Just as a recap from our previous post “Planning & Due Diligence”, the Land Development process will consist of three stages: Feasibility, Entitlements, and Land Development Construction. And typically you would make your offer to the seller after the Feasibility stage. Click here to visit the post and read more in depth.
And usually this offer is your “quick and dirty” or “back of the napkin/envelope” offer to the seller. (Your more realistic offer will come later during your Entitlements/Due Diligence stage).
How to Structure the Offer!
Here are the FOUR STEPS to structuring your offer:
- Find what houses sell for
- Get the “Finished Lot Value” by multiplying by a percentage
- Subtract all soft costs and fees
- Subtract all hard costs (costs associated with the land development construction)
1. Selling Price of Homes
Pretty simple. Find out what houses (or other products) are selling for that are SIMILAR to what you will be building. So your basically finding your “Comps” in this step.
2. Find the “Finished Lot” Value
To get this number, you take your selling price found in Step 1 above and multiply it by a percentage. This percentage is a fluctuating number that all depends on what the market is CURRENTLY BEARING! Meaning that this is the number that the market naturally comes to that allows builders and developers to be able to purchase the land, build and sell homes, and then make a profit at the end. It could be 40%, 35%, or even 55%, etc. There are multiple things that are taken into account, such as: brokerage fees, closing costs, house construction costs, etc. There’s quite a bit more, but you can find this “Finished Lot” value by talking with your realtors or land brokers, etc.
And what’s also interesting, keep in mind that not all markets refer to land in “Finished Lot” terms. Some states may refer to it as a “Lot Standard” or even a “Front Footage“. So find out how your area considers this exactly.
3. Subtract Soft Costs and Fees
Next up, you will have to find out how much you will be paying in fees and permits and then subtract that from your number.
4. Subtract Hard Costs
This step pertains to all your construction (for land development ONLY!) Please note that this does NOT include the cost to build houses! These are two separate types of costs and belong in two different categories. The cost to construct a home is actually included in that percentage already stated above in Step 2 to find the “Finished Lot” value. The reason why the “hard costs” are specifically broken out here in its own step is because, as I’ve mentioned before, each project site is different. Land is unique. So costs can fluctuate pretty wildly depending on the location. Also, not to mention the accessibility of your utilities. Are they right outside your tract or are they 5 miles down the road??
But the cost for building a house doesn’t change as drastically between sites! Once builders have “finished” land, they know already how much they’re going to spend on the homes. Therefore, because that number is consistent, that’s what plays into the percentage number as stated above in Step 2.
Let’s Do an Example!
Now we’ll put into effect the four steps we learned above with real numbers. See example in the Infographic below.
In this example, we used 40% to get the “Finished Lot” value, which is what the current rate is here locally for “raw” land (meaning NOTHING is developed on the property).
So per this example, our number that we can offer is $45,000 PER LOT! Don’t forget that we have analyzed everything as a “PER LOT” number. The reason being it makes it easier to gather costs and estimates and then SCALE them over the number of lots/units you’re looking at. So if the property you are looking at can hold 10 lots, then your offer would be $450,000.
