Land purchase options

5 Replies

So we are looking into development a 22 Acres land to build 46 Villas. Land developer already sub divided the land. For a land of this size, what kind of deal you guys go with the Land developer? It would be too much holding cost if we pay the land price up front. Curious to know the possible options that we can present to the land developer.

Thanks for your suggestions!

If you’re not holding it, then it means that someone is, and if I were the seller, I would add all my coins plus a premium for “what if” because you’re only buying in pieces. Or he might not sell at all.

@Amit Barman

First question: What does the land developer want, what's their ask? Most want to close and get out of the deal.

Most deals like this you would close the land, then build the homes and sell, or sell lots to other builders as fast as you can, and in this case you must underwrite your carry cost for the entire time you are holding the land, from land close to sale of last lot. 

Are you using financing plus equity to close? All equity? 

Each is different in how you act, i.e. all equity has you be more patient, or at least you can be more patient. You should want to execute cleanly and with velocity on any deal you put together. 

Who will finance the construction of the land infrastructure? 

Who will finance the construction of the homes? 

Will you build the homes, or will you sell the lots to 3rd party builders? What is the price of the homes? What is the price of the lots? What is the per lot finishing cost, infrastructure, soft costs, development impact fees?

Have you run a proforma? To see if the land price the developer is asking makes sense in the direct home building model and did you account for land infrastructure in the model (that is if you are finishing the lots)?

My instinct is, that if you are asking this type of question here on BP, you should very seriously consider hiring a development consultant, or partnering with a developer who has experience in this process. 

Many folks have gotten into land deals and lost significant amounts of capital when they can't or are unable to answer the questions I wrote above. 

Finally, these questions are the starter set of questions. Most real estate development projects have 200 or more individual variables that need to be assessed, and an infinite number of solutions to address problems and issues that always arise when grounding assessments of the 200+ variables. 

There are always issues that arise and exist in these types of development deals. This is why developers can make huge amount of profit, and why they (the new ones at least) can lose huge amounts of capital when entering unfamiliar domains.

@Amit Barman

BTW there are other land contract structures, such as extended escrows, rolling options, phased take downs, land joint ventures, builder joint ventures, and many many other types of land contract structures. 

Once you can answer the questions above in the my first reply, it will guide this conversation further on how to approach the deal.

Thanks.

@Scott Choppin

Thanks for your reply.

to answer your question, We did not discuss with land developer yet, I am trying to explore possibilities to present to him to negotiate. The final SDP will be approved on 1st quarter of 2018, so they are flexible in terms of going to  a deal.

We are planning to build the homes and sale, with some short of arrangement with the land developer, either buy upfront or have a deal to pay as we sell each block. That is where I need some feedback on available deal structure.

we are looking into Finance plus Equity. House will be built at home buyer's financing, we already roped in a lender who would pre-approve the project and make the financing available. So we basically need money for the land and infrastructure development. Infrastructure development can be done in phases and cash flow from phase-1 can be rolled into phase-2, so do not really need money for the entire infrastructure development but for phase- and two may be and common infrastructure such as storm water.

Yes we ran the proforma. land cost is around 33k each lot, infrastructure/lot around 43K(considering all common facilities), development impact fee+ cost of building+holding cost is around 180K, target selling price is around 425K

Thanks

Looks good @Amit Barman

Given this set of facts, I would suggest phased closings with seller where you would only purchase a few lots at a time. This it the rolling options method I mentioned before. 

You would propose X number of phased closings in your negotiations, once agreed upon deal, then close on phase 1 purchase, and provide him with option money for the future phases, to incentivize hime to wait for the future closings. If market turns against you, you can bail out, you lose your option payments, but you aren't forced to close future phases unless you want to, and you don't close the whole thing in the beginning and hold land when market turns down. Many large homebuilders use this method to protect against market downturns.

Suggest you get those option payments to be applicable to purchase price. Put some money in his pocket to get him patient, but you pay down your purchase price while you move through the options. 

You only pull trigger once you build out X homes, then roll to the next phase, hence the term rolling options.

Have fun!

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