Deal Junkies Be Patient

On today’s show we are looking at the anxiety of missing a deal. Real estate investors are deal junkies. Let’s call it like it is. We’re going to look at a real life example. 

We’re going to talk about creating value with land. There are two main methods for creating land value. One is to start with raw land and carve it up and get it zoned and serviced for development. The other is to take land that has already been carved up into tiny parcels and put it back together so you can do something more substantial with it. 

Sellers are often of a mindset that they are the ones holding the cards. Their property is worth a gazillion dollars, especially if it has development potential. Some rich developer will come along and offer me so much more than the property is worth in its current condition to an owner occupant. 

In a dense urban environment land is both scarce and abundant. It’s abundant in the sense that there are hundreds of properties for sale at any given time. Most of the land is not suitable for redevelopment in its current form.

A case in point is a small land assembly that has already been designed for a 66 unit mid rise  building. 66 units is a bit small from a property management standpoint. Ideally a building should have more than 100 units in order to optimize the economics of staffing the project.

The proposed building is already compliant with the zoning requirements and can be built by right. There are constraints on the size of a building on this street because of utility capacity on the street. A larger building would require an upgrade to the water main which would add considerable cost and delays to the project. The main constraint is water volume for fire suppression. A larger building would require a larger water main pipe and possibly a booster pump if the pressure at the top of the building is not sufficient. So we know we are not going to get more density on that block regardless of the zoning. 

The original land assembly consisted of two properties and along the way different scenarios of three and four properties were considered and negotiated.

In the end, while a larger project would have been possible, we opted for a smaller mid-sized project at only 66 units. This past week, two more properties came up for sale on the same street. Among those was a property that had previously been considered. It was being offered at 30% below the original asking price. 

This is where sellers often get confused. You see there are realtors out there who will pick the most expensive comparable sale in the area and recommend that as the asking price for the sale. It’s as if there is a broad market for development land and the offers will start pouring in the second the land hits the market. 

But when you are offering a property that will ultimately form part of a land assembly the market for buyers shrinks dramatically. You have two neighbours, one on the left and one on the right. There are only two possible buyers for your property as a development site. 

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Episode Transcript

(00:02):
Welcome to the Real Estate Espresso podcast, your morning
shot of what's new in the world of real estate investing.
I'm your host, Victor Minash. On today's show, we're looking
at the anxiety of missing a deal.
Real estate investors are deal junkies.
Let's call it like it is. Today we're going to look at a
real life example. We're going to talk about
creating value with land. There's two main methods for
creating land. Value 1 is to start with raw

(00:23):
land and carve it up. Get it zoned in service for
development, the others to take land that's already been carved
up into tiny parcels and put it back together so you can do
something more substantial with it.
Now sellers are often of a mindset that they're the ones
holding the cards, their properties worth a gazillion
dollars, especially if it has development potential.
Some rich developer will come along and offer me so much more

(00:45):
money than the property's worth in its current condition to a
knowner occupant. While in a dense urban
environment, land is both scarceand abundant.
It's abundant in the sense that there's hundreds of Properties
for Sale at any given time, but most of that land is not
suitable for redevelopment in its current form.
Case in point is a small land assembly that's already been
designed for a 66 unit mid rise building, now 66 units a little

(01:09):
small from a property managementstandpoint.
Ideally a building should have more than 100 units in order to
optimize the economics of staffing the project.
The proposed building is alreadycompliant with the zoning
requirements and it can be builtby right.
There are constraints on the size of the building on this
particular St. because of the capacity of the utilities.
A larger building would require an upgrade to the water main,

(01:32):
which would add a lot of cost and delays to the project.
The main constraint on water is volume for fire suppression.
A larger building would require a larger water main pipe and
possibly a booster pump if the pressure at the top of the
building is not sufficient. So we know we're not going to
get more density on that block regardless of the zoning.

(01:52):
The original land assembly consisted of two properties and
along the way there were different scenarios of three and
four property assemblies that were considered and negotiated.
Even in the end, while a larger project would have been
possible, we opted for the smaller mid size project at only
66 units. All this past week, 2 properties
came up for sale on the same St.and among those was a property

(02:13):
that we had previously considered.
It was now being offered at a 30% discount below the original
asking price. See, this is where sellers often
get confused. See, the Realtors are out there
who will pick the most expensivecomparable sale in the area and
recommend that as the asking price for sale.
It's as if there's a broad market for development land, and
the offers will start pouring inthe second the land hits the

(02:35):
market. Yes, the location is great, the
zoning is good, But when you're offering a property that will
ultimately form part of a land assembly, the market for buyers
shrinks dramatically. You've got 2 neighbors, one on
the left and one on the right. There are only two possible
buyers for your properties, a development site.
If you have a clean property line at the back, then maybe you
have a potential third buyer. But we're talking one to three

(02:57):
buyers, not a whole marketplace.The property by itself is
useless for development because it's too small.
You might get 4 units on it, maybe 10 if all the planets run,
but you're not going to get 20 or 30 by itself.
The property is too small, and it's only through the assembly
process that you get enough landto do something useful with it.
So in my mind, that little property is not worth the

(03:17):
$1,000,000 the seller was askinga year ago.
It's not worth the 700,000 he's asking for it now.
And even if you could build the density you want, the fact that
utilities won't support a largerproject until utility
improvements are made means the property's not suitable for
development right now at all. If the developer were to pay for
the utility extensions, then maybe, but you'd have to add the

(03:40):
cost of those extensions to the cost of the land when you're
performing your comparable land analysis.
Let's say if the water extensions are going to cost you
300 grand, you'd need to add that 300,000 to the total cost
of the land, or conversely, subtract that 300,000 purchase
price of the land, all other things being equal.
This is where understanding the true cost of a project is key to

(04:00):
knowing the value of the land for development purposes.
See, the seller is not a developer, their realtor has no
development experience, and theyhave no tools to perform the
math to understand the value. The buyer comes along.
That single family home is not going to want to be sitting next
to a six story building. The seller is going to have a
hard time selling to an owner occupant.
So for now, we're content to wait.

(04:22):
Maybe we'll get another of the neighboring properties under
contract and negotiate a brand new land assembly for another 2
properties. Land assemblies are slow and
time consuming and it makes sense to be a very patient buyer
as you think about that. Have an awesome rest of your
day. Go make some great things
happen. We'll talk to you again
tomorrow.