Two land deals, opposite bets. Which is the beginner version?

Question

I own small multifamily and I've never done a land deal, so I'm going to define the words as I understand them and someone can correct me.

Entitlement means getting the government permissions that let you build what you want, zoning changes, plat approval, environmental sign-offs. Platted means the subdivision map has been approved and recorded, so the individual lots legally exist. Unimproved means there's still no street, no pipe, no power to those lots.

Deal one. 38 acres, currently zoned for one house per five acres, seller wants $18k an acre, $684k. If it got rezoned and platted it might carry 90 lots. Cheap dirt, and every dollar of value comes from approvals I'd be trying to get for the first time.

Deal two. 14 lots already platted and recorded in a stalled subdivision, no infrastructure in, $52k a lot, $728k. Almost the same money. The approvals exist. I'd be buying the right to spend a lot more money on dirt work.

The case for deal one is that entitlement is where the biggest markup lives, and if I never learn it I'm always paying someone else for it. The case for deal two is that I can't be denied. Nobody votes on whether my lots exist, my risk moves to construction cost and to whether builders want lots there.

The case against deal one is obvious, a no vote makes the land worth what I paid or less and my money is gone. The case against deal two is less obvious to me, which worries me more, and I suspect that's where the room will split.

So I'm asking rather than arguing.

marcus_hale41 · Answer

The thing you can't see in deal two is what's attached to those recorded lots.

Start with whether the plat approval has expired. In a lot of jurisdictions a recorded plat carries conditions with time limits, and if the original developer never built the improvements, the approval can lapse or the city can require resubmittal under current standards, which are usually stricter and more expensive than the standards in force when it was approved. A plat that looks final on paper can come with a requirement to redesign the stormwater to today's rules, and that's real money.

Then the obligations. A stalled subdivision usually has a development agreement, a subdivision improvement bond or letter of credit, and sometimes a recorded declaration creating an HOA with an obligation to build something. Whether those obligations run with the land or stayed with the original developer depends on the documents and on state law, so a local attorney has to read them. I'd ask for the development agreement, the recorded plat with all conditions, the bond status, the declaration, and the file from the city planner before I priced it at all.

Also ask why it stalled. Fourteen unimproved lots sitting there means someone ran the numbers and stopped. Sometimes that's just a dead builder. Sometimes it's a sewer capacity moratorium or a lift station nobody wants to pay for, and if it's the second thing your $52k a lot is a $52k a lot problem.

Deal one you can lose fast and know it. Deal two you can lose slowly while thinking you're fine.

Two land deals, opposite bets. Which is the beginner version?

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