Info on preselling residential lots?

[blackdog38]

I have read through much of Don Campbell's books, and have learnt a lot about rentals and other real estate investment related to this. What I am looking for is information (books, articles, etc. that would provide advice or tips or even procedures) for preselling residential improved lots (developed) in order to reduce the risk involved in putting out the money for development costs?



Does anyone know of good sources of info?



For example, one thing I suspect is that you cannot presell something unless it has been legally surveyed; not just from a concept or plan. Not 100% sure on some of these things.



Thanks

Kevin

 

[Thomas Beyer]

you can presell a concept. In BC it is called "a disclosure statement" i.e. you do not sell a legal lot yet (as it doesn't exist) but you sell what looks like the most accurate version of where the lot will be.



Anything is sellebale .. just the price and/or terms and conditions have to be conducive enough !



In most cases of preselling a "concept" the money stays in trust. You don't get it. But you can frequently borrow against it.



Here's a (hypothetical) scenario to show the risks:



Let's assume bank might say: land is worth $500,000 for this 10 plot raw piece of land, based on an appraisal. Lucky you, you paid only $350,000 for it 3 years ago, say. Cash. Retail value with services might be $1.8M or $180,000 per lot with services. Servicing might cost you $500,000 if all goes well.



You presell 8 lots for $130,000 each - 10% of their money in trust.



Bank now lends you $500,000 at 12%, secured by land AND your personal net worth.



You slave away, get the lots serviced, but it actually costs you $600,000 plus $50,000 in interest. Now you are in the hole $650,000 plus the cost of land. 5 of the 8 buyers actually do buy, but 3 walk. One forfeits deposit, and 2 say "no" and you have to sue them which takes $s and 1 1/2 years in court.



You now have $650,000 + $13,000 = $663,000 to pay back loan + interest + development overrun i.e. basically NO CASH as you spend it all to service. This assumes, before you started, you had the $100,000 + $50,000 in cash to pay servicing cost overrun and interest, PLUS the $350,000 in cash to buy land.



But, you have now 5 lots serviced, free and clear. But you have now $500,000 into it: $350,000 for the initial 10 lot parcel plus the $150,000 for interest and cost overrun.



Now you start selling the remaining 5 lots @ $180,000 per. The first 3 cover your initial investment. The last 2 are profit.



Is this a good investment ? You decide !



Land development can be very profitable if executed well. It is very hard to borrow against. Demand is fickle. But, if bought in cash and with ample deep pockets it makes sense.



If you invest in such a venture, even as a mortgage, be forewarned that loss of capital is VERY COMMON. IT IS HIGH RISK.