New Subdivision Development

47 Replies

NOTE:  This is @Jay Hinrichs  development, I am posting pics as he was having issues with his computer. 

To all that may be interested.. this is a 27 lot subdivision we (Jay Hinrichs) just broke ground on 10 days ago. There were two homes on the property they were both demo'd. We will be building the subdivision out with 1800 to 2200 sq ft homes some single levels as well.. Price point 299 to 350k.

Deal notes.

Land 750k

Soft cost 100k

Development all in 950K

Total 1,800,000 or 66k per lot.

We could spin these once complete to Horton or Lennar for 85k per.. however we can pick up builder profit on top if we build them out and we have bank financing on this at 6% Cash equity required 500k when we took the A and D loan down... This is the first A and D loan my bank had made since 06... So we feel very proud that they chose us to fund and get back into the market. Houses will cost 85 to 100 a foot all in to build.

My Wife is our Broker so we will keep that in house and try to sell as many as we can ourselves however it will be multiple listed with full BAC offered to procuring agents. Development will be done mid December depending on weather we can then pave.. Its not uncommon in our market to not be able to pave until middle fed.. The plat is running concurrently with the building of the infrastructure.

If you could spin these for 19k per then your looking at $513k. If you build out I would expect you to profit another 15% on the construction, or 27k per = $729k. 

The question is whats your estimated time to build out the subdivision. 3yrs? ( I don't know the demand in your area) 

How is the bank structuring your payoffs, are they loading the front end ? 

I just purchased 22 duplex lots in a development that has BK'd the 2 companies that owned it prior to me. If I could have flipped it for a $300k profit I'd be hard pressed not to take it. But my area is starting to get saturated by the national builders as well. This makes it hard for small builders like myself to obtain lots to build on. 

Best of luck to you ! 

@Chris Adams  

  Build out on this will be 12 to 16 months.. we will sell 2 to 3 a month.. ( according to the 5k bank MAI appraisal :)  )  But we should easily hit that metric.

Our base model will cost 85 a foot all in and sell right at 325k for 2000 sq ft. plus 66k for lot which is our all in cost on the lot.  We are the listing agents so 10k for sales cost 5k for tax's insurance etc. nets us 310k per home...

170k all in build cost +  66k for the lot =  236k all in but lets round up to 250k because we all know it never goes right or cost what you think...  so 310k - 250k = 60k net net per house X 27 = 1.620.000 on 500k investment in 24 months max start to finish.

We do not have accelerated pay downs on the lots its straight prorata. Although I have had the bank do that in the past were we ended up with the last 5 lots free and clear.

WE also have INTENSE competition for lots in the Portlandia market..

One reason to build it out is its darn hard were we live to buy one lot let alone have 27 of them all in one spot that we don't have to try to buy one at a time or a few at a time.

this is one of 6 subdivisions I have going in the Metro market. this is the largest smallest is 5 lots.. But they are all in different sub markets so no competition for buyers between them.

We are going to go at it hard for the next 24 months then see were it all shakes out.

Our market was a 10,000 door per year growth market in new construction from 1990 until 2008 with 30% of those being multi family... In 09  a total of 700 doors were built. Our construction industry imploded.. Next year we pulled about 2k, then the next 3500 and so on.. I think we are back to about 4500 for 2014 maybe a little higher.. So you have pent up demand for housing as our population continues to grow even in the down times.

What is an A and D loan?

@Jon Klaus  

  A & D loan =  Acquisition and Development  And once we go vertical then they pay off the lots that are encumbered by the A and D loan and it converts to a vertical loan. Each lot will have its own Deed of Trust recorded against it.. Were as the A and D is for the entire legal description. We can't record the plat until we finish all construction. Plat recording End of FEB.. Because we have two legal lots of record they will let us build 2 homes prior to plat recording but no more.

Personal guarantee required?

@Jon Klaus  

ABSOLUTLY Not sure how it is in your area but if you want to borrow from a bank for RE deals there is always a PG and most if not all HML I know require it as well.

Originally posted by @Jay Hinrichs:

@Chris Adams 

170k all in build cost +  66k for the lot =  236k all in but lets round up to 250k because we all know it never goes right or cost what you think...  so 310k - 250k = 60k net net per house X 27 = 1.620.000 on 500k investment in 24 months max start to finish.

I like to separate the land development from the construction since they are truly 2 different endeavors. If we remove the profit from the lots as if you sold them (19k) from the total home profit then your at 41k profit on a 310k home which is 13.2%.

Im running at around 14%-15% on $164k properties

Even though we are 1800 miles apart it seems our numbers are pretty close. I just wish I could speed up my time frame. I have financing in place to run 2 spec/model buildings at once. And as many presolds as I can sell. Maybe things will go better since I tend to look more at a more conservative estimate when planning out projects.

@Chris Adams  

  my bank allows me 12 specs at once and presells don't count. and If I buy one of their OREO lots it does not count.   You may want to get a few lenders in play to speed up your velocity.. But of course you want to build to meet demand so you don't have excessive carrying costs on your standing inventory.

Who are you going to sell the duplex's to would it be to investors or .. Owners who will rent one side out.. ( which I really like for first timers getting into the game)

Originally posted by @Jay Hinrichs:

@Chris Adams 

Who are you going to sell the duplex's to would it be to investors or .. Owners who will rent one side out.. ( which I really like for first timers getting into the game)

 Most of my buyers are empty nesters downsizing. They tend to pay cash. These would not be ideal for investors. The numbers don't work that well, trust me I researched that on Day #1 LOL.

Im certain I will get financing for more buildings as I prove I can move properties to the banks. I have financing on this deal with 2 different banks. 1 did the land and 1 spec, another does 1 spec for me. Both will do presolds. In the duplex game selling a pre sold means 1 side is still a spec. 

Here is a pic of a unit I just finished.

As for demand, with the short time I have been in here they are selling right after drywall. Most buyers don't want to wait to build from scratch, so I am loosing a few buyers by not having enough product up.

But as you said I don't want to be carrying 3 buildings if it slows a bit, and winter is just weeks away.

@Chris Adams  

  OK I was thinking duplex in the strict sense of rental properties not attached patio homes as it appears your building and selling.. Looks nice.. out here in PDX our lots are to small to really accommodate that kind of building we have to go vertical. We build on many 25/100 lots and I did one subdivision out at Hood River were my lots were 40X50  we did 3 stories on those  really neat looking product.. I got to figure out how to post pictures on the site here so I can share some of our product.. I think it is cool to see different product from different markets.. Karen posted the sub pictures for me.

Great thread - just wondering as a developer why not take the sale to the builder & move on to the next deal? Seems like a lot can happen in 24 months. If prices appreciate higher I assume you would make more profit on the builds as well. 

@Danny Day  

unlike many areas of the country we have NO lots.. So I could not recreate these lots at this price again.. ( unless there is another 08 type event).. And we are in the building business not the lot flipping business. However if for some reason Horton or Lennar offered me 100k or so I would probably do that deal... Our market here is just super competitive.

For instance in this town we are building in ( population 120k) and in the metro PDX area there is only one other new build subdivision.. So we are pretty confident unless some major calamity we can build and sell.  We are not allowed to take reservations in Oregon until our plat is recorded.. but we have a buyers list right now of 20 maybe 2 or 3 of them will convert.

I like the thread as well.

What I know from development is most of the profit is on the back end. If you sell the first half out and then the second part slows down a lot It could take you under.

I haven't built any myself but I do know investors that did and it happened. The thing with ground up development is the rewards are huge but so is the risk. Long lead times until the finished product and the markets can change quickly affecting your position.

The mailbox in the picture does it open from the backside?? I have seen some where you can open from the back and people love it because they do not need to go in front of the road and worry about cars etc. hitting them.

@Joel Owens  

 spot on ...our dooms day scenario would to be build them out and rent them out.. they would carry themselves.. The bank that I am with has been my bank for 22 years and in the last downturn they did the same thing when I got stuck with about 5 homes in another subdivision and then sold them off a few years ago when things got better.. Its not ideal but these homes would rent right at 1800 to 2200 a month and be full in a day.. My bank would then convert my loan to a 20 due in 5 ... But like you say to get any serious scale and profit one must take some risk and you need some velocity can't just build one or two at a time. Much like those in the fix and flip business if they are going to make bigger money they need 5 to 10 homes in inventory  a few on the market a few mid rehab and a few just starting then keep the cycle.  We will come out of the ground with 5 homes.. then start 2 a month or more if demand stays anywhere were its been the last 24 months.

Great post.  I look forward to following this... It has drawn some fantastic comments so far!

Off Topic:

I grew up building/selling new construction with my father in NW Indiana.  Normally we just bought the lots (max we did was 8 holes at once) but we did do a small duplex development pre-2008 (6 lots - 12 units, built 3 then the other 3).  Our target market was: divorcees, retirees, and young families.  3/4 went to retirees/divorcees, and the other 1/4 went to young families.  Hoping to get into development as primary but the raw land race is highly competitive in my area.

Could you go into further detail regarding the A and D financing? When you mention going vertical is that what you mean by construction begins on a lot? Do terms of loan change when this happens, etc?

Excellent thread @Jay Hinrichs  !

I am hoping to graduate from flips/rentals to specs, so hopefully I can learn more by following your progress. I know I hare already learned on just the first page! 

@Jay Hinrichs  

 Great info, would love to hear more about the specifics of the A&D loan, rate/terms etc.   

Also, how do you build these?  Do you have all trades on payroll?  Everything subbed out? A mix?

Good luck!

@Danny Day  

  A and D is the acquisition and development loan.. its the loan that is used to buy the land and build all the infrastructure and plat the lots... When we go vertical we will then have separate loans on each home ( just your typical construction loan).  The new construction loan will payoff the lot release on the A and D loan..

Loan terms are   1 point  6%  on  A and D  due in 18  months and  loan has 12 month interest reserve so no payments first year.

My verticals are the same 1 point and 6%  I could probably negotiate on this but my bank has been so good to me for so many years I just don't I think its fair and we all need to make some profit. The key is having the 500k equity up front.. That equity will carry us through the build out we will not need to put anymore cash equity into the project.

How is lennar out on the left coast?  I work in land acq for Lennar in MD

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here