All Forum Posts by: Scott Choppin

Hi Folks

Some of you may not know that I have posted a series of articles about the RED process in the BP blogs, it appears that real estate development does not seem to garner much coverage from BP staff. 

To be an offer of help to everyone here who is interested in the RED process and learning how to be a RED, I created this post to give you the series all in one place. I expect in the next few months to complete a book on the real estate development process, covered from the pragmatic style of doing deals that is our hallmark. Keep an eye out for that here shortly.

Here ya go....

5 Fundamental Components of Real Estate Development

RE Development Zoning Research Process - Part 2 of a 2 Part Series

Apartment Financial Underwriting - Part 1 of a 2 Part Series

Apartment Financial Underwriting - Part 2 of a 2 Part Series

@Jay Hinrichs @Duriel Taylor

Always one of the assessments we spend some time and energy on in the beginning of a project: 

Do we want to take on the entitlement/political process risk on X project?

One of the observations I make about other developers and other projects is whether taking on that particular project is coherent with the political risks. If I observe someone is hell bent on taking on an impossible project, it makes a statement about their skill and discipline as a developer. 

This is a a learned skill, usually by being burned by a deal or city, and taking a loss either early or late in a projects lifecycle. In the early part of my career as an APM, I thought every deal was doable, and that there was no deal that I couldn't make work. After a few years working for others, you will see that in fact, that's not true. 

Here on BP, many folks propose to move from investment/flipping to development, and part of what's missed in that type of transition is the learning on someone else's dime, the learning  of the development process in a disciplined, rigorous, professional manner. I've seen too many projects (including some of my own) lose money because someone got it in their head: that they loved this deal, or could make this particular deal work, or loved working in X city, and want to do a deal there. It's just not true, you have to be quite brutal in your assessment of a deal's viability. 

This is why in our UTH family townhome rental housing projects, we only work on already zoned sites. We have done major entitlement projects, and made a lot of money doing it. We know how to entitle in California, the toughest state in the nation to process entitlements. The risks are huge, and the payoffs are too, mostly. And it's the "mostly" part that gets you. We want a predictable pipeline of projects, that we can acquire, build, rent, and sell/hold. So we work to eliminate rezone, GPA, subdivision approvals entirely.

This is why getting educated in every way possible is so valuable, read everything possible, every book, every video, every post, take classes, pay for professional training, do it all. 

The other thing that people miss: hire an advisor for your development career or specific project, or bring on a seasoned JV partner. It's so valuable, but people get it in their heads that because they know how to flip houses or buy and value add apartment deals, that this somehow qualifies them to step into the role as a developer. I advised a guy who reached out to me for help on a development deal, where he knew nothing about development, and was asking really basic questions. I told him: we can help you, but the amount of help you need can't be given via BP posts or email, and that he could pay our company to provide real estate development consulting. He declined based on it costing too much, to which I responded, we can make you 10 times the amount of our consulting fees, by saving you from major costly mistakes or designing a more valuable building to sell when complete. He declined, which is his prerogative, but I will tell you this: it's a mistake. It's a mistake not to get the best, most powerful help possible. Take it from me, a 34 years seasoned developer, I've spent a lot of money paying into the "experience" bank account, way more that if I'd hired a seasoned pro to advise me. Great help, the best help and advice, is NEVER free.

The entitlement, zoning, subdivision, political process will kill you if you don't know what your doing. The developers who worked on the project Jay mentioned in his post, would all tell you that.

~ Scott

@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