What due diligence should I do for land development investment?

[llee]

I received an opportunity for investment (1-year term).

A developer in Oakville (Ontario) has secured a large plot of land. They are in the process of sub-diving two of the lots enabling them to build four semi detached houses on these LOTS while building five single family residential detached homes on each of the remaining five (5) LOTS.

The developer is looking for secured JV backing from multiple investors with the individual investment amounts being ‘bonded’ against the title and land value of the property. Total investment capital sought in phase one is $800,000 with minimum investor participation being $25,000. Investment term is 12 months at 25% per annum with prorated cash payments made out in calendar quarterly instalments.

What kind of due diligence should I do on these land development deals? What kind of questions should I ask?

Lucas

 

[housingrental]

Lucas - If not familiar with the particular property, valuation, issues, and you don`t have a will to take over ownership and direction of project in event of default don`t invest in it.
If your looking for a 25% return OR building project go for it

 

[BarryMcGuire]

Good point Adam. Property development has no resemblance to the kind of real estate investing done by most REIN members. It is a quantum leap up in terms of difficulty and issues. Very difficult to do any diligence that means anything to you. Only gamble on this with $$$ you don`t care if you lose.

Cheers

Barry

 

[Thomas Beyer]

QUOTE (llee @ Feb 1 2010, 12:38 PM) What kind of questions should I ask?
Ask:

What is your track record with land development ?
What 1st mortgage financing (if any) is envisioned ?
Are you (the investors) in 2nd or 3rd position behind a 1st ?
Why was 1st mortgage financing refused ?
Is there an uplift on value for investors ?
Is the exit price realistic ?
Are expenses realistic ?
Are the times lines realistic ?
Is the sub-division approved .. or is it possibly being denied ?

"bonding" means nothing if you are in 2nd or 3rd position in a stalled, semi-finished land development deal behind a bank in 1st position.

Now, many land development deals make A LOT OF SENSE .. AND ARE EXTREMELY PROFITABLE .. if
i) proven track record
ii) well financed
iii) no mortgage
iv) realistic prices going in and on exit
v) realistic timelines
vi) realistic expenses .. well managed !!

Many competent land developers can`t get land financing as in 2007 or prior years. So: it might be a great deal .. it might not !

related post:

8 mistakes to avoid in real estate syndications: http://myreinspace.com/public_forums/Real_Estate_Discussion/62-13817-Real_Estate_Syndications_-_A_Good_Idea_.html