All Forum Posts by: Bear Geiger

@Dave Foster & @Bill Exeter.  Thank you for the comments.  I want clarify my objectives in the deal.  I have several lots that a builder wants to build on.  I wish to trade him these lots and in return have him build me a house on one of these lots. providing we can agree on terms, what does this look like on my side?  If I hold the lots more than 12 months can I differ the capital gains since I am "buying" a house?  What does the deal look like if I don't hold the lots 12 months?  

I am trying to set up a deal whereby a few vacant lots in a subdivision are exchanged for a house of similar value. Is there a way to set this up without selling each property, but using some sort of direct swap? Preferably we would like to structure this so that reduces or eliminates the tax liability.

Hi Zachary,

The first thing I will tell you is the rules vary from state to state and from county to county inside the same state. As a developer of raw land, I will tell you the rules in my area and give you a tip that my help you.

I am working in the Raleigh, NC area but not in the same county where Raleigh is located. We are not able to sell the lots to builders or individual until the final plat is recorded with the Register of Deeds. I think this is true in most (if not all) areas. Also, the steps to get to recording the final plat are different depending on location and type of subdivision.

MINOR or MAJOR
Most counties in this area make a distinction between “minor” and “major” subdivisions. If you are building a minor subdivision (usually less than 9 or 10 lots depending on your county) you usually have fewer requirements than a major subdivision.

MUST or MAY
Another consideration is what do the county rules say about granting the developer approval for the subdivision. Some counties “MAY approve” and other “MUST approve”. This means that even if you do everything right, a “MAY approve” county can simply turn your project down. In a “MUST approve” county, if you do everything on the list of requirements, they HAVE TO APPROVE the plat.

CONTRACTS BEFORE PLAT
One of the problems we are having in our area is we cannot supply our product fast enough (mostly because of government red tape). We have eager builders ready to take down lots, but we don’t have the final plat recorded yet. We don’t want to lose these sales, so what can we do? In our area (check the law in your area) we can put these lots under a fully refundable contract with the builders before we record the lots. In fact, the builders have presale contracts on houses for these lots they do not yet own. And yes, that is legal in NC. Hope this gives you some encouragement to get out there and get started!

I am doing a project right now in NC with a road of similar length and the price tag is about $265K with us doing some of our own clearing.  This is a road with no curb and gutter and laying only power lines. (no water / sewar) .  In our area I would say $225 to $240 per linear foot. 

As for power line area, it depends on many things.  If the soil is good and you want to place houses there, I would approach the power company and see if they will move the lines.  (we just did this and got a "yes").  If the soil is not good, you can set the area aside as a common area.  in NC most of the counties Wil allow you to reduce the size of the lots if you set aside a common area.  This helps you recoup some cost of the lost land, and smaller lots mean shorter road which also saves money .  so you can come out ahead by giving away land you couldn't use anyway!

You may want to look into forming an HOA then section out the common area and deed it to the HOA. In many counties there is NO TAX on land owned by the HOA.

I am preparing to do my first 1031 and I can share what my research has tuned up...

There are tax advantages available using a tool called a 1031 exchange to allow proceeds from a sale of one property to purchase a new property. Using this process the money is never received by the seller, because the funds are held by a "Qualified Intermediary".

Rules:

• 1. Qualified Intermediary - A Qualified Intermediary must hold the proceeds during the exchange. If you control the funds in any way, you may risk disqualifying the entire exchange.
  

1. 2. Like-Kind Property - The IRS states that the relinquished property (property being sold) and the replacement property (property being bought) must be like-kind. Generally speaking, any type of investment property type may qualify for an exchange, except your primary residence.
   
2. 3. 45-Day Identification Period - The IRS states that an exchanger has 45-days from the date they sell their property to identify potential replacement property(ies). You must complete the purchase in 6 months.
• There are 3 sub rules that apply to identifying replacement properties:
• 3 property Rule - The 3 property rule states that the exchanger may identify up to 3 potential replacement properties regardless of value.
• 200% Rule - If you are looking at more than 3 properties, you will be subject to the 200% rule. This says that the purchase price of all the combined properties cannot exceed 200% of the sale price of the old property.
• 95% Rule - The 95% rule states that the exchanger may identify any number of properties with no reference to sale price of the relinquished property, provided you actually acquire and close on 95% of the value identified.
3. 4. Own for a year and a day before selling
4. 5. 180 days to complete the purchase
5. 6. How you held title on the old property is the way you have to hold title in the new company.
6. 7. You must buy property equal or greater value

Hi William, are you a realtor who is contracted to sell these lots? If so you may want to work with a custom builder to bundle a lot with a house plan for a given price and try to obtain a presale contrate. (In the simplest of terms, a presale home is one that's for sale that hasn't been built yet).

The answer above also depends on how much work these lots need. Let me ask a few questions.

1. Are these lots in a subdivision?
2. City or rural
3. Is water and sewar nearby, or will they need well and septic?
4. Can these lots be accessed from a public road with just a driveway or will they need to have a road put built?

@Misael Carlos Vera .

Yes, land investing (and real estate in general) requires a solid team. I have spent time building a team of the folowing..

FIRST find a GREAT realtor. Your realtor can make or break your sucess.

Real estate attorney to help with contract addendums, rules and closings

Surveyor

Soil Scientist - For properties that need well and septic system work

Civil Engineer - For mapping out driveway connections to government owned roads and more

Tax Attorney - Find all those deductions and loop holes

You don't need all these prople to get started, but you should be trying to find them along the way.

I connected on BP with a person doing their first land subdivision. (1 parcel into 3) They sent me a message to ask a few questions and I thought other may benefit from what we discussed. Hope you find this useful.  - David Geiger

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My situation is that a family friend is selling their house, a 3 bedroom 2.5 bathroom house. The house is located in a low density zoning area (LDZ) and has a gigantic yard, .8 acres. I did some quick numbers and looked at the zoning laws and I can turn the house into 3 lots (it's a corner lot so it does work out).

I can tell that this is a great opportunity but I've educated myself primarily in multifamily assets in rural areas so I know very little about single family homes and raw land.

So I wanted to know the following.....

1. If you were in my position, what would you do?

Sounds like you have started by looking at the local rules and logistics. Great start. I love subdividing land because it can be very profitable with relatively little sweat, but it takes careful planning and patience. Figure out what you can do yourself and what you will need to get done by contractors. Unless the local rules require it, I would not involve a civil engineer except possibly to testify on your behalf (see next section). Another question is utilities. I assume this property already has power, water and sewar? If well and/or septic you will need to do some more DD.

2. Who/what type of people should I contact to make this deal profitable?

You will need a surveyor to define where the new lot lines are. A good surveyor can save you money and be a big help. They know all the steps it takes to subdivide property and may even interact with the town/county on your behalf. Don’t be afraid to ask them before committing…

a) how much will it cost and

b) what you can expect them to do.

In many cases the subdivision of property must go before a town council. If this is the case, do your homework and be prepared for any questions that come up. If you think they may ask how adding additional driveways in the neighborhood will affect traffic flow and safety, pay a civil engineer to come answer as an expert witness in the event the question comes up. This may cost you a few hundred dollars but could save the deal. Similarly, if you think someone will ask how this will affect the neighbor’s property value, have an appraiser come prepared to answer the question.

I don’t think your situation will require a septic system, but if you ever encounter this scenario, it is a good idea to find a good private soil scientist.

Finally, you will likely need a “sitework” company to put in driveways and culverts. Or you could opt to sell the lot as is for a lower price and skip the headache. Honestly, as a first timer, I would take the easiest path, pocket the money and get fancy later.

3. Any recommendations on raw land education? Chambersburg is a growing town and raw land is a good potential investment.

YouTube, Bigger Pockets, ask me and others. You should be able to make a 50% (or better) margin on raw land subdividing where you can just add driveways. If you have to actually put in roads and other infrastructure the margin will drop to 28% to 35% but you should be dealing with much larger sales numbers.

Here's the take away message ....
After you figure out all your costs, multiply by 150% (in case something goes wrong). Then figure out what the reasonable selling price for the lots are and multiply by 75%. If you can still make money, do the deal!

The answer is that even if you had a formula it doesn’t work if you move 5 miles from the current site. The answer is also very different depending on the market. The best thing you can do is look at comp prices and see what other similar land is going for in your area. My mentor taught me to double my estimates for what I think my project will cost and ½ what I project my income to be. If you still have more income than costs, move forward. It’s a bit extreme, but I follow a similar rule (about 50% over and under rather than 100%)