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Need some advice from experienced residential developers

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MoneyDoc

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Jun 24, 2014
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Hey guys,

Trying to get my development company off the ground with my very first deal and would love some things to lookout for to avoid "noob" mistakes. If any experienced developers like @SteveO , @JScott , @MetalGear could provide some guidance, advice, mistakes to avoid, etc. it would be greatly appreciated as it's not a small deal.

I'm in Canada by the way.

I've done a quick "back-of-the-napkin" analysis below:

Deal:

Bungalow on incredible premium lot in prestigious neighbourhood.

Asking Price: $1,598,000

Total lot size: 22,776 sqft

Total buildable Square Footage: 9110.4 sqft (40% FAR)

Reductions to Total buildable: 500 sqft

Final Total buildable: 8610.4 sqft

Build costs per sqft (average): $175 sqft

Build cost: $1,506,820

Total Build cost: $3,104,820

Sales price per square foot - high: $550

Sales price per square foot - low: $400

Sales price - high: $4,735,720

Sales price - low: $3,444,160

Realtor fees: ~5%

Potential Gain (high price per sqft): $1,630,900

Potential Gain (low price per sqft): $339,340

I will be putting 5% of the total purchase price down, my financial partner will be putting up 15% + construction costs. He will be getting a 6% return on his cash before we split the profits 65% (money)/35% (developer - me).

I know it's overly simplified, but what else should I be looking at? Have I missed anything crucial? The sales price will be negotiated. But let's assume full ask.

One of my main concerns is that this will potentially be one of the first redevelopments in this street. The house to the left, to the right, in front, are all old homes (50+ years). Will that stop me from getting a high asking price assuming the buyer will be surrounded by old homes. I personally would not like buying a $3 million+ house surrounded by 50+ year homes.
 

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MetalGear

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Speedway Pass
Jan 24, 2017
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Hey guys,

Trying to get my development company off the ground with my very first deal and would love some things to lookout for to avoid "noob" mistakes. If any experienced developers like @SteveO , @JScott , @MetalGear could provide some guidance, advice, mistakes to avoid, etc. it would be greatly appreciated as it's not a small deal.

I'm in Canada by the way.

I've done a quick "back-of-the-napkin" analysis below:

Deal:

Bungalow on incredible premium lot in prestigious neighbourhood.

Asking Price: $1,598,000

Total lot size: 22,776 sqft

Total buildable Square Footage: 9110.4 sqft (40% FAR)

Reductions to Total buildable: 500 sqft

Final Total buildable: 8610.4 sqft

Build costs per sqft (average): $175 sqft

Build cost: $1,506,820

Total Build cost: $3,104,820

Sales price per square foot - high: $550

Sales price per square foot - low: $400

Sales price - high: $4,735,720

Sales price - low: $3,444,160

Realtor fees: ~5%

Potential Gain (high price per sqft): $1,630,900

Potential Gain (low price per sqft): $339,340

I will be putting 5% of the total purchase price down, my financial partner will be putting up 15% + construction costs. He will be getting a 6% return on his cash before we split the profits 65% (money)/35% (developer - me).

I know it's overly simplified, but what else should I be looking at? Have I missed anything crucial? The sales price will be negotiated. But let's assume full ask.

One of my main concerns is that this will potentially be one of the first redevelopments in this street. The house to the left, to the right, in front, are all old homes (50+ years). Will that stop me from getting a high asking price assuming the buyer will be surrounded by old homes. I personally would not like buying a $3 million+ house surrounded by 50+ year homes.
  • I am flattered to be mentioned in the same line as SteveO and JScott
  • Personally, I know most people are holding off on buying until there is some sort of a cool down
  • What are the comps of similar builds in the neighborhood or in the adjacent neighborhoods?
 
OP
OP
MoneyDoc

MoneyDoc

Platinum Contributor
FASTLANE INSIDER
Speedway Pass
Jun 24, 2014
1,089
2,542
680
26
  • I am flattered to be mentioned in the same line as SteveO and JScott
  • Personally, I know most people are holding off on buying until there is some sort of a cool down
  • What are the comps of similar builds in the neighborhood or in the adjacent neighborhoods?
Yeah, so much uncertainty currently. Some numbers in my area don’t make sense even now.

Not too many comps that are 8000+ sqft. However, most of the 6500+ new builds are selling/sold for $3.5-$4.4 million. Large spread mainly due to lot size and sqft (6000-8000).
 

SteveO

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Yeah, so much uncertainty currently. Some numbers in my area don’t make sense even now.

Not too many comps that are 8000+ sqft. However, most of the 6500+ new builds are selling/sold for $3.5-$4.4 million. Large spread mainly due to lot size and sqft (6000-8000).
How about comps for teardowns or lots?
 
OP
OP
MoneyDoc

MoneyDoc

Platinum Contributor
FASTLANE INSIDER
Speedway Pass
Jun 24, 2014
1,089
2,542
680
26
How about comps for teardowns or lots?
The only comp I can find is on the same street (two houses down) at $1.178 million. However, total buildable is around 4500 sqft (11237 total lot size).

I think I’m going to take your advice from our call and low ball them. They were at $2 million 2 years ago...
 

biophase

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The only comp I can find is on the same street (two houses down) at $1.178 million. However, total buildable is around 4500 sqft (11237 total lot size).

I think I’m going to take your advice from our call and low ball them. They were at $2 million 2 years ago...
My comments and I have never built a home before.

$175/sf seems really low for a high end home.

Are you also accounting for landscaping the outside?

6% return on $1.5m for 3 years is $225kish. That could eat up a lot of your profits.

High end homes sit for a long time sometimes before selling, especially if they aren’t in the right neighborhood.
 

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