Real Estate Investing Adventures

Adding Value to Your Development Deal

My previous post discussed how we selected our architect. This post addresses how we chose the building lot. This would be a major decision since the cost was a significant portion of our overall development. Our initial financial model had the land estimated at $500,000 of the overall $1,323,062 in estimated costs or 38% of our development. You can believe we wanted to have a strategy for maximizing our value. Remember from one of my previous posts - You make your money on the cost side. What you pay will dictate how much you will make.

Do you believe me? Look at it this way. There are only a few ways we can add value to this deal. Any guy off the street can buy some land, hire an architect and builder and go build a couple of million dollar home. But how does he make money on it? When he goes to sell, the bank is going to appraise the property and they are only going to go so far. Unless you get lucky and prices are escalating in your area, not a lot of value add here. In this situation where you are not doing the actual design or construction work, one of the few ways to add value is buy everything cheaper than the average person off the street. Then design a great place that people want. Then manage the design and construction process efficiently and market it smartly so it sells as quick as possible reducing your interest carry costs.

Land Development Purchase Criteria

In reviewing potential lots, here was our criteria:

• Had to be a waterfront lot
• Had to be able to permit a floating dock
• Decent water depth
• Moderate grades at the building site
• Decent views of the lake and mountains
• And most important, a below market cost

In this development, there were two groups of sellers. First the developer of the actual development had a sales team selling “virgin” lots or lots that had not been purchased before. Second were speculators and private owners who had bought previously. They were selling because either prices had escalated and they were going to make a profit now or they just wanted out for whatever reason. We were after the “motivated” seller. Our most important purchase criteria was to buy at below market cost.

Purchasing the Land

We gave our criteria to one of the developer’s sales team and had him show us everything that matched in the development. He showed us some nice pieces of property, but nothing within our budget parameters. We let him know that nothing worked and we were going to look at a different development on the lake. If anything changed, call us. Our plan was to start looking at the existing lot owners and see if anyone needed to sell.

Any sales person will test you. It is important that the sales person knows how serious you are and that you are willing to walk away or you are not going to get the best deal. Two days later we received a call that they were getting ready to open a new piece of the development and they were running a special! They had a lot that would be priced at $463,271 including the $50,000 club membership he thought would be a fit for us. Most other decent lots we looked at were from $450,000 to $550,000 without the mandatory membership. This was a pretty big new section they were opening up and they wanted to show some movement.

We inspected the lot that weekend and although not perfect, we could make it work. We thought the lot was worth about $550,000 with the membership, picking us up about $87,000. Time would tell. It met the numbers we carried in our initial financial model. The only item of our criteria we compromised on was the decent views. The views were ok, but nothing spectacular. We signed the sales contract and our lives got very busy immediately. My next post will discuss setting up our company so we could actually close on the purchase of the lot.