Raw Land for a first deal

Real Estate Deal Analysis & Advice
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Raw Land for a first deal

Kim Pham
Flipper/Rehabber · San Jose/Santa Rosa · Member since 2015 · 8 posts · 5 votes

Hi BP Community!

Would love to get your guidance as I think this might be my very first deal. 

-FSBO priced at $80K (free and clear)

-Owner is an elderly man who purchased the lot for $60K nearly 20 years ago through a foreclosure sale. He lives out of the area and is motivated to get rid of it.

-Property is 1/2 acre raw land. 

-Property profile report shows the property use is residential/vacant

-Located on block with single family homes valued $500k-$700K with same lot size. 

This might be my first deal and I'm so nervous. I told him I'd get back to him on Tues/Weds. Does this sound like an okay deal guys? Raw land? I am completely clueless on what I need to do next. Do I find a lawyer to help me fill out a purchase agreement? I'm sorry for sounding like such a newbie but any guidance would be very much appreciated. :)

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Karen MargraveBusiness Member
Moderator
Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes
10y

@Kim Pham You can probably go onto the website for the City, and look at an interactive map that shows zoning, etc  Depending on where in San Jose the lot is, it could be worth far more than you are thinking, as a 1/2 lot can be split, depending on the minimum lot size allowed in the neighborhood. 

As to the value ratio @Christina R. those are for some areas of California, not all, and things like that are definitely local, so you need to find out for your area. In some areas of California we have to pay ridiculously high prices for land, other areas of the country are sometimes lower. 

When a builder is looking at land, we are looking at zoning, location, topography (is the land flat or is it going to require a lot of excavation, retaining walls, etc.) where are utilities in relation to the lot, are there any utilities that will need to be relocated, put underground, etc. What is the minimum lot size, etc. Type of soil (that's more a concern when you are in coastal areas or have sloping lot, etc.) 

If you want to send me the address of the lot in a private message, I'd be happy to look it up on google earth an give you a quick opinion of the land, the neighborhood, etc. You don't want to put too much online until you get it tied down.  Once you have that done, there's some builders here on BP that are in your area that may be interested. 

Sounds like a great opportunity though. 

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  • Michaela G.
    Investor · Atlanta, GA · Member since 2013 · 3k+ posts · 3k+ votes
    10y

    Is this raw land or an infill lot? 

    The difference is that infill lots are typically properties, that are in the middle of other residential homes and which may have previously had a house on it, that maybe have burnt or destroyed in some other way.  That also means that there's water/sewer hook-up and possibility to rehook up power. 

    With raw land you may have to start from scratch with any infrastructure.

    4Reply
  • Michaela G.
    Investor · Atlanta, GA · Member since 2013 · 3k+ posts · 3k+ votes
    10y

    Typically, a vacant lot is worth about 25-30% of ARV of finished house. Of course, that varies in different locations. But on first glance it looks like a great deal to possibly wholesale to a builder

    0Reply
  • Christina R.
    Investor · DMV Maryland · Member since 2013 · 867 posts · 370 votes
    10y
    Originally posted by @Michaela G.:

    Typically, a vacant lot is worth about 25-30% of ARV of finished house. Of course, that varies in different locations. But on first glance it looks like a great deal to possibly wholesale to a builder

    Is that 25-30% of ARV for a finished, ready-to-develop lot or a completely raw lot?

    0Reply
  • Michaela G.
    Investor · Atlanta, GA · Member since 2013 · 3k+ posts · 3k+ votes
    10y

    If a finished house sells for 500K, then the lot at 25% would be worth $ 125K

    0Reply
  • Kim Pham
    OP
    Flipper/Rehabber · San Jose/Santa Rosa · Member since 2015 · 8 posts · 5 votes
    10y

    I believe this is raw land without sewer/water hookup. I think wholesaling to a builder would be a good idea. This will be my first deal from a FSBO. I have never made an offer or put a contract together before. Is this when an attorney should come in? Or RE agent?

    0Reply
  • Account Closed
    Real Estate Agent · Las Vegas, NV · Member since 2015 · 2k+ posts · 1k+ votes
    10y

    I would go to city planner and ask what it would take to build, 20 Years is a long time for no one to try to buy the lot, especially in a good area, must be more to the story, After you pick up some information you will know what price to pay for the lot

    6Reply
  • Stuart Birdsong
    Investor · Fort Collins, CO · Member since 2015 · 304 posts · 112 votes
    10y

    @Kim Pham Are there houses on either side of this particular lot? Do you know the lot dimensions? How much Street frontage? At first glance it sounds like a good deal. I Highly recommend asking if he has any soils reports, surveys and any engineering reports for the property. This will be critical due diligence, that will give you a lot more value to turn to your end buyer. 

    2Reply
  • Michaela G.
    Investor · Atlanta, GA · Member since 2013 · 3k+ posts · 3k+ votes
    10y

    Don't think of getting an agent involved, because they will tell the seller that they're selling too low and get him to not want to sell to you at the price. 

    I would ask an investor in your area to give you a blank, simple (not more than 2 pages) contract and get this lot under contract, with a 10-day due diligence period. 

    Then I would immediate drive through every street in the area and write down the addresses of every new construction, in progress (then you can get builders contact from permit, if in front of house) or recently built homes. Find out who the builders are and try to find out what they paid for the land. 

    Contact them and get their email addresses or fax numbers. 

    Create a flyer and offer a quick-sale-price. Don't get greedy, but if you sell for 100K, then that will give you 20K profit on your first deal and you might have some builders fight for it, if that's a low price in the area (which it may be).

    Those builders will do your due diligence for you, because they know what you're looking at, so, you want to give them not more than 5 days for that. 

    Before you sign the contract, call your local zoning and find out what kind of road frontage is necessary in the area and make sure that lot has a minimum of that road frontage.

    The quick closing would ideally be a simultaneous closing, in which the money from the builder pays the seller and you'll get the difference.

    1Reply
  • Kim Pham
    OP
    Flipper/Rehabber · San Jose/Santa Rosa · Member since 2015 · 8 posts · 5 votes
    10y

    Yes there are homes on both sides of the lot. I will drive by to take a look tomorrow. I wish I had a local investor I knew to help me with this. This came so much sooner than I was ready for. 

    0Reply
  • Michaela G.
    Investor · Atlanta, GA · Member since 2013 · 3k+ posts · 3k+ votes
    10y

    With 'local' I meant someone that can give you a contract that's made for California (I work in Georgia). Make a request on bigger pockets to see if someone can send you a blank contract.

    0Reply
  • Kim Pham
    OP
    Flipper/Rehabber · San Jose/Santa Rosa · Member since 2015 · 8 posts · 5 votes
    10y

    Will do. Thank you so much Michaela

    0Reply
  • Stuart Birdsong
    Investor · Fort Collins, CO · Member since 2015 · 304 posts · 112 votes
    10y

    @Kim Pham Please heed advice above, ask for soils reports, surveys, engineering. 

    0Reply
  • Kim Pham
    OP
    Flipper/Rehabber · San Jose/Santa Rosa · Member since 2015 · 8 posts · 5 votes
    10y

    Stuart, the seller does not know anything about the property. He bought it "as is" and has only visited the lot once since he purchased it back in 1996 in an auction. Should I have it ordered after he signs the offer agreement? And who would normally pay for this?

    0Reply
  • Michaela G.
    Investor · Atlanta, GA · Member since 2013 · 3k+ posts · 3k+ votes
    10y

    If the seller is willing to give you a long closing time - 60 days, then ask for 30 days for due diligence and you turn around and require the builder to do his/her due diligence in less time. If something comes up, you can back out of the contract.

    0Reply
  • Karen MargraveBusiness Member
    Moderator
    Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes
    10y

    @Kim Pham You can probably go onto the website for the City, and look at an interactive map that shows zoning, etc  Depending on where in San Jose the lot is, it could be worth far more than you are thinking, as a 1/2 lot can be split, depending on the minimum lot size allowed in the neighborhood. 

    As to the value ratio @Christina R. those are for some areas of California, not all, and things like that are definitely local, so you need to find out for your area. In some areas of California we have to pay ridiculously high prices for land, other areas of the country are sometimes lower. 

    When a builder is looking at land, we are looking at zoning, location, topography (is the land flat or is it going to require a lot of excavation, retaining walls, etc.) where are utilities in relation to the lot, are there any utilities that will need to be relocated, put underground, etc. What is the minimum lot size, etc. Type of soil (that's more a concern when you are in coastal areas or have sloping lot, etc.) 

    If you want to send me the address of the lot in a private message, I'd be happy to look it up on google earth an give you a quick opinion of the land, the neighborhood, etc. You don't want to put too much online until you get it tied down.  Once you have that done, there's some builders here on BP that are in your area that may be interested. 

    Sounds like a great opportunity though. 

    7Reply
  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    10y

    @Kim Phamtake Karen's advice and help. She has the knowledge to help you work this one!

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Kim Pham  lot value ratios as described above are not appropriate for most of the Bay Area... 

    Let @Karen Margrave give you a little help on the zoning and other issues.

    My first blush is if this is in Santa Clara county.. and the price is what he is asking then there is probably some hair on this deal... IE something that is precluding it from being easily or economically feasible for a build project.

    Unlike other areas of the country were the cost of construction is normally much more than the cost of the lost.. IE 100k lot 250k to build home all in 350k sell for 500k.

    Much of CA is inverted.. IE you pay much more for the lot than you pay to construct the home.  For instance I bought a lot in Palo Alto for 575k and spent 325k building my home on it.  etc.

    But if this is buildable and homes are worth 500 to 700k  I will give you 100k for it tomorrow  LOL.. and so will any number of other builders.. which leads me to my first statement and @Account Closed post that there may be an issue.

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    3Reply
  • Doug N.
    Lynnwood, WA · Member since 2015 · 221 posts · 157 votes
    10y

    @Kim Pham Thanks for posting! @Karen Margrave is right on all counts. 

    As someone who has worked in acquisitions and feasibility, I can tell you that my experience has always been thus: long empty lots are that way for a reason. In the Bay area (land of not many buildable lots), it's likely this is doubly true. No doubt every builder in SJ is aware of this lot, and for various valid reasons, it remains unbuilt. 

    That being said, it is possible that this lot is ready to go, simply needing infrastructure buildouts - assuming that the thousands of postcards sent to the owner over the years have gone unread, and that he has no telephone service, etc. Not to sound too pessimistic, but it's quite rare to find an open lot in this area. The first tell is the price at 60k for 0.5 acres - this puts raw South Bay lots at 120k per acre, and that's about 1/20th of the real price, maybe 1/30th depending on the exact locale.

     Please let us know what happens! Best of luck!

    2Reply
  • Account Closed
    Real Estate Agent · Las Vegas, NV · Member since 2015 · 2k+ posts · 1k+ votes
    10y
    Originally posted by@Jay Hinrichs

      lot value ratios as described above are not appropriate for most of the Bay Area... 

    Let @Karen Margrave give you a little help on the zoning and other issues.

    My first blush is if this is in Santa Clara county.. and the price is what he is asking then there is probably some hair on this deal... IE something that is precluding it from being easily or economically feasible for a build project.

    Unlike other areas of the country were the cost of construction is normally much more than the cost of the lost.. IE 100k lot 250k to build home all in 350k sell for 500k.

    Much of CA is inverted.. IE you pay much more for the lot than you pay to construct the home.  For instance I bought a lot in Palo Alto for 575k and spent 325k building my home on it.  etc.

    But if this is buildable and homes are worth 500 to 700k  I will give you 100k for it tomorrow  LOL.. and so will any number of other builders.. which leads me to my first statement and @Account Closed post that there may be an issue.

     Good lots don't just hang around in hot areas of especially California as Jay mentioned Why is it getting so hard to make 20 grand?

    1Reply
  • Jo-Ann LapinPro Member
    Loan Officer · Tustin, CA · Member since 2015 · 3k+ posts · 713 votes
    10y

    Karen is giving you good sound advice. You should try and reach out to building and safety and speak to a city planner to see if it developable. Get a  breakdown of school fees. What type of setbacks, zoning, utilities and soil's  reports on record. Was there ever any structures on the land previously? What size lot is it? Is it normal for the area? Is it flat or hilly? Ask about endangered species. Ask what is the stauts now the the CA drought on getting water to the subject. Raw land is very ambigious for your first investment.

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    3Reply
  • Mercedes Cantero
    Real Estate Investor · San Diego, CA · Member since 2015 · 32 posts · 13 votes
    10y

    These posts are full of good advices. Also, it's important to walk around the neighborhood and ask to the people who live there. They are a good resource of information and they will tell you more than the owner. 

    Best of the luck @Kim Pham.

    2Reply
  • Mark Phillips
    Apple Valley, CA · Member since 2015 · 4 posts · 0 votes
    10y

    hello Kim

    I'm new

    I'm a licensed  gc  in  calif  builder/ investor 30 years experience  in lake arrowhead ca  and high desert my advice , keep this close to you, don't employ realtor at this time , first you should approach, hall of records  search out ownership, physically  so you understand  simple puplic  search example  is he owner, clear title no encumbrances,  you'll see a surveyor plot line and stamped  engineering, print all documents,  then proceed  immediately to  building dept, talk with planing for this specific lot,,   you might just discover  it's small in lot size and or land locked,,,  or it might have a grandfather Claus  now you'll  have your ammunition,  for pursuing,  on a land contract ,,,  beware of  how he purchased  online,, and  here's a fact ,   I have purchased lots  amongst  the feeding  frenzy of  builders who oNE reason or other overlooked, or could not in fact figure out the build,,,,,lastly  my saying  it was min to begin with    best regards  on your  hunt 

    0Reply
  • Mark Phillips
    Apple Valley, CA · Member since 2015 · 4 posts · 0 votes
    10y

    hello all just noticed my profile ,, stager,,  I will update   licensed gc/ investor   apologize  

    mark

    0Reply
  • Kim Pham
    OP
    Flipper/Rehabber · San Jose/Santa Rosa · Member since 2015 · 8 posts · 5 votes
    10y

    Hello All,

    I am meeting with a lawyer today who will help me draft my first offer. I am going to work to secure my contract and do my due diligence with all of your valuable advice. I am blown away by all of the support the BP community has given me. Keep you all posted and wish me luck! :)

    -Kim

    1Reply
  • Tom V.
    San Francisco, CA · Member since 2014 · 345 posts · 281 votes
    10y

    Why is this deal attractive to you? Sometimes FSBO stands for

    Freaking

    Stupid 

    Bad 

    Opportunity

    It sounds like you have never purchased or developed land.  Why would you choose this first?  It is much more complicated than buying an existing place and trying to flip or hold. 

    Don't let the low price fool you.  If you are uncertain about proceeding and unsure about whether you will lose money, that is your brain telling you that you don't understand enough and that you will probably lose money.  

    Pick something easier to start with.  Surgeons don't go straight into open heart surgery - they learn to stitch up a wound first.   

    You might get lucky on this deal, sure.  If you feel lucky, go to Vegas and bet on red on roulette.  You could double your money.  

    2Reply
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