a $1m home spec they'd spend 300-350 on the land. If they could subdivide 1 large lot into 4 lots and put $1m home on each they'd pay 1.2-1.4m.
If it's different in your market go for it, just be really sure on your price before you close without having a buyer for it in hand. 50% of land-value just seems high to me.
Tax assessed value is NOT a way to value property at market value.
If you go the JV route the builder will probably want to have the first lien on the property, so owning the land free and clear will help. Otherwise you'll want to create an LLC for the two of you as equal partners, 'sell' the property to that LLC so you both have equal rights to it. (consult an attorney obviously).
@Alex Cotter, I wholeheartedly second @Brian Gibbons advice.
I think with the right structure a savvy builder would definitely be on board.
I had a very similar deal fall through recently... it could have been literally, the property was on a sinkhole and the seller waited til the last minute to disclose it, $160k in engineering to get it build-able.
BUT, I had several reputable builders express interest in JV'ing and carrying the construction costs as a 50/50 partner in the profits.
I'd begin by seeking the broker-owner of the of the brokerage that lists and sells the greatest number of luxury homes. The broker owner can cut the best deal as to commissions.
It would not surprise me if that broker had a partnership arrangement with a luxury home builder, maybe more than one.
Who is going to pay for the tear down?
Simply from a building code point, a rehab will be easier than new construction, but your list of contracts might be much shorter and total rehabs compared to new construction will take longer costing you more in labor and contractor's fees, I'd bet on that. Consider it both ways with the cost of the tear down.
The age of the house is a big factor as to hazardous materials, asbestos and lead remediation means much higher costs of a tear down.
If a contractor has no skin in the game, I'd bet too that the project will take even longer.
And, what is a 100% rehab, are you saying tear it all down leaving a wall to call it a rehab?
What do you have to contribute to a JV other than the property? Homeowner JV's are usually with contractors or investors short on cash or only getting in on the improvement side, they have to have some motivation as well. Why would a luxury home builder or upper end broker want to partner beyond the current value of the property?
Most likely, they will make (or get) an offer and move you out of the way, IMO. I would because the homeowner doesn't add value past subordinating the lot. They can do that at an agreed price and close prior to their sale sticking you with holding costs. Title isn't really that great of a factor for a licensed contractor, they have the option of using liens that can take priority over mortgage liens, the risk is built into their pricing to enforce the contract and secure their money. The value the owner provides is the buyer's/contractor's cost of money.
You could seller finance to a contractor and subordinate your loan to a construction lender, hope you have faith in the contractor taking a back seat to a larger first mortgage, or you have assets to cover yourself.
Also, as to lots in a higher end subdivision or area, the neighbors are prime prospects, some people are funny about what gets built next door or who moves in, so if they have the money and don't want to move, they might just buy it.
I'm considering doing that with one of my properties, just buy the place next door, it's why I haven't rehabbed it yet.
Don't forget word of mouth works pretty well in luxury sales.
Post some pics, get better valuations, holding time in that price range (?). If you're dried in, I don't see weather being a big issue. :)
You ask some important questions that I don't have answers to. I appreciate your bringing them up.
You mentioned that neighbors can be funny and will sometimes buy the property. This has happened a couple times before. There is a good story about a really low key guy who lived down the street. He noticed the neighbor's "cottage" had someone in a suit walking around it. He asked if he was there to sell the property. The real estate agent said they were going to list for X Million. They started talking and worked out a deal right there in the front yard. Later this guy bought the other neighbors house too. I have driven by, they houses are empty (but well maintained)...he never tore them down or did anything with them.
I agree with partnering up with a builder. Scattered site builders also like using other peoples money. If you carry the land, they spec the build and split profits down the middle. Depending on the equity you have in the land, you may qualify for a partial construction loan. Speak with several builders and their banks to get a better grasp on your options.
I'd begin by seeking the broker-owner of the of the brokerage that lists and sells the greatest number of luxury homes. The broker owner can cut the best deal as to commissions.
It would not surprise me if that broker had a partnership arrangement with a luxury home builder, maybe more than one.
Who is going to pay for the tear down?
Simply from a building code point, a rehab will be easier than new construction, but your list of contracts might be much shorter and total rehabs compared to new construction will take longer costing you more in labor and contractor's fees, I'd bet on that. Consider it both ways with the cost of the tear down.
The age of the house is a big factor as to hazardous materials, asbestos and lead remediation means much higher costs of a tear down.
If a contractor has no skin in the game, I'd bet too that the project will take even longer.
And, what is a 100% rehab, are you saying tear it all down leaving a wall to call it a rehab?
What do you have to contribute to a JV other than the property? Homeowner JV's are usually with contractors or investors short on cash or only getting in on the improvement side, they have to have some motivation as well. Why would a luxury home builder or upper end broker want to partner beyond the current value of the property?
Most likely, they will make (or get) an offer and move you out of the way, IMO. I would because the homeowner doesn't add value past subordinating the lot. They can do that at an agreed price and close prior to their sale sticking you with holding costs. Title isn't really that great of a factor for a licensed contractor, they have the option of using liens that can take priority over mortgage liens, the risk is built into their pricing to enforce the contract and secure their money. The value the owner provides is the buyer's/contractor's cost of money.
You could seller finance to a contractor and subordinate your loan to a construction lender, hope you have faith in the contractor taking a back seat to a larger first mortgage, or you have assets to cover yourself.
Also, as to lots in a higher end subdivision or area, the neighbors are prime prospects, some people are funny about what gets built next door or who moves in, so if they have the money and don't want to move, they might just buy it.
I'm considering doing that with one of my properties, just buy the place next door, it's why I haven't rehabbed it yet.
Don't forget word of mouth works pretty well in luxury sales.
Post some pics, get better valuations, holding time in that price range (?). If you're dried in, I don't see weather being a big issue. :)
You ask some important questions that I don't have answers to. I appreciate your bringing them up.
You mentioned that neighbors can be funny and will sometimes buy the property. This has happened a couple times before. There is a good story about a really low key guy who lived down the street. He noticed the neighbor's "cottage" had someone in a suit walking around it. He asked if he was there to sell the property. The real estate agent said they were going to list for X Million. They started talking and worked out a deal right there in the front yard. Later this guy bought the other neighbors house too. I have driven by, they houses are empty (but well maintained)...he never tore them down or did anything with them.
I bought a house once for 45K, no money down CFD, needed TLC, and kept it for about 8 years. Never rented it. My wife and I, mostly my wife, would go over and and paint mostly, it was a playhouse for her. Sold it for 125K and didn't have 5K in materials. Kept the utilities on, that was the biggest expense. I just didn't want landlord headaches! My time and hassle is worth something, more than rents, so you can figure out my ROI, all I now is it made money and it was fun to play with!
Sometimes, t's not about ratios, investment analysis, cash flow or what operators look for, sometimes it's just about wanting a property, just to say you own it. Sorry, but I've never been wrong yet, Just say'n, every "deal" is different. :)
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I assume its a typical on the water property in Norwalk? I'm not very familiar with Fairfield County.
I was offered a lot not to long ago in that area of Norwalk for $500k, final sale price on the house would be $1.5m. I have been told houses under the mid 2 range are selling ok, higher than that not so much. For $1.3M I'd expect final sale price to be around 3ish.
On the east coast the number of builders who operate in a given area is pretty small, I'd put it up on the usual websites and they will come to you. Or their agents that they use will. Its not a big playing field out here.
Lol. This is an interesting thread. First a 1.3m lot with a 2.6 exit, where's the money? 1.3 land, 3500*200 build, 100k in soft, thats 2.1m plus interests, fees, etc, whats left? 100k? MAYBE 200k? At that risk and amount? Another suggestion is to carry materials and labor, say about 600-700k, lol, really? And only 30% aka 30-60k for 6-12 months? I'd bring my business elsewhere faster than lightning. Well, maybe, I could charge 1M for the build, then the owner/seller will be working for free for me. A joke for a joke.
At this point I hope you have it under contract.
Completely agree that I would partner with a builder.
I work in Norwalk (actually working on my first two lot subdivision and new construction deal there right now) and am familiar with Wilson Point. First I would ask what kind of interest do you have in the property? Do you have it under contract with the seller, is this a family owned property, or do you own it out right?
I would echo the other responses on here about your valuation being off a bit. The 33% "Rule" does tend to be pretty accurate around here for new construction as well. Meaning builders are paying roughly 1/3 of their Sale Price for the land and the other 2/3 makes up their development costs and profit. So your valuation of $1.3M sounds high unless you can build a $4M house there.
The last point I would make is that waterfront properties can sometimes (not always) be more difficult to develop depending on the land features, topography, and such. Finding a builder that works along the coast would be key.
All of that said, I think your first step is to solidify your interest in the property in a way that is flexible on price and then approach coastal builders about doing some form of joint venture. Let me know if you want to get together and discuss in person, I would be more than happy to help.
@Alex Cotter In reading your questions, etc., it's clear that you are not experienced in the market, or with construction. You haven't told us what your financial situation, or experience is, therefore; it's hard to give a good answer.
Though there are options available to you, such as doing a Joint Venture,because of your inexperience, it would probably not be the best choice, as there's just too many things that can go wrong, and you wouldn't know what to look for until there's a big problem.
I think you should find out what the lot is valued at, based on actual comps not tax rolls. Find an agent that has sold other lots in the area and list it with them, as more than likely they have builders ready and waiting.
Remember, it's not about what you paid for the lot, what you want, etc., it's about what is the real value of the raw land? A builder still has to do all the work to get it to the point of actually building, and it costs money to do that, and it needs to be factored into selling price.
Bill Gulley mentioned 20-25% of value for land. However; in high dollar areas 30% is probably more realistic. Some have mentioned ARV, which has nothing to do with new construction. It would be based on the actual market value of the house upon completion.
hey Alex, how did this deal turn out... what path did you choose?