How To Control An Infill Lot Instead Of Buying It

Question

Hello,

I recently attended a webinar that states investors should control build-able infill lots instead of buying them, how do I draw up a contract to do so?  The intention being to find a retail buyer that through their purchase of the new home construction, would provide the financing needed to build the new house, and my profit margin.

I'd also consider wholesaling this lot as well.  Are there any considerations for doing so?

Thanks,Marvin

Randy Palazzo · Answer

$110 PSF as a builder with a good sub base is reasonable. This is sticks to bricks; permits included, unless your in an area that charges a huge amount for building permits. Also, this assumes utilities are in the street, as well as reasonable finishes (no big upgrades).

Randy Palazzo

Derek Montes · Answer

Another thing I forgot to mention is that your cost to build at $60/sq foot is extremely low. You will only get this pricing if you're building a neighborhood. Unless if you have an awesome connection (and if you do, please let me know so I can connect with them!), then expect to pay around $110/sq foot or more.

I am currently looking to do a 5 unit build in the third ward area. It's looking to cost us around $140/sq foot, but we are still in the early stages of working numbers. We won't have accurate numbers until we have an architect draw up the design. Architects usually cost $3/sq foot to design a spec home.

I'm not sure of your experience, so if I told you something you already know don't take it wrong. Just be careful what you decide to do.

Derek Montes · Answer

What you are proposing is very tricky and too risky.

I've only done one residential development here in Houston, and it was a definite new experience where I learned so much.

Here's the number one reason it has a 99% chance of not working: timing. This could be pulled off in such a short time frame if everything goes as planned. Now consider time for architect to design, time for engineering, permitting delays, sub-contractor errors, on-site theft (and having to deal with insurance), time to list/sell.... and anything else I did not mention.

Play it safe, especially the first time you do something like this.

Chris Field · Answer

This sounds like a royal PITA.

Basically what your trying to do is flip a contract. The problem with flipping to a retail buyer is well immense. The average retail buyer cannot finance or fund the purchase of a house for starters. Your time on the contract is also limited.

If you find good deals on land the fastest way to make a buck is to flip it to a builder or another investor. If you want to make more money than just buy it and build on it yourself.

Marvin Robinson · Answer

Ok understood.  So with that said Karen, is wholesaling infill lots that are empty or have tear downs on them, similar to wholesaling houses?  Meaning, I would find a lot and try and get it at 70-80% discount to arv?  Would I then find an investor buyer that would pay potentially what the lot is worth or am I expected to provide a discount to the investor buyer?  How should I pull comps on said infill lots either ready to build or teardown?  By pulling and comparing similar vacant lots or properties sold and current similar listings?

Thanks

Karen Margrave · Answer

If you want to KISS then what you need to do is understand this. What the value of the land is, it is. It has nothing to do with the cost of construction, what someone can sell for down the road, etc. If you are selling dirt, then find out what it's worth in its current condition, and that is the value, add your fee onto that, and marekt it. Let the builder coming in figure out theie development costs.

Marvin Robinson · Answer

Thanks for all the great responses.  I think I'll follow the KISS advice on this one and look to wholesale this puppy.  No, I'm not a contractor.  Before attempting building new, I'll look to get more knowledge in this area.  That said, I believe I read a post or two in here stating in order to come up with a price to offer you have to take the arv for the new construction in that area and subtract the new build construction costs, permits and site prep and my assignment fee is that correct?  Retail construction costs average $112-$120/sqft.  I'm told builders can build for ~$60/sqft, what number should I use for construction costs in general?  Did I miss anything in terms of determining an offer price?  What type of earnest money deposit should I shoot for?

Thanks

Karen Margrave · Answer

@Marvin Robinson What you are proposing is tying up the lot, then marketing it to find a home buyer that would obtain the financing for you to build the house. You didn't mention being a contractor, therefore; you would be hiring a contractor to do the building correct?

The problem with your plan is there are too many hands in the pie, and it would be a difficult one to pull off without the experience needed. Your best bet would probably be to tie up the land, and sell directly to a builder, then let the builder deal with finding a buyer, etc.

Wayne Brooks · Answer

KISS.  Just wholesale the lot.....don't try to get involved with designing the construction, permit costs, funding, etc.

Nick L. · Answer

I would do one of the following:

1. Use a standard purchase agreement with a long general due diligence period

2. Use a standard purchase agreement with a specific contingency related to your situation, for example signing a development agreement within X months

3. Use an option contract

In all cases you may need to make a concession to the buyer to extend the timeline, for example upping the earnest/option money or making it non-refundable.