I Wannabe a Rich Land Baron, Too!
Dear Tim,
It seems to me the real money in our industry is in land development, not contracting. I’ve got a small nest-egg saved and am thinking of buying some land and doing a small subdivision. Your advice? — Scott B.; Oak Harbor, WA
My advice is proceed with extreme caution. If it were easy, everyone would be doing it. The fact is, very few rookie developers succeed. Indeed, even well-seasoned professionals commonly fail or reap only marginal returns.
In the hundreds of subdivisions and short plats I’ve been involved with, maybe 10% made close to the money the owners thought they would going in. Here’s why:
Know your costs — ALL your costs. Most land divisions fail before they ever start because costs were not defined correctly going in. I find it unbelievable how many would-be developers scratch out a few numbers on a napkin, look at their "bottom line," grin and start dumping buckets of hard-earned cash into hopeless losers. For example, I know two semi-retired gentlemen — one an attorney and the other a real estate broker — who in the early 1990s teamed up and bought several large tracts of land — sight unseen! They did no due diligence, no feasibility studies, no environmental research — nothing. Instead, they hired engineers, surveyors and wetland consultants, expecting them to magically transform their pipe dreams into reality. When costs shot through the roof, years ticked by and still they had no approved lots to sell, they blamed the consultants, jurisdictional personnel and everyone else unfortunate enough to be involved. In reality, their failures were sealed the second they took title.
Land cost has to be right. Ever wonder why so many "prime" pieces of real estate languish so long on the market? It is because smart developers invest only in bargains. Many consider land their only variable cost. Infrastructure and consultant’s costs will be what they are no matter what. So if a bargain is to be had, it’s got to be on the land itself.
Know your end buyer. How can you be sure there will be a buyer in the end? Will you have the right product at the right time? I know of many beautiful new lots still on the market after several years, priced below any sort of profitability threshold.
Be well-funded. I can’t count the number of plats that started well enough, had the potential to make money, but fizzled and failed because the owners ran out of cash. Land division projects are front-end cash intensive. You’ve got to have the staying power to cover consultants' costs, permit fees, infrastructure construction, environmental remediation, loan interest, etc. — all before seeing a penny of income. With the loan interest meter ticking, time becomes your enemy. My rule of thumb is, however long you think it will take to get approvals, double it, at least.
Beware the woodwork! Are any neighbors upset at you? You never know who’ll come out of the woodwork to noisily and ferociously oppose your project. Some are backed by well-funded watchdog groups. Even if they can’t beat you in court, dragging you through the process may be enough to sink the project.
Develop only flat, dry, non-vegetated, wildlife-inhospitable, non-historic, barren lunar desert. Anything else, and you run the risk of encountering an environmentally sensitive area and being barred from your mission. Of course, I exaggerate. But the point should not be underestimated.
To summarize, though handsome returns are possible, certainly do expect a large amount of time, effort, cash input, and very likely, frustration.
Tim K. Garrison P.E. of ConstructionCalc.com has authored books and short courses and lectures on topics relevant to builders. Got a technical or management issue? E-mail buildersengineer@constructioncalc.com. Tim reads every one.
This column cannot be reprinted without permission from the author.
The views expressed in this article represent the personal views, statements and opinions of the author and do not necessarily represent the views, statements, opinions or policies of the National Association of Home Builders. NAHB does not necessarily endorse any of the views expressed by the author and NAHB is not responsible for any direct or indirect consequences arising out of the views expressed in this article.