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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