I posted a few weeks ago about an opportunity I have to purchase 14 acres, with current zoning allowing for the site to be developed into 5 home sites. Recently I have looked into the possibility of annexing the property into the city, and have met with city planning officials to understand that process, and it looks like it will be my best path forward as I could technically build up to 45-50 homes on it, but realistically I would go for about 20 with larger lots.
While the annexation and re-zoning seems more likely than not, it will take 4-6 months according to the official I met with until we have all of the approvals necessary. I would like to make an offer on the site, with an agreement in place that the sale only becomes effective once the city approves the annexation and re-zoning. During that time I will finalize whether I want to build and sell finished homes, or sell the lots with a design-build agreement included. I am leaning toward the latter as it would require less financing.
Being as this would be my first project on this scale, I would love feedback and ideas from BP members experienced in this based on my annexation and re-zoning idea. Is it reasonable to defer payments and finalizing the sale for 4-6 months until the annexation and re-zoning is approved?
This sounds like a real long play. Are you tying up money, hope not much for the option. Once you do get approval, assuming you do, then you will have to develop it unless you think you can sell it just with the zoning change. Getting the community developed is really hard and expensive right now because every contractor that does this type of work is super busy after all of the rains we have had.
@Joshua Stewart yes you are on the right track. You never want to close on land until you get all your entitlements including any rezoning, annexation etc. You also need to tie your purchase price to the number of lots you can get unless it's cheap enough that it doesn't matter. I don't even put up option money on development deals like this these days. I put the land under contract contingent on all approvals and permits. If I do not close the seller get's all my due diligence as option consideration.
Also I would advise you to just sell the lots to a builder or to end buyers and stay out of the construction side especially since this is your first deal. If you want to get into building houses then maybe keep one lot for yourself and do a spec on that but do not contract with a buyer unless you have an experienced GC that will deal with them directly and you're out of the picture. Way too much to go wrong if you have never built a house from the ground up.
@Greg Dickerson and @Brent thanks for the advice.
I've got a great construction team in place, and since we are a year out at least from the first shovel, plus the volume of work, my guys feel the timing will be good and they can have the security of so many homes to build.
With me owning a residential design business first and foremost as my primary business I am only interested in doing this with getting the design work to build the homes. While it is the first such development deal as the lead, I have been a service provider on this type of project before. I am almost certainly going to sell them as finished lots with the contract including me as designer and one of my GC'S as builder.
In talking with my broker I am going to make my offer with a due diligence fee but no earnest money and everything contingent on approvals and permits.
@Joshua Stewart what do you mean due by diligence fee? Do you mean a non refundable option fee? I would not do that. It's not necessary. I would not offer a deposit or a fee only my work product in the event I do not close.
@Greg Dickerson yes that is correct. I am not putting anything down until I receive all annexation and zoning approvals, etc.