The Advantages of Building When Zoning Changes

In this market, it is getting more and more difficult to find deals where an investor can simply fix up a home and flip it for a profit because sellers expect to get higher prices and there is an abundant of investors looking for the same deals. So don’t follow the crowd; find older homes in areas where the zoning has changed and build a new structure that will increase the value of the property. Here is an example of a deal I am working on in Los Angeles, California:

 

There is an area in North Hollywood near Universal Studios that is very desirous to live in. In this area, the zoning changed from single-family homes to multi-unit condos (three story condos with underground parking.) Because of the change in zoning, the property values in the area have risen tremendously, but that is okay, because the price of the condos units, when completed, are very expensive also; thus a great profit margin can be achieved. For instance, a friend of mine just inherited his mother‘s home which looks like a small, very old starter home: three bedrooms, two baths, and about 1500 square feet. It is not the house that is worth the money, but the property in its location. He was offered a $1,000,000 for his property by the next door neighbor. Should he take it? Maybe, but not necessarily. He asked me for advice.

 

First, I could see that the zoning had changed because all the properties surrounding him had three story condo complexes built on them. I investigated what the condo units were selling for and discovered that a 1450 sf condo demanded $700,000 and sold like a hot cake, and there were not a lot of units for sell. Then I laid out a building plan on the property after calling the building department to discover the set-backs and height requirements. I estimated that we could get 14 units on the property with a semi-underground parking structure. Fourteen units times $700K each equals $9,800,000.00 in retail sells. Then I calculated the building cost after talking with a local contractor to be $4,500,000.00 and I contacted a few financial institutions for a construction loan. By having the property paid for and the appraisal of the project as high as it was, one was willing to loan us the money to construct the building at a reasonable rate of 1 ½ points and 5.2 % ARM.

 

The projected profits, after paying to design and construct the building and demolish the old building, as well as taking away the financial charges, the marketing cost to sell the units, the closing costs and the holding costs for taxes, insurance and utilities, and paying my friend $1,200,000.00 for his property ended up being $2,562,500.00. I told my friend I would do a joint venture with him where he would put the property up as his investment and I would procure the construction loan and supervise the project: line up the architect, hire the contractor, see that the interior finishes are up to par with what is selling, line up the real estate company, create all contracts (using an attorney) and oversee the project. My friend would receive $1,200,000.00 for his property out of the proceeds first ($200,000 more than he was offered) and half of the remaining profits after all expenses are paid for. I would receive the other half of the profits with no money invested, but dong all the work. (A cool $1,281,500 in a year to a year and a half, with no money down). The key was finding the construction loan and that is why it pays to network with cash investors who may end up becoming lenders on future projects.

 

So, look for those unique deals that are a little out of the ordinary and think about building new.

Part 2 – Getting Started with Residential Land Development

Part 1 of this series discussed the initial steps to getting started with residential land development. We covered financing options, finding partners, and finding properties. Part 2 will pick up where we left off and teach you 3 more steps you need to take. Because we covered 3 steps in the first article, we will number the following steps 4, 5, and 6.

4. Preliminary Due Diligence

After identifying a potential property, you will need to explore the codes, zoning regulations, and development processes for the local municipality or jurisdiction. Although you can go through the process to change the zoning or use for the property, it is typically a long and painful process that doesn’t guarantee your proposed changes will be approved. It’s ideal to keep your development conforming with existing codes and regulations.

5. Obtain Estimates For The Development

You will likely need to talk to several different contractors to get bids on the work that needs to be done. It’s wise to use contractors that have done similar projects within the area. They will have more experience working with the local city. Their experience will help them understand the requirements and costs for the project in the area. In addition to getting bids from the contractors, make sure you talk with multiple city officials multiple times. You need to make sure all of the stages of the application and approval process are covered. This process can include, but is not limited to:

  • Filling out and submitting paperwork
  • Meeting with city officials
  • Various 3rd party tests and permits
  • Purchasing water rights
  • Application fees
  • Construction inspection fees

6. Negotiation

Now you should have a good estimate on the timeline and cost to execute the development. You are ready to run numbers and make an offer to the seller. One of the keys to making an offer and negotiating is understanding if there’s any part of the development process that the seller is willing to complete. If it’s a big enough project, the seller may be willing to seller finance or subordinate the property. With the amount of information needed for a development project, it’s usually a good idea to have at least one meeting with the seller to discuss as many details as possible. Then you should present an offer that contains multiple options to make the deal happen.

Getting Started with Residential Land Development

There are those of you who would like to pursue land development, but you lack the knowledge and courage to do so. I’ll try to help you learn a little more about it with 3 basic tips. The courage part is something you’ll have to work on yourself. Get some guts dude!

  1. Discuss Financing Options with Banks, Brokers, and Private Lenders

It’s common practice to have a discussion with a bank before buying a car or house. This helps you figure out what you can afford. It also helps you understand the shopping process and what you need to do to secure the loan. The same applies to pursuing a land development project. Find out how much money is needed for a down payment and what loan terms are available. This will help you understand what types of projects will work for you. You will also know if you need to bring on any partners. This takes us to tip number 2.

     2. Find Some Partners

Don’t let greed get in the way of bringing the right partner into your project. You’re likely to lose a lot more money with ‘rookie mistakes’ than you would lose by sharing the profit with a good partner. I use 3 different types of partners to do development projects.

  • Private money lenders will loan the money needed for the project and have some advice or resources that will help you.
  • Joint venture partners are also a great option. They invest their own money and can offer expertise and effort.
  • Other investors and developers are important if you want to pass on the project for a finder’s fee.

      3. Find Some Property

As with most real estate, a good real estate agent can be helpful in finding the right property. Search the MLS or websites like Redfin.com for properties that are oversized compared to the surrounding properties. These are the types of properties that can be subdivided into smaller lots. You can also drive around your local market and search Google Maps for oversized properties.


    Go through these 3 steps and start finding some development opportunities. You can learn and network while you go through the process. Peace be the journey.