Ask Brian is a weekly column by real estate expert Brian Kline. If you have any questions about real estate investing, DIY, buying / selling homes, or other housing inquiries, please send your questions to [email protected]
Question from James in Texas: Hi Brian, my brother and I recently inherited a 40 acre property. It is a flat property less than a mile from a small town of about 12,000 people. Many more people live in the surrounding area on areas or at least large lots that have been individually developed. We don’t have a use for the 40 acres now or in the future. However, we would like to maximize the value. We have seen the region’s population grow over the past 15 years. We think there could be a lot of money to be made by developing the area into a residential development with large lots (1/2 acre each). We know that we have a lot to learn before embarking on this adventure and that we will have to raise funds. To begin with, we just want an answer to a basic question. How Do Real Estate Developers Make Money? Thanks in advance.
Answer: Hello Jacques. In short, real estate developers make their money by maximizing the value of the land they are working with. You stated that your goal is to develop residential homes, so I guess you know the property is zoned for that. If not, you need to start by checking whether the zoning can be changed. Many rural areas limit the size of property you can subdivide and have “use” restrictions. A successful developer does not try to insert a square peg into a round hole. This means not trying to develop something that has too many unknown variables. It is a step by step process which, when followed correctly, will result in a nice profit.
That said, a 40-acre development would be considered a moderate project in more populated areas, but it’s a big project depending on how you describe the surrounding area. Because you will need to bring in other investors, I suggest that you start by hiring a real estate lawyer to decide how to structure the business. It could be you and your brother operating a business entity such as an LLC who are taking the greatest risk. Since you already own the land, this should be your main investment in the project and satisfy other investors who will insist that you have your skin in the game.
Most investors still won’t put any money into the deal until zoning laws align with the project and permits are available. This requires you, as a developer, to perform due diligence which also includes market analysis and pro forma financial reports to attract early investors. Investors will most likely be financial partners who hold a substantial share of the final profits. Your equity in the land will be your main source of profit from the project. The developer typically receives a developer fee as the project progresses, ranging from 5% to 10%. Many developers stay as property managers until all the homes are sold. All this requires that an individual developer engages a team of specialists to carry out the project (architect, civil engineer, general contractor, project manager, real estate agent, etc.). According to the National Association of Home Builders (NAHB), developers average around $ 3 million in gross profit out of $ 16.23 million in revenue. That’s a profit of 18.9%.
Once you have defined the zoning and permits, the next step is usually a survey to establish the exact outside boundaries of the land to be subdivided. From there, a plot plan is created. The level of detail required for a plot plan varies from county to county and is based on the proposed use of the land. At this point, a zoning change may be necessary. Obtaining zoning changes can range from a simple formality to an impossible obstacle. At a minimum, this requires presenting your plan to the zoning board and public meetings where nearby landowners can ask questions and express their approval or disapproval. Then the Zoning and Development Board needs time to complete a review, including impact studies to determine the suitability. At this point, you get approval, rejection, or approval with changes.
With approval or on the basis of modifications, the developer subdivides it into smaller lots to develop and sell the lots individually. Land development costs include fixed costs such as clearing and leveling the land and setting up utilities and roads. There are also ancillary fees for legal fees, financing fees, and design / engineering fees. Some developers will build houses on the improved lots while others will simply sell the lots for individuals to build on.
James, because you and your brother seem to have limited knowledge in all of this, I would strongly suggest that you hire a top notch project manager with experience. In 2021, the average salary for a land development project manager in the United States was $ 99,100 according to the Economic Research Institute. Most development project managers have a bachelor’s or master’s degree in related studies (civil engineering, development planning, finance, business management or a degree in real estate). The main responsibilities include:
- Coordinate activities.
- Supervise staff.
- Prepare and / or collect specific reports, including appraisals, available properties, feasibility studies, quality of water resources, mineral deposits, electric power and labor.
- Discuss terms and conditions with contractors and other professionals.
- Write agreements.
The best project managers have strong professional and personal relationships. These relationships include a wide range of professions such as brokers to sell land, title agents to help with transactions, attorneys for legal issues related to development, real estate investors and anyone else who can help make your project more successful. efficient, successful and profitable. .
James, I hope that’s enough to get you started in the right direction. I also hope that your ambitious project will succeed.
A ton of additional information could be included here. Please add your comments.
Our weekly Ask Brian column welcomes questions from readers of all levels of experience with residential real estate. Please email your questions or inquiries to [email protected]
Author Biography: Brian Kline has been investing in real estate for over 35 years and has been writing about real estate investing for 12 years. He also draws on more than 30 years of business experience, including 12 years as a director at Boeing Aircraft Company. Brian currently lives in Lake Cushman, Washington. A vacation destination, close to a national and the Pacific Ocean.