Potential New Construction in LA
Hello BP!
I'm new to this forum and RE investing in general so please bear with me, especially if my questions seem a bit rudimentary.
I just moved out to LA and currently living in an up and coming area within 10mi of downtown LA and 5mi of Pasadena.
I've been reading and learning from some of the posts here as much as I can and an investment idea came to me which I haven't been able to fully hash out and therefore I was hoping that some of you could perhaps shed some light on:
There are quite a number of vacant lots in the area I'm in that are selling for $25-80k. Some of these lots are located in an underdeveloped area, which means that utilities (water, sewer, elect and gas) haven't fully been connected yet, although the listings say they're "close by." Others (on the higher end of the pricing spec), are connected but the land is on a slope. In fact, most or all of these lots are located on a slope. The land is zoned for residential and allows for construction of a fairly large unit (in terms of sq ft). One lot I looked at is quite large and even allows for a building.
So, assuming that the cost of grading and excavating runs around $10k, the X factor in this becomes the cost of running utilities (power, gas, sewer) to the lot.
I like to be conservative and estimate that the cost of land is $50k. So now we're up to $60k (with excavation and grading). Cost to build is (conservatively) $150/sq-ft. and we build a 1200 sqft home which comes out to $180k.
What am I missing in this equation? Does anyone know what the cost of connecting sewer, water, gas and elect might run?
It seems like there is enough room for profit, but then again, I'm a newbie and I'm sure that there's stuff I've missed here. Plus, I wouldn't want to take on a project of this magnitude by myself.
I would just like to ask if some of you could perhaps go over the numbers with me and tell me what I'm not seeing. Clearly, if there was a potential to make money here, I would think that others would long have jumped in.
Thank you kindly!
#3 Contractors Contributor
- Contractor
- Los Angeles, CA
Yeah, 100k on plans and permit, 50-200k on utility taps. You are also short if it needs to be designed on a slope, for foundation, etc. I found two properties selling at 750k for both, and ARV is 1.65M. The numbers are, 100k repair for on the dwellings, about 500k on caissons and grade beams, projected to be a 1 year project, pretty sure I'll be done in 6-8 if el niño doesn't go that bad. Problem was, there was not enough contingency if something goes wrong. 300k might not be enough for some investors also for the risk.
You may have to also pay for extension of fire hydrant in your utilities. Check local fees, they can be substantial for school assessments, fire districts, etc.
Also, if there are a lot of empty lots that look really good on paper, you can bank on the regulatory end of things being difficult; hillside ordinances, view preservation ordinances, design review requirements, etc.
Gene,
I too tried to develop a house on a hillside in the Hollywood Hills just as the recession began. It ultimately evolved into two houses but my effort failed as you might have guessed and I have actually written an ebook about my experience. Here are some of the highlights.
The thing that ultimately killed the project was the inability to get financing because of the recession. Actually, that was my partners responsibility at the time who said he had it nailed down but didn't.
And to get financing you will need plans and specifications for the house, a contractors estimate of construction cost or two or three based on those plans and a schedule.
Our construction costs back then were coming in at over $400 sq. ft. primarily because of the foundations as @Manolo mentioned. We also had to get a special haul route permit because of the amount of dirt we were excavating.
Then local politics got us. At the insistence of a powerful local community group, a Baseline Hillside Mansionization Ordinance was passed severely restricting what you could build on a hillside which mean't we could not then get a building permit and explained why they dragged their feet for over a year delaying our permit process.
In summary though I still believe there is money to be made, especially in LA, with the right project in the right area at the right price. Get the advice of a good architect, real estate agent and attorney. Or team up with a developer. Without a lot of experience in this area there are just too many potential pitfalls but the profits are there.
As an engineering geologist and realtor working within the hillside areas of Los Angeles I can tell you that there are many pitfalls which you may only become aware of as you get into the project. What lurks below the surface can really crush a project. Slope instabilities (landslides, mudflows, adverse geology, etc.), governmental regulations (mansionization ordinance, coastal commission requirements, etc.), and septic system limitations. Any one or all of these things can make it impossible to develop a property. If you are looking at a specific property reach out to me and I can give you additional info that you won't get from any other realtor.
Welcome to Bigger Pockets. It is great to see you hear.
Wow, thank you all for the insightful feedback. This is definitely info I will put to good use.
@Mark So happy to be here, thank you again for your hospitality.
Gene
How likely am I to find developers out here (in CA) that would want to partner on a small-size project (be that single family flip, rental, etc)?
I wouldn't want to dive into anything without having an experienced and trusted partner. I'm willing to give up some equity to learn the business.
Does that seem like a reasonable proposition? Anything you think I should watch out for?
Thank you all again!
Originally posted by @Gene Maltsev:
How likely am I to find developers out here (in CA) that would want to partner on a small-size project (be that single family flip, rental, etc)?
I wouldn't want to dive into anything without having an experienced and trusted partner. I'm willing to give up some equity to learn the business.
Does that seem like a reasonable proposition? Anything you think I should watch out for?
Thank you all again!
what are you bringing to the table and what do you expect from your "partner"? if I were to guess, the area you refer to is Mt Washington. There are quite a few hillside vacant lot available for sub-$100K. It would be very costly to develop. As pointed out by a few BPers, the development cost will be a lot higher than your $60K estimate. Just building the house alone is easily $200/sf, your $150 is way too optimistic.
@James What I would bring is capital and design experience in addition to whatever else I can do...like pulling permits, coordinating/admin, etc. I would do whatever's necessary to get the project to completion. I don't mean to sound vague but I'm interested in the learning experience more than payout at this point.
I would love to work with someone trustworthy (wouldn't we all).
I have some capital and time and I like working with my hands.
Hi Gene. I just registered on BP for the same reason as you. I live in Sherman Oaks and just finished building a house there on flat land. I am a GC and oversaw it myself. It is on a flat land though. It did cost more then I planed but it was still worth it. So I am thinking I should do this again but there are no flat lots out the here anymore. I Like NE LA, I used to live in Eagle Rock just before it became hip. I am really trying to figure out how to build something in that area. All Mount Washington lots are hillside. I talked to people that have hillside experience and they all try to talk me out of it. The foundation and retaining walls make it very difficult. It can run a couple of hundreds of thousands. It has to be attached to the defrock. Down slope is worse than upslope. Also staging anything is hard.
I don't know how yet, but I a determined to build there.
Current drought moratorium not an issue?!
#3 Contractors Contributor
- Contractor
- Los Angeles, CA
Originally posted by @Sandor Bogdan:
Hi Gene. I just registered on BP for the same reason as you. I live in Sherman Oaks and just finished building a house there on flat land. I am a GC and oversaw it myself. It is on a flat land though. It did cost more then I planed but it was still worth it. So I am thinking I should do this again but there are no flat lots out the here anymore. I Like NE LA, I used to live in Eagle Rock just before it became hip. I am really trying to figure out how to build something in that area. All Mount Washington lots are hillside. I talked to people that have hillside experience and they all try to talk me out of it. The foundation and retaining walls make it very difficult. It can run a couple of hundreds of thousands. It has to be attached to the defrock. Down slope is worse than upslope. Also staging anything is hard.
I don't know how yet, but I a determined to build there.
The answer is easy, buy at a price where it will make sense. IE if they bought the land for 130k a few years ago, offer 170k, even if they ask for 500k.
- Realtor, General Contractor, and Developer
- Redding, CA & Bend OR
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@Gene Maltsev You don't just need someone with experience, you need someone that has experience in that specific area. Southern California is a world to its own when it comes to development. Aside from all the things already mentioned, (cost of retaining walls, utilities, caissons, etc.) there's the cost of hauling dirt (determined by the type of soil the lot has and how far you have to haul it to dump it. Factoring in paying trucks by the hour, and the small window of time you can use them without traffic becoming a major cost factor) What you think is a slight slope on a lot can end up being a huge amount of dirt. On a project we just started, from the time we applied for permits to actual obtaining the permit, costs of moving the dirt doubled because the place that takes the dirt is running out of space.
There's so much more that goes into development than people realize, and every city has their challenges that you have to deal with. Some cities move things very efficiently through the process, others at a snails pace, and you have to know which it is.
Usually if there's several parcels that haven't been developed, there's a reason for it.
the costs usually for utilities can run real high. Check with a city planners and find out about school fees too. The drought is a big factor in many cities so find out of the are issuing water for new construction.
I agree that development and the rising cost makes a land
Expert tha t can look at land and understand there starting point.And have some reality of the end game.
Example the recently adopted Annex of the North Area plan ,Which has a great effect on anyone
Planning to Remodel or Build in and around the Santa Monica mountains.If you are not very fimilar with effects
And understanding of the different Envoirmental and general updates that make up the equation of feasibility,
I strongly suggest you have a Realtor schooled in the development process or Land consultant.
Thus is where you make the greatest equity in your project.
Thanks Karen, I really appreciate your feedback!
I think I'll stick to setting my sights on flipping for now.
Good luck to you and everyone with their projects!
Gene
#3 Contractors Contributor
- Contractor
- Los Angeles, CA
@Gene Maltsev You might consider building "modular" buildings before jumping that ledge. That will give you a taste of what is coming, with half the work (maybe less). You do site work and watch from the sides the house construction.
Thanks @Manolo!
Here's another question for everyone in this thread:
How difficult would it be to take an existing property in need of renovation and expand its sq footage...
Suppose you have a 2br/1ba 1000sqft home. Would it be difficult to obtain a permit to add another level to the house? Would it be difficult to obtain a permit to change the zoning from R1 to R2 or R3?
Would there be another requirement to survey the foundation, structure and support again, requiring time, money, etc.?
Thank you in advance for your input.
#3 Contractors Contributor
- Contractor
- Los Angeles, CA
@Gene Maltsev Adding another level is fairly easy. Rezoning is a different story. And another building is simply that, 'another building' all requirements for a new build comes in, if not all, then most.
What category would adding another level/story fall under? Would the building need to be rezoned/reassessed?
When you say "adding another level is easy", do you mean constructing an additional level (which I can also easily assume is not difficult). My question is: would the building require any special permits? How difficult would it be to obtain them? Would the building need to get rezoned from R1 to R2?
I would imagine that if one were to expand horizontally (like expand foundation and build or attach a new structure to an existing one), one would need to survey land...and this would more or less be considered along the lines of "new construction."
However, if I wanted to build vertically, upon an existing structure, what would be required?
Thank you again!
I am also in the same position in that I am trying to legalize a floor that was added to my house at the lowest level (let's call it basement). While trying to get a permit for the same, wondering what the city might be looking for and what might be needed. The foundation is caissons that seems strong enough to hold it (the floor has been there for 10+ years). This is also on the side of a hill by the way in the LA area.