Land Development or House Flip... Which is better?

Question

Hey All,

So... we have been getting a ton of questions about land development recently. I have a feeling its because there is such a housing shortage and the flips just are not as good as they used to be. I am curious how many people have been wondering how to do land development and if there are as many people out there that know how much more profitable land development is than flips right now.  Please comment and let me know your thoughts.

J Scott · Answer

First, I'll ignore the fact that you're clearly leading up to a sales pitch or are trying to attract coaching students...

Land development is generally more profitable, but these days is a lot more risky.  Statistically, our economy is almost certainly near the top of the cycle (average time between peaks is 7.5 years and it's been nearly 10), and development can easily take years to complete, depending on scope of project.

It wouldn't be tough to get caught in the middle of a project when the market turns, and not hot proforma numbers.  An experienced developer can mitigate this somewhat; a new developer, probably not so much.

Will Barnard · Answer

Just because land development in YOUR area has been better for YOU, that does not make the investment strategy better for all. Lastly evidence said, all areas and investor abilities are different. I would argue that doing full land development right now is not better because we are getting closer to a potential correction in the economy and real estate will follow that, so any project with 12-18 months or more timeline adds an extreme amount of risk to th deal. Total profit is NOT the measurement for which is better. Hope that clears up why I do not believe she Nevis better than the other in general, only in individual circumstances can that be measured.

Matthew Crawford · Answer

Thank you for your comment Jason. While I agree that flipping a home and land development processes are somewhat apples to oranges, by definition the act of flipping a home is developing and land developing is also developing. Anytime you take a parcel of land or a home and improve it, you are developing it into something it was not when you bought it.

When you flip a home you need to have a team (contractors, attorneys, realtors, and hopefully a mentor)

When you develop land you need to have a team (contractors, attorneys, realtors, hopefully a mentor, and an engineer/surveyor)

Those teams are not much different granted you will need several more contractors than a flip. However, if you are good at managing your current team to do a flip you can easily add more contractors and manage the team for land development.

You said it is more risky so of course there is more profit. When I flip a home I very rarely have a buyer before I close on the home thus making it possible I may not be able to sell it when I am done for what I wanted to. In land development I never buy a piece of property until I have already sold it to the end user for a predetermined price and received a deposit. You can easily argue that in this scenario the land development is less risky. The time in a deal can be longer depending on what you are developing but the same can be said for flips.

Should you get into flips without a trusted adviser...NO.

Should you get into land development without a trusted adviser...NO

I hope that clears some of the misnomers up.

Jason Hsiao · Answer

It's apples to oranges @Matthew Crawford, holding period for development is so much longer, capital requirement is higher, more complicated than a flip. Of course developers make more because the risk factors are higher. Does it make sense for someone with no experience to get in without a trusted partner? Prob not.

Hai Loc · Answer

You comparing apples to oranges..  takes 7-8 figures for development  but yes process is much longer.. flips can be 5-6 figures and yes you get your money back quicker..

Sometimes you can flip the development and don't even have to build to yield nice margins.. Just approvals, clean up and dividing lots..

J Scott · Answer

First, if I misinterpreted your post, I apologize.

Second, my definition of a coach is someone who charges money for their services helping others.  I don't charge money to help people, so I don't consider myself a coach.  But, if there is such a thing as a "free coach," then I guess I am I that...

Peter Linneman doesn't believe that.  Here is an interview with him from about 4 years ago (as best I can tell based on the numbers being thrown around).  When asked very specifically about how long he believes an economic cycle is, and his response is:

"I think normally you are looking at about seven to eight years. So  normally you would say we are in the fifth of seven to eight. I think  the truth is, we are in the second year of a seven to eight year cycle,  so we still have five or six years to go."

http://www.trademarkproperty.com/economic-discussi...

Now, I didn't go to Wharton, but when I got my MBA, NBER was considered the main source of information about economic and business cycles.  All the data they provide supports my assertions (within a few months)...

Here are a couple articles, and the raw data isn't too hard to find on NBER's website:

http://www.marketwatch.com/story/current-us-econom...

http://www.investopedia.com/terms/b/businesscycle....

https://www.forbes.com/sites/advisor/2014/03/04/ho... (from 2014)

http://smallbusiness.chron.com/long-average-busine...

At different points in the economic cycle, different investing strategies are generally more profitable and/or less risky.  I don't think that's a controversial statement.  The question is, where are we in the economic cycle, and which strategies are specifically most profitable and least risky at that particular point?

Personally, I believe (as do most economists) that we're towards the peak of the current economic cycle, and therefore, my belief is that any investing strategy that has a long-term liquidity horizon is going to be higher-risk and less profitable than those investing strategies that have a shorter-term liquidity horizon.

In summary, right now I don't believe land development is more profitable than other strategies, such as flipping, new construction on infill lots (in areas with quick turnaround on site development and permit approvals) and buy-and-hold.

Matthew Crawford · Answer

Thanks for your post J Scott. I want to clear the air real quick about the conclusion you jumped to in your first sentence. I am not a coach, you couldn't pay me enough. I am an investor asking an honest question to see if people have an opinion and why their opinion is what it is. I instantly have to take your opinion with a grain of salt because it looks like you are a coach based on your link under your name. More specifically you coach people how to flip and wholesale. While I flip homes and have wholesaled in the past I also do land development so I am trying to get an unbiased opinion.

On your statement about average cycles going 7.5 years can you post something to back it up? In Warton school of business curriculum, more specifically Peter Linneman book about real estate risk and opportunities it shows 20 year cycles from peak to peak. The last valley was  super low so you could make an argument that the next peak would take even longer to reach.

You can get caught in to middle on any project whether its a flip or land development. You have to mitigate risk as much as possible on any project but ever type of deal has risk.

It sounds as though you agree that land development is more profitable which in my book makes it better.

Matthew Crawford · Answer

Thanks for your comment Will. I agree, It is very necessary to keep home sales going etc. I do flips and land development as well and I am seeing land development being more profitable so I feel like it is better right now. At the end of the day i think if we are in this for profit then development would be the way i would lean in this current economy. I am curious why you say you don't know if one is better.

Will Barnard · Answer

They are two different strategies, not sure one can say that one is better than another. A lot has to do with the investor's abilities, the market conditions, etc.

I have done both over the years and in my local market, it is a necessity to redevelop to create a spread as the flip deals are difficult to find.

Land Development or House Flip... Which is better?

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