How to get started redeveloping single family home property to 4 small homes

[Lgrowth]

Hey all, we're looking at redeveloping a 1/2 acre property that has a 2br cottage on it, with a view to having 4-5 2-3br homes on it eventually. The property is zoned medium density (not in Van or Vic) and it looks like multiple dwellings won't be an issue.
More interested in how you'd approach the financing of the project and if selling the homes is possible - we would use pre-manufactured (and certified) homes to avoid building delays. Total cost for 4 homes would be around $850k (980sq ft homes); there's already a regular mortgage on the property (80% LTV) and a tenant currently renting the cottage.
Pretty new at this so really just at the theoretical stage right now. Seems like we could do short term (1yr) financing through private investors, pay a hefty interest payment (perhaps $85k) and in that time aim to develop the property.
Where I'm stuck is not knowing if we could actually sell each home separately - would this be a re-titling or subdivision? Or is there a way to leave the title as-is but sell homes to unrelated people. If it's possible, it looks like we could see a reasonable return on the investment, though nothing incredible.
Thanks

 

[Thomas Beyer]

You need a sub-division. You need to hire an engineering firm to plan this out ( roads, water, sewer, gas, electricity, telephone/cable etc ) and then submit detailed plans to city for approval. Possibly a Strata as well if you wish to ascertain a certain look. Once approved you can build the services. Then you need a building permit to build each unit, or you sell serviced lots to a builder.

With presales bank would finance 70-75% of cost and without presales maybe 50%. Of cost, not of value.

Developers do it all the time and if you do it well and fast it is very profitable and if you do it poorly and slow margins deteriorate quickly.

 

[Lgrowth]

Thankyou very much @ThomasBeyer. I would have to assume that it being my first time, I wouldn't do it well, or fast! Sounds like it's quite a process, but I know that this area is enthusiastic about there being more homes available for people to live, and these would be targeted not at the 'affordable housing' level, but they would still work well for many young families in the area, which I would hope could carry some favor.
Sounds like without deep pockets I could lose my shirt if part of the subdivision/finance process messed up. I'll keep doing some more research on subdividing. Thanks so much.

 

[Thomas Beyer]

Plan to pay for engineering services and all underground services in cash. Then find a builder in parallel to sell serviced lots to.

Land servicing and building homes are two completely different disciplines and each must be profitable by itself.

Talk to a few local builders and find out what sells and what they would be willing to pay for a serviced lot. Talk to an appraiser also to get an idea of value for a serviced lot. Services are anywhere from 50-100,000 per lot plus city levels plus soft costs such as marketing or financing charges.

Borrowing on raw to be serviced land is one of the highest risks there is. Ok to borrow with assured demand but better to pay in cash.

You can sell to a builder for cash (to you, i.e. cash and a mortgage to buyer) or you can get more by getting say 20% in cash and the remaining 80% when house is selling, secured via a second mortgage behind builder's first mortgage. More risk, and $s later, but more $s.

Example: It costs you $75,000 to service each lot so you spend $300,000 on planning, engineering and actual digging, pipes and cables. You then sell 2 lots for $150,000 each to cover those costs and 2 more lots for $200,000 each with a $40,000 downpayment each. The $160,000 is paid when the builder finishes the house. This $160,000 could carry an interest rate, or not, or a penalty if beyond X months, or not.

 

[Matt Crowley]

@Lgrowth why not just sell the lot? How much money is in that?

Developing vacation properties is a not very good first development project to undertake. If you are looking for a retirement project and can float the development on cash and are not in a big hurry to get it done, that would make some sense. These markets tend to be very cyclical and you can end up holding for a long time. I think 50 - 100k per lot servicing is too high. Before land, we see closer to $40k with hard costs of infrastructure, professional fees, administration including marketing, contingency. There will be an offsite premium in the country which will totally depend on access to services and whether the city has an assessments system.

If you are not a builder, then you will likely end up hiring a GC to tackle this whole project. Most likely profit = $0 if you are new at every step of this.

Thomas' outline is the right way to think about it: break it down to margin on lot value and margin on build:

1. Lot value: full inventory of everything available on market and prices. Take your land cost + professional fees ($50,000) + servicing ($40,000 x 4, on low end) + planning fees $15,000 + development management 5% cost, + interest carry 8% x 1.5 years. If there is a 20-30% profit you may want to reach out to an engineering firm and get some hard costs on servicing. Most likely, the result here will tell you that it is better to buy 4 developed lots from someone else rather than develop yourself.

2. If (1) shows a profit, take an inventory of every new building for sale in the area and get an idea of what prices are in the marketplace. Reach out to small builders for an idea of cost to build 4 units on your land. Most likely, profit will be $0 here because you are basically a retail client. But if there is a chance for a 30% profit you can invest $20 - $30k in some architectural drawings, then structural, mechanical, electrical engineers. You can easily sink $30k before a shovel hits the ground once you have lot servicing.

 

[Thomas Beyer]

Servicing cost of course highly variable depending on lot size, road access, distance , infill, rock blasting required etc