I am looking to develop 3 townhomes on a 13k sq ft lot. I estimate the cost of the project to be about $2 million. I have an architect/contractor that I will work with and I estimate the development to take about 1 year.

I am trying to figure out how much I will be out of pocket to do this development. I have $1.2 million liquid of my own money that can be used as collateral or leverage. I have no experience as a developer but have worked in Los angeles as a realtor and am now in commercial real estate so I know how real estate works.

Can you give me some advice?

Thanks for your help.

Chlo

Chlo

Can you provide:

1- Information about the land. Are you buying it? Do you own? Purchase price? Appraised value?

2- Projected sale prices for the townhomes

Hi Loan Universe,
The land will be purchased by me for $600kish. It is 13,000 sq ft and is appraised by the city at $470k. From looking at the comps of new construction in the area, I believe I can get $700k on the low end to $1,000,000 on the high end but the latter is if I opt to build a very high end product. Since I am a rookie at this game, I will do the safer, more conservative condo that can sell for $700k.

Three condo's can fit on the property.

What are your thoughts?

Ok, here are my thoughts {organized randomly as they came to mind}:

- If you are purchasing the land for $600M, and you are fairly certain that the land will appraise at a higher amount, then you are looking at the bank lending about 50% for that phase {as long as you can get a bank to lend you at all, experience is the problem here}

- You can mitigate the experience issue by adding a resume indicating your familiarity and understanding of the market gained by your years as a broker. You can also include the qualifications of your architect/contractor in your request. Hopefully, the one building it has built similar projects.

- The lender is going to look at two loan-to-values primarily. The first ltv is the initial loan-to-value on the land acquisition, where he would not like to be over 75% if it is developed. In your case probably 50%. The second ltv is the loan-to-value on a per completed unit basis where once again the magic number is around 75%.

- This means that the maximum loan that you could get if the sale price is expected to be $700M a unit is $525M per unit or $1,575M.

- You won’t be making any money by selling the units at $700M each if costs are $2,000M. {$2,100M gross sellout - $2,000M cost =$100M}

- There are different costs associated with building different townhouse models. Depending on the size and market that you are going for {mass or luxury}, I have seen construction costs ranging from around $80 per Sq. Ft. to around $140 per Sq. Ft. This goes back to your budget and sales price being a little misaligned.

- Getting a bank might not be that difficult to obtain if you do have that much liquidity. Take into consideration that you will be required to guarantee the loan.

- The bank will require the GC to be bonded since he will be working for you. I am assuming that the GC is not an investor here.


Good luck