Please Help On A Development Deal!

kdub1777

I have recently came across a development deal that we have in the works. My partner and I have been contacted by an individual that wants to develop his acreage into buildable lots. He has 5 acres that we think will be prime for 5 1 acre lots. (One lot will have his original house on it). So, 4 new lots. He is going to put up the land, and we will carry the loan for the development from the bank. We will also be doing the majority of the developing and all the building on the lots. My question is, how does one go about finding a percentage of the profits each party will receive in a joint venture like this?? We are in the process of writing up a proposal but we are not sure what percentage each party should receive. Has anyone done a development deal similar to this? If so what agreements did you decide on and how?

Thank you

River Rat Dad

I'll give you the answer..... for 20% of the action...

kdub1777

haha. It's a deal.

PipeGuy

Who's at greatest risk? That's who gets the big piece.

__________________
Fortunately I keep my feathers numbered for...for just such an emergency. -Foghorn Leghorn

Mike Finley

Why is he involved? Why don't you purchase the land from him? You're doing the development and a lot of the profit will be from the spread between what you would purchase the land for and what it becomes worth by the time the last home is built on it.

Another way to think about it if you can't just buy the land from him is what would his profit be if you did just by the land from him? That's his percentage.

Another way to look at is land costs are traditionally supposed to be about at 25% of the total costs in a house. So his percentage should probably be around 25% of the gross profit.

joasis

Here is another take on it. Developers buy land to sell house lots...and of course, develope the lots so they can be sold, i.e., the mechanicals, drainage, and depending on what your community or state requires, impact studies, zoning, ect. The apreciation of value is the profit.

If the owner puts up the lots, his participation should be the value of his property from the selling price of the home, i.e., the lots are worth "unimproved" $15000 each, then when you sell the new home, he gets 15k. You will be paying for the surveys and sewer, ect...with no active participating help from the landowner.

Another thing: A building loan will draw a mortgage on the land...so have you thought about that carefully? Will the property owner be the principal on the loan? He would have to have participation in your building projects OR you would buy his lots in advance, and then procede as a conventional project.

I am working on a 70 acre deal here, a mile from the golf course, and the current owner wants to participate..he wants me to pay the surveys, have the water wells drilled, build the homes, pave the streets, and share in the profits...but he is putting up the land...sweet.

He bought the property 4 years ago for 50k, and I will pay him 100k...and he may not take my offer....but he doesn't have the money to make it happen on his own. He cannot understand why I won't develope the land for him using the 100k as a base and he will share the profits.....geez.

Mike Finley

I would have to agree. That is even a much better way of looking at it and simpler too. That seems totally fair since all he is doing is supplying the land, his contribution is the land with very little risk so he should get what it is worth and really nothing more.

kdub1777

We would like to buy the land but we can not afford it. It is in the $500,000 range. (the bank will not give us that loan)This price includes the house we would have to buy that is currently on the land. The house appraised for $250,000. The 4 finished lots should sell for $150,000 - $175,000 each. It is prime property for this area. The owner will be putting up his land in the deal. He is also a real estate agent and will be selling the lots or houses if we decide to build at a later date. So he will get a nice percentage there.


A good point is that he is only supplying the land. That means he gets payed for the land and maybe a real small percentage for putting up the land for us. We would have the higher risk and will be doing the majority of the work.

I have never done anything like this and am hoping we are not looking past anything. I think this can be profitable for eveyone and I hope we can keep everyone happy.

Is there anything I might be overlooking? DO you think this would be the best wat to set up the agreement?

ruskent

There was a article in profesional builder about this..


Buy the land from him. Even though you don'
t have the capital, determine a selling price and have the contract written , so that he gets the said price when the finsh house sells.

joasis

I think you are overlooking the construction loan details...the Owner puts up the land, you build, he sells, and takes a small percentage, like a real estate guy will do....now, how do you plan on financing to build unless you own the land or use a 3rd party investor? This would make sense if the owner was bankrolling the project.

kdub1777

To finance the build we would have to sell a lot or 2 to gain some working capitol or bring in another investor after we develop and re zone the lots. There would be a clause written in the contract about the building phase.

The main problem is we do not have enough working captol to buy the land or put down a down payment. We know have to find something that works for everyone. It's kind of a pain but I think it will be worth it in the end.


Also, ruskent or anyone else, can you point me to a link of the article in professional builder if there is one?

thanks for the input

PipeGuy

http://www.google.com/

__________________
Fortunately I keep my feathers numbered for...for just such an emergency. -Foghorn Leghorn

joasis

The funny thing about building homes is....yuck, yuck, if you have the money to invest, why would you? There are far more profitable things to do besides the risky home building trade. My low end projects are OK for me, since the capital requirements are much lower, and financing is not a big deal. When I buy a lot, I pay cash, then use it for collateral for the construction loan. The only additional financing I have to provide is a CD in the bank to keep my interest rate low. Private money is always available if you want to give up most of the profit and be happy with a small share of the total. I made a decision a few months ago to stop building for an investor here, and build under my flag, or stick with steel buildings and commercial work only.