All Forum Posts by: Scott Choppin

@Ben Morrow

Can you get a copy of the R2 zoning text from town and post it here (or DM me, and email it)? 

My thought is subdivide the land into the smallest lots possible that the zoning allows. Example, let's say that they allow 2 acre lots in the subdivision. The zoning won't change, but if it is a typical R2, in most place that's two on a lot. With my example you have 5 lots and 10 units. Or 5 lots x 2 units each = 10 units. As it stands now, 10 acres may only get you 2 units without subdivision. You would need to install road and utilities, but we'll cover that later.

But, send the R2 zoning text (the language of their zoning code) and we can help you determine from there.

Thanks.

~ Scott

@Sarah Purdum

Thanks for the heads up. It would be worthwhile for you to go see these sites, in the link you sent me, you can see two things that are a dead giveaway for hillside sites to avoid:

1. They have pictures of a great views, which means they are on the side or top of a hill, "looking out" over the valley.

2. On the map on the link you sent, you can see they are in the hill area, the area with topography. If you look at my map from the previous post, you'll see lots of vacant sites on the rim of my map, most of those are on the hills around the valley and hence why they are available.

This is the reason their so cheap, hillside, usually not buildable, and it they are, much more expensive to build, caissons, stilt style framing, crazy parking (like on top of the house, from the up hill street). 

Keep your eyes out on the flatlands, for cheaper sites, that's your best bet. Or just do the ADU thing you mentioned, that will be one of the new trends, and with updated zoning, it's just getting started.

One other item, ZIMAS is only for City of LA, and since you're in the valley, that should cover most of what you need.

Good luck!!

~ Scott

@Joseph M.

You could use 125 psf to be conservative on a new build. I am sure someone will disagree, but we are delivering well below this cost on our 3 story apartments deals, and we just finished bidding a small project in Long Beach. Our numbers are real, although, the spec level for our apt deals will be below what you would spec on an SFR for sale.

Thanks.

@Justin Case

Did you come to any conclusions from the above advice?

My thinking, the tree is on your site, he can't compel you to tear it down, and sounds like SEA is hard to get tree demolition permits anyways (maybe you say "yes" to developer, city says "no").

Also, make sure if you do agree to it being taken down, and he pays you for it (he absolutely should pay, more than the 2k mentioned above), that there is a written agreement, that he takes the stump out, or at least grinds it down, backfills and compacts correctly the stump hole, cleans up the area real nice, and re-landscapes that area plus more on your property. 

Also, don't forget to make sure that his subcontractor/tree guy, has insurance: GL with you/owner named as additional insured, has workers comp insurance, and has the correct licensing. You don't want the tree guy incurring damage or having one of his workers hurt on YOUR property, and the developer washes his hand of you. This alone might be reason enough to say "no" to him generally.

He probably has the right to trim the branches that hang over his PL.

~ Scott

@Sarah Purdum

First, looking on the MLS, I see lots in West Hills and other parts of the valley (none in Canoga). All the lower priced lots are hillside, and you'll want to avoid those. You don't have to disclose here, but I am curious where you are finding lots (or homes) for $100k in the valley?

On Zillow, see the Canoga Park area, there's big blank are in the center part of the valley, see screenshot (this is vacant land sites only):

A couple of additional things:

1. Check to make sure that the houses (or lots) you describe, with larger lots, can actually be subdivided. Check ZIMAS, and determine what the zoning for a possible site is, then determine what the smallest lot subdivision is for that lot. The lots may be big, but the zoning may not allows a smaller subdivision then what exists.

2. Consider a house with a larger lot for the development of an ADU. The state of CA just recently passed a law that mandated more beneficial state zoning standards that all cities must comply with. City of LA has passed (can't recall if it's been ratified at council yet) their updated ADU ordinance, which could work on these larger lots. Only issue I see compared to what you want to do, is that you generally can't subdivide the ADU on a larger lot to be sold separately. The ADU has to be sold with the house, although it should increase the value of the house, now that it's house plus unit.

Thanks.

~ Scott

@Chase Gochnauer

Checking in, did you do anything with this site, and did the info conveyed in our post help you at all?

Thanks.

@RJ Bohigian

Tagging you in the thread, see my post above. 

Welcome to BP. 

To start, read this article I wrote about land development underwriting:

Land Development Article: https://www.biggerpockets.com/blogs/9960/68001-lan...

Just to make you aware, your background in business is excellent, and will serve you well. I would say that land development and the real estate development business are very different from your normal business environments.

A few observations, when you plan out the site, plan the whole thing out. Given what I see, you'll want to map the entire project from the beginning, and have those approval in place from the start. Next, you'll need to finish the lots and record your final plat map, so you can sell the lots/homes. 

As part of this, you'll need to:

1. hire a civil engineer, 

2. have approved engineering plans prepared, plan checked, and permits issued, 

3. pay the development impact fees and all other soft costs, 

4. grade the site, and build the infrastructure for the project, i.e. utilities, street, drainage, etc. 

You'll want to think long and hard how you are going to phase the delivery and finished lots, as you'll need to carry those costs with either your own capital or bank debt until enough lots are sold to repay that cost. Any common area facilities, docks, clubhouse, would be included in this upfront cost structure. 

Once you've planned out the land development portion, you'll to decide: do you sell the lots to builders and let them build and sell? Or do you build yourself as the developer, as seems in your post, and if so you'll need to design, finance, build, and sell each of the homes. 

If you sell the lost directly, best to find the best local land broker, and get the lost onto the market as fast as possible. You can also use platforms like LoopNet, Zillow, etc to sell lots directly. But your land brokers will know all the local homebuilders and have relationships that can be leveraged to get the lots sold as fast as possible, to pay down your lot finishing cost and land carry.

If you build homes and sell directly, you'll want to:

A. Hire the architect to design each home plan

B. Design, prepare CD's, plan check, and issue permits for the build

C. Hire a general contractor or builder to build the homes. 

Many times, folks don't start actual const. of a home until they've sold it to a specific buyer, get a deposit, then start the construction. You'll want to be very careful about building speculatively, as you don't want to build homes that you cannot then sell quickly once completed.

D. Determine who you buyer profile is in detail, prepare a marketing plan, and initiate advertising or other marketing methods to get the word out into the marketplace that you are selling homes. 

E. Set up a sales office, hire a sales agent with knowledge of selling new homes. Warning, this agent is not just any agent, they need to know how to sell NEW homes. Sometimes, a local agent can do this, but the process of selling brand new house in coordination with you the land developer and the homebuilder, is a major departure from selling an existing home, there's ton more to deal with and coordinate to have a successful sale.

F. Hire a customer service person to handle the post-close/post-construction warranty issues that always come up. You may be able to rely on the GC to do this, but getting subs to come back and fix stuff is a major time cost, and there is nothing worse than an unsatisfied homebuyer and a slow to respond subcontractor. The word gets out fast in the market when this happens.

G. You, the GC, and the sub will hold the long term construction defect liability when you develop this way. 

Last, before any of this happens, you'll need to underwrite the deal, run a proforma, along with land costs when you purchase, you'll need to gather lot finishing costs, homebuilding costs, developer impact fees, soft costs, and finance cost, so that you can make sure the deals makes sense. That in fact, you'll actually make money. 

Do this before anything, so that you can make sure you are making the most informed decision possible. I know many folks in general business that want to get into the development business, and end up losing money as they didn't do the math in the beginning. 

Hope that helps.

~ Scott

@Alyssa Healey

Great question. 

I have also observed that most duplex/triplex properties in DEN are sold as Bill suggests. But, I also observe that if you are the developer of the deal, you will be able to leave your sweat equity for managing the development process in the deal, and this might make the economics different versus a pure purchase of existing units. 

You will no doubt have to raise additional equity to hold it long term in a development scenario, but you need to do that during the build phase anyways. Then the question becomes, how much does your perm loan underwrite at, and how much equity does that require, and what's the net differential between development value/equity vs. new needed equity in perm phase.

So I'll give an example using cap rates (not real numbers):

Example 1 - buy existing (possibly a breakeven buy) at a 4.5% cap rate, with whatever rents, operating expenses and NOI, that generate the value on the deal and the purchase price.

Example 2 - develop the property, and if it's underwritten correctly, you produce a NOI/Cost ratio (the development cap rate) of 6%. If you assume that the sale cap rate in Ex. 1 is true, 4.5%, then you have produced a profit in the development deal, or said another way: 6% minus 4.5% = 1.5% value difference between build cost and sale revenue or profit.

To be clear, this is 1.5% of the entire value of the property (before everybody freaks on me, this is NOT 1.5% profit). Another way to calc this, take your NOI and divide by 1.5% and this would be your dollar profit.

You can now decide as follows:

A. Sell the projects, reap the NOI/1.5% value differential

B. Keep the project, leave the 1.5% value in the deal as equity, underwrite on the "as complete" value with a lender, and plug any equity difference in the deal.

Now, this does not mean the deal makes sense to sell or keep in the first place. 

You have to underwrite the whole deal, to make sure you achieve general economic feasibility, i.e. sale revenue less build cost = profit. You also have to analyze cash flow generally, is it enough for all the work of developing the project? And,  you need to calculate the return of equity from the cash flow, your "cash on cash". Is it enough for you/your investor to take the risk to do the deal (remember: someone also has to provide a completion guaranty to the const. lender). 

Also, I am giving you rental project numbers in this post, it may be likely that selling the unit as a duplex condo, can produce more on a per unit sale basis than a rental unit of the same size, it depends on how aggressive the condo buyer is, and how much rent you could get for that unit. My analysis above does not take these differences into account. But pull the comps for condo sales in new duplex units, and pull comps from newly build rental duplex, and if the condo prices are higher, generally you might build and sell as a condo. If your orientation is long term hold rental, you may choose to overlook this condo build vs. rental build, in order to keep the unit as a rental. 

Developing a deal is a hell of a lot of work, and the returns need to be sufficient to spend the time, energy, and money that you will need to, to do the deal. Sometimes it's enough, sometimes not.

So bottom line, developing a deal should generally produce additional value above a straight purchase (the 1.5% example value diff. above). This is the economic return for doing the extra work of acquire, build, rent, sell/lease. Those are all things above and beyond what you are required to do in a straight purchase. Not everyone can do that, and if you can, that value differential is yours for the taking.

~ Scott

@Johnny Quilenderino

Ok, thanks for the answers. 

Things to confirm:

1. Approvals from 2008, are they still active or "in place"? In most jurisdictions, entitlements, other than recorded subdivision maps, expire if permits were not pulled to build the approved project. Now to confuse the issue, sounds like the developer built 7 units out of the 24, so another question, did the 7 units become the "approval" and the 24 units is expired? Sounds to me, like the developer ditched the 24 units, built 7 apartments just to save the deal, now wants to sell the 24 unit project. You as the new developer must prove to yourself that the 24 units in fact is real and can be built without undue cost, time, and political risk.

I would ask to set up a meeting with the city planning department, have your broker and architect go with you, ask as many questions as you can about:

A. Is 24 unit approval expired, or in place? Was there a subdivision or condo map approved and recorded? Are all the subdivision map conditions met? Is there a subdivision bond in place?

B. What is the process to get building permits for the 24 units?

C. What's that planning approval and permit process timing look like, how long to get all the permits you need to build 24 units?

Fine having the broker run the numbers, but why don't you just set up a basic spreadsheet based on outline from my previous post and run the numbers yourself? Reason for this as follows: You control the input and make sure it's real, you can also explore scenarios to see if the deal work, i.e. 220k sales price doesn't work, what if we sold at 230k, would that work (make sure to check market will support you explored changed variables)? No deal I've put together ever stays static from the first underwriting, you are always updated, tweaking, exploring scenarios, until you are satisfied that the deal generally works, or is dead. Then once you are working on the deal, you'll continue to update the numbers to make sure you are tracking.

Good you are getting GC costs, but make sure you get all your soft costs, insurance, architect, CE, MEP/S, soils, environmental (Phase 1) if needed, condo map completion, dept. of real estate condo map sales process costs, etc.

My observation at this point is that my ability to guide you through the process via BP posts will be very limited. Our company does provide real estate development consulting services, send me a DM if we can be of further help.

Thanks! Happy Thanksgiving!

~ Scott Choppin