The problem - I recently listed a 20 acre parcel of land that has development potential. The land is easily subdividable into 9 lots (7 standard city lots and 2 large acreages), but the owners are not in a financial position to develop the property. Selling the property is an option that they will consider, but it's tough to get the maximum value for the property since most developers are cautious with their money these days.
The Solution - I ran all the numbers and talked to a few land developers, and quickly determined that the property has little potential to develop in the near future using the traditional formula of - the owner incurring all costs of development and then recovering costs and profit when the lots sell.
The numbers do however work out for both the seller and a developer if we arrange a trade of land in exchange for the road development. There is a house on the property that will end up being located on one of the 7 small lots. The sellers have offered to trade the 6 vacant lots (estimated value $600,000 to $650,000) to anybody willing to do the road construction (estimated to cost around $400,000). That would leave the sellers with the two large acreages plus the small lot containing the house.
This is a win-win situation for all concerned.
- The 3 lots that the sellers would end up owning would be worth more than the current 20 acre lot.
- The developer would end up with over $600,000 in assets rather that just receiving about $400,000 for doing the work.
- Both parties have substantially reduced their risk and greatly increased their assets. The contractor has benefited by a hugely reduced risk since they have no large capital outlay to purchase the property up front, and the seller has not had to finance the expense of the construction.
- Of the $400,000 or so that the developer could charge for the work, only a portion would be actual profit, where as the extra $200,000 of asset value is almost entirely profit.
I am not aware of this formula being used before, although I suspect it has been done in a similar format at some time. I think it makes sense and i am anxious to see if I can make it work.