Thinking like a Builder: Part 1
| | Tuesday, January 13, 2004 @ 08:00 AM EST
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Contributed by: Nancy Chadwick
Nancy Chadwick Properties
Read more archived articles about Land and Development
If you understand how residential builders make their buying decisions, you will be likelier to achieve success in buying and flipping land. Some builders search for property strictly by geographic area. Others search for parcels that would enable them to reach particular buyer submarkets, such as housing type, price range, lifestyle and age group. Either way, builders begin by casting the net into their areas or markets of choice and sifting through potential acquisition candidates. They often have to pick through dozens of properties before they find one they think they can develop
profitably and frequently spend varying amounts of time, effort and money collecting information before they even know if the parcel will work. Their due diligence focuses on obtaining answers to five fundamental but critical questions.
What can I build
How many can I build
What can I sell them for
How long will it take to sell them
What are the costs
These questions collectively define economic feasibility and influence every decision builders make, from their initial contact with the property, during contract negotiation with the seller, subdivision approval, the day of closing and beyond.
The value of development property is relative not only to the value of the end product, but also hard and soft costs, that is, site improvements costs and the expenses that will have to be incurred during the approval process. Residential builders and developers do their income and expense projections for properties on a per lot and not a per acre basis because profitability is a function of how the property can be used and not the number of acres in it. Accordingly, for all practical purposes, the parcel's overall size is a meaningless number in the builder's determination of property value.
Note: Nancy Chadwick has developed two books about developing land and conducting research as an investor.
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