How Much to Pay Land for New Development – Real Estate Investment
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How Much to Pay Land for New Development – Real Estate Investment


I am Lynn Currie, a real estate investor
in Austin Texas. I make videos to share my real estate
knowledge with you .Today I’m sitting in front of a property for sale in south,
Austin Texas I’m considering for an urban infill
project. So let’s run back to my office, run some numbers and see if it makes sense. This is what I
call my back up the napkin spreadsheet. It allows me to run a quick calculation
to determine what I’m willing to pay for property. It
doesn’t include all the variables needed to thoroughly vet the project, but it
does allow me to quickly decide if I’m going to pursue the opportunity. Hopefully you’ll find it useful. For this
example, I’ve pulled up a lot on redfin: which is MLS service in the Austin area. Redfin’s not
available in all markets so you may have to find another service, that’s similar, that works
in your market. Or you may just have to get this information from a realtor. We’re pretty lucky, it’s a it’s a pretty
here great service. Let’s take this lot at 3404 South Oak Drive and do a
really quick, down and dirty look at it. A couple of things I want to know first. I want to know what the asking price is for it. I don’t
have to pay the asking price, but it’s a good place to start with my numbers in
running them and, what I can do is once I run the
numbers, is make adjustments to the asking price and find out what for me make sense and
then if I want to offer something on the property I can. The next thing I want to look at is the lot size: this is important in
the city of Austin. Lots over 7,000 square feet that are zoned SF-3, you can put a duplex on. And, what that allows you to do, of course
you can rent the duplexes out, but for the prices that we’re seeing in these neighborhoods
most the time that doesn’t really make sense. So what you’re seeing happen a lot are duplexes are built, and then a condo
regime is laid over those duplexes, and they become
sellable each side as condos. So what you end up
with, are two separate dwelling units that sell separately. There’s a small HOA
a fee that covers some costs for the shared structure and the shared property. what I like to call my back up a nap and
spreadsheet. It’s really down and dirty spreadsheet that gives me really quick
numbers so I know what I wanna do immediately. When I go under contract on a property in my option period, I move into working
another spreadsheet that I have that gives me much more detail, a lot more detail, it’s
got cash flow projections, I put things
like carrying cost in it, I put a lot more
detail in it that takes it down to the month by month
calculation. This right here, is simply a tool that I
use to decide what to do with a lot, if anything. So
let’s start with the total lot size: that’s the first thing I put in on my spreadsheet, and it was 8624. And then the asking price for the lot was 409,000 dollars. So, immediately the spreadsheet starts calculating things. The FAR that is allowed by Austin in SF-3 is 40%. FAR is the Floor to Area ratio. It’s a term used by city governments
and zoning entities to decide how much you can
build on a lot. It’s going to vary from zoning designation to zoning designation, and from city to city, and county to
county, and state to state. So it’s your responsibility to find out what the maximum buildable square
footage is per year lot. So we’ve got our 40% there. SF-3 lots in the city of Austin have
40% FAR are allowed. The next cell is an auto calculated sell. It’s
my total buildable square footage. This is 40% times my 8624 feet. This is the maximum amount of square feet I can build on this lot. The next cell takes us to a reduction to that total buildable. What I know from experience is that there’s
going to be things that I want to do on a lot that reduce the number of sellable
square feet. We come down here and what we find is our final total buildable. This is our total
buildable square feet, minus the reductions that we’ve taken. And we
end up with 3199. I like to use this number for all the
numbers that I start calculating down here, which is what I can sell for. When I calculate on the MLS what
they want to know is this 3199. You don’t get to
calculate your garages and your other unairconditioned spaces
in your sales data. This cell is, this number, my final total buildable
divided by two. And the reason I use this number is, I
build a lot of duplexes with that condo regime over them, and this gives me it quick idea of, if I
build two identical units, then each unit is going to be that 1599.8. So essentially 1600 square feet. Moving down comes to my build cost per square foot.
This is based on experience and my estimate of what I would spend per square
foot, building this project in this
neighborhood. The best way for you to figure out what is doable in your area, is to start
asking other contractors, builders, investors, what
they’re able to build for. And, you also need to be sure to ask what
they include in that cost. In my case, I include my demo, my permits, everything that that it costs me to
actually build the structure. A lot of times you’ll find a builder, maybe
doesn’t include their demo cost, or doesn’t include their permits, so this
110 isn’t all-inclusive. In my calculations, the 110 is everything
but the land. Now that we’ve got are 110 per square
foot build cost, our final total buildable, we can
calculate our total build cost. Which in this case comes to 379,456
dollars. This is actual dollars to build the
structure. It does not include carrying costs or
anything like that. I don’t calculate that in this spreadsheet, but I
have to know it going in because at at some point
you’ve got to know cost of your money in order to really get this calculation
down. But at this phase I don’t put it
in there. The next one in here, is the total build
cost. This is my build cost, plus my lot price. So for this project
at that lot price, and that build quality, for this project
what I end up with is is 788,000 dollar build cost. Moving on down, I need to figure out what
my high sales price per square foot in the area
is, and what my low sales price per square foot is in the
neighborhood. There’s a couple of ways you can do this. You can go back to service like Redfin and start doing some comps. If I make the assumption that I’m going
to build brand new construction, duplex to condo conversions. In here,
what i’m looking for are other projects, that were about 1600
square feet. I would probably, in 1600 square feet,
build a three-bedroom two-and-a-half bath because it will be two story. So I’m looking for similar projects that I can use for comps. And what I would start doing is going to these blue ones which on redfin: are my
solds, and see if I can find anything. Everything I’ve pulled up his either been
older construction, or a lot, or another tear down. We just we have to keep poking around
hopefully what you can get are good comps. And we still have not done it. Decent comp here, a little bit big 1953, 4/3. It’s not a good one, but you can see that
were in the 225 range. This is a remodeled, it wasn’t new
construction, it’s different but you can see that a newer home, what
we can start charging. Looks like we have to move over to this
area. Here we go. Here’s a 1600 square
foot, 3 bedroom, 2 bath, which is what we’re talking about doing.
$284 per square foot. Let’s move over here. This is newer. This is small. You’re up at $431 square foot, but because of the size, it’s not even a real, it’s not a comp
because these smaller units sell for a lot more
money. What this tells me though,
is that, for what we’re building, we can get over $300,000
easily. So let’s look at that one. We already did.
Here’s one, we’ve got 1600 square feet, three bedrooms, 3 baths, it’s likely that
the third one is a downstairs half bath. $261 a square foot. Here are some. 1100 square feet, $370. These are smaller, so they’re going
to be a higher price per square foot. But
again, what we’re looking at here look at the the $420. You start knowing what a neighborhood will bear. What the market will bear. For example you can’t, everything we’ve
looked at here has been in the $400/$500 range. I think we’ve got
some $600s here in Cardinal. Yeah 599 here, 605. I would say that these are the upper end
of the neighborhood, especially for condos, and that 420 is getting on the lower
end of it. So let’s go back to our numbers that was
370, I think that, lets use $284 for high, and, let’s see, let’s use, that’s a bigger
unit, 261, let’s use $250 for a low. So, what’d I say? 284 and 250. And then we start doing some
calculations down here. We’ve got sales price on the high end. This is my sellable square footage
multiplied by my high price per square foot. We end up with this $908,000. Now remember that we have also figured that were probably selling a
duplex, so we go over here and it looks like that’s on on the end that price would be up $454,000. Remember back to what we were looking at Redfin that’s not out of the realm of possibility. We saw one for $420k. $454,000 may be a little high, but we’re in the ballpark. We’re not
like we are over here, where at $908,000 we didn’t see anything
in that range. Even the houses over there on the high end were right around $600,000. So, this right here is not even a
possibility. Then down here we do our cell on the
other end, on the low side. Looks like the low side, we’re at $800,000. Divide in half, were right at 400, we’re pretty confident we can get that low side. One thing I didn’t point out that, is in
this calculation, is that pull that Realtors fees. I’ve not pulled out closing costs. Depending on your market, those can be anywhere from 4% to 8% percent, probably. You should be able to find out pretty
easily what your closing costs are going to be.
Generally in our projects they turn out to be about 7%. I know that I still need some
breathing room in this project, because I’m going yo have another
7% come out of it. If you look at this, what we start
looking at is our percentage gains and loss. If we go on the low side, we’ve lost money. On the high side, were 8% with a $65,000$/66,000 gain, which on something that’s risky, in this market, for me personally, is not enough but upside to pay what’s
being asked here at the 409. So, let’s start playing with this sales number.
What if we made an offer for $350,000? Now we start coming down here and we
look at 17% and still 3% on the bottom. I’m not entirely comfortable that this
454 is achievable, so this 17% is still pretty tight for me. I would go
back here and play with this again, and look at 300,000. Now I’m getting a little bit
more comfortable. I still don’t like the low end. I would
have to think about this and can be pretty
confident that my low end was a low-end, and not closer to the high end. What I like
to do with the low end is use it as my “I have to dump this
house” cost, or price. So what I like to do is look
at it go, “okay, at $400,000, can I essentially list this and sell it within 24 hours?” Will I have multiple people clamoring to get it? So that if something happens, what this
tells me is, if something happens to the market, and I need to slash my prices to exit
quickly, where do I have some breathing room? And that’s hopefully on the low end. What you have to find is what makes
sense for you, and if you’re just starting out, what I can tell you is
you want to give yourself quite a bit of a room right here. Because if you don’t, as you make
mistakes along the way, which which are likely, I mean we’d all
like to think that we won’t, but we do, or things will pop up
with the city, or the county, that you didn’t
expect. If you have enough room in this,
you can still come out and make a little bit money. If
not you could end up doing a project that
takes you six months, eight months, a year, that ends up costing
you money. So this is my first pass. This is what
I would do if I was interested in this lot, I would have my realtor write up an
offer, probably at $275,000 and send it to their realtor and see if they take
it. I hope that you found this useful. Remember building spec homes or doing flips can be a risky endeavor. Before you purchase a property, make sure you understand the entire process and have a good team in place. You should also search out your local real estate investment clubs. It’s a good place to meet people and learn
more.

9 Comments

  • tyron mcdaniel

    Thanks for sharing Lynn, especially providing the spreadsheet! Would love to see a video about your floorplan design process, thanks again!

  • Lynn Currie

    I'm glad this is helpful @tyron mcdaniel. I haven't done a video regarding the floorplan design process. I use one of a couple of architects that I'm comfortable with, give input as to what I want I want in the house and the style that I feel would work best for that location, and let them do their thing.

  • shoes330

    Great Video. I'm looking to doing the same here in San Antonio. Instead of duplexs have you tried triplexs or quads? Or does the FAR limit you from doing so? I'd figure the cost to build would go down since your building up.

  • Chenyu Xie

    Hi Lynn,

    I am based in New Zealand.

    I'm working on real estate industries. i have built many houses and also invested in many properties.

    drop me an email [email protected]

    I would to have some conversation with you regarding of development.

    cheers
    chen

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