As we left off in our last post, Mr. Adams has obtained an Option from Mrs. Walters to purchase 40 acres of land on the outskirts of the city. In doing a little homework, Mr. Adams has discovered there is a shortage of lots that allow manufactured homes. In discussing this situation with dealers of manufactured homes, Mr. Adams has also obtained the names of developers who have been selling developed lots to buyers of homes from these dealers. They have explained to Mr. Adams that the majority of buyers of manufactured homes do not usually already have land or a lot to put the mobile home on. Some of these home buyers have the home placed in a mobile home park wherein they rent the space for the home. However, many of these buyers would rather have their own land to place the home on.
In doing a little more homework, Mr. Adams does some research on the land itself. He had already done much of this before, in order to buy an “Option To Buy” the land.
The land is located on a County Road with frontage. Water and electricity are available along the road. The homes in the area require septic tanks for sanitation. In checking with the County Planning & Zoning Mr. Adams discovers that the maximum density is a one acre lot, primarily because of the septic tanks. Mr. Adams then visits an engineer he knows who has planned similar size land tracks for development.
He discovers that for approximately $10,000 per lot he can get the following improvements:
1000 gallon Septic Tank (installed) = $6,500
Water Lines from road to lot = $1,000
Driveway and Pad for home = $2,000
Electric Meter Loop = 500
Other off-site improvements, such as streets and dirt work, should be approximately $160,000 for the forty lots. Figuring another $40,000 for miscellaneous costs, the engineer’s estimated total to develop 40 lots which are ready to move onto, is $560,000.
Next Mr. Adams, in talking again to mobile home dealers, appraisers and developers who have been selling lots, discovers that the fair market price for a developed one acre lot is $32,500. This would compute to a total gross sale for 40 lots to be $1,300,000. Armed with all this research, Mr. Adams is now ready to take the next step and sell his Option.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Showing posts with label land. Show all posts
Showing posts with label land. Show all posts
Monday, August 9, 2010
Thursday, July 15, 2010
Rolling Option
Situation: A Land Developer, Mr. Tierra, has located a large parcel of land that he would like to develop into smaller tracts (5 acre tracts) for which there is a great demand.The land totaling 640 acres is owned by Mr. Grande who has had the land on the market for some time with no success in finding a qualified buyer. Mr. Grande does not want to finance the land for a buyer. It is difficult to find a lender who will lend on raw land. Mr. Grande’s firm price on the land is $1,000 per acre.
Mr. Tierra can raise the cash to buy 40 acres of the land and put in the improvements (Roads, Water, Septic Tanks, Electricity, etc.)
Possible Solution:
1. Mr. Tierra will buy 40 acres for $1,100 per acre, cash payment.
2. Mr. Tierra negotiates and buys an Option from Mr. Grande to purchase the remaining 600 acres in
40 acre or larger parcels over the next 5 years at a price of $1,100 per acre.
3. Mr. Tierra pays $4,000 for the Option which will be credited toward the purchase of the last 40 acre parcel.
Let’s look at some of the benefits for both parties.
Mr. Tierra:
1. Is able to start the development of the first 40 acre parcel which he can afford to do, wherein, if he had to purchase the entire 640 acres he could not do it.
2. By developing the first 40 acres, Mr. Tierra will increase the value of the remaining land because he has now built the popularity of 5 acre parcels being available.
3. Developing and selling the first 40 acres in 5 acre tracts will provide additional funds to buy and develop the next parcel of 40 acres or more.
Mr. Grande:
1. Receives a cash price of $1,100 per acre. He could eventually receive an additional 64,000 cash for the land.
2. Receives $4,000 as Option Consideration which he will not have to pay tax on until the final parcel is purchased or the Option is not exercised.
3. Each sale will be on individual parcels and not the entire 640 acres; therefore, Mr. Grande does not have an installment sale and will only have to pay taxes on each parcel as it is sold.
4. The development of the first parcel by Mr. Tierra will increase the value of the remaining land. If Mr. Tierra does not exercise any portion of the Option, the remaining land will be more valuable. Plus, Mr. Grande gets to keep the $4,000 Option Consideration.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Mr. Tierra can raise the cash to buy 40 acres of the land and put in the improvements (Roads, Water, Septic Tanks, Electricity, etc.)
Possible Solution:
1. Mr. Tierra will buy 40 acres for $1,100 per acre, cash payment.
2. Mr. Tierra negotiates and buys an Option from Mr. Grande to purchase the remaining 600 acres in
40 acre or larger parcels over the next 5 years at a price of $1,100 per acre.
3. Mr. Tierra pays $4,000 for the Option which will be credited toward the purchase of the last 40 acre parcel.
Let’s look at some of the benefits for both parties.
Mr. Tierra:
1. Is able to start the development of the first 40 acre parcel which he can afford to do, wherein, if he had to purchase the entire 640 acres he could not do it.
2. By developing the first 40 acres, Mr. Tierra will increase the value of the remaining land because he has now built the popularity of 5 acre parcels being available.
3. Developing and selling the first 40 acres in 5 acre tracts will provide additional funds to buy and develop the next parcel of 40 acres or more.
Mr. Grande:
1. Receives a cash price of $1,100 per acre. He could eventually receive an additional 64,000 cash for the land.
2. Receives $4,000 as Option Consideration which he will not have to pay tax on until the final parcel is purchased or the Option is not exercised.
3. Each sale will be on individual parcels and not the entire 640 acres; therefore, Mr. Grande does not have an installment sale and will only have to pay taxes on each parcel as it is sold.
4. The development of the first parcel by Mr. Tierra will increase the value of the remaining land. If Mr. Tierra does not exercise any portion of the Option, the remaining land will be more valuable. Plus, Mr. Grande gets to keep the $4,000 Option Consideration.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Tuesday, July 13, 2010
Creation of Wealth - Convert Land Into $$, And You Get To Keep Your Land!
You are a Real Estate Agent and you have a client, Mr. Able, who owns 320 acres of land which he leases out to a rancher who raised cattle and uses the land for grazing. 40 acres of the land is used to raise alfalfa. Mr. Able could sell the land; however, he feels confident the land will greatly increase in value within the next 5 years because of it’s proximity to a major Freeway Interchange. Mr. Able would like to obtain improved property with which he could obtain some tax shelter and the opportunity for additional income. Mr. Able has told you that he would be willing to take property that required some “fixing-up”.
After some research you locate a 32 Unit Apartment Complex which does need some “fixing up”. It currently is only about 50% occupied. The property is in an upper blue collar area near an elementary school. The problem is that the owner who is a widow, Mrs. Calhoon, has little knowledge or desire to solve her problem. She has hired different managers; none of whom have been able to turn things around.
After inspecting the property Mr. Able is confident that he can do the fixing-up and turn the property around. However, he is going to need the cash he has available to buy the materials and labor to do the fixing.
In counseling with Mrs. Calhoon we discover that she needs Long Term income more than she needs a lot of cash. She has some cash from her husband’s Life Insurance. He has managed the Apartments prior to his demise. So let’s analyze the situation:
1. Mr. Able’s Land
Owner’s Value $480,000
Loans $0
Equity $480,000
2. Mrs. Calhoon’s Land
Owner’s Value $384,000
Loans $0
Equity $384,000
Note: Market Comparisons indicate that the value of the Apartments, after rehab and leased up, should be approximately $586,000.
After some negotiating the following transaction was agreed upon -
Mr. Able will purchase the Apartments by creating a First Mortgage to Mrs. Calhoon for $200,000 secured by his land. He will also give her a First Mortgage on the Apartments for $184,000. This will provide a substantial monthly income to Mrs. Calhoon and will get her out of the problem with the Apartments.
Mr. Able now has the tax shelter he is looking for and once the Apartments are upgraded and leased out they will provide more than enough income to pay Mrs. Calhoon’s notes.
You as the Real Estate Agent should receive a nice fee from Mr. Able, your client.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
After some research you locate a 32 Unit Apartment Complex which does need some “fixing up”. It currently is only about 50% occupied. The property is in an upper blue collar area near an elementary school. The problem is that the owner who is a widow, Mrs. Calhoon, has little knowledge or desire to solve her problem. She has hired different managers; none of whom have been able to turn things around.
After inspecting the property Mr. Able is confident that he can do the fixing-up and turn the property around. However, he is going to need the cash he has available to buy the materials and labor to do the fixing.
In counseling with Mrs. Calhoon we discover that she needs Long Term income more than she needs a lot of cash. She has some cash from her husband’s Life Insurance. He has managed the Apartments prior to his demise. So let’s analyze the situation:
1. Mr. Able’s Land
Owner’s Value $480,000
Loans $0
Equity $480,000
2. Mrs. Calhoon’s Land
Owner’s Value $384,000
Loans $0
Equity $384,000
Note: Market Comparisons indicate that the value of the Apartments, after rehab and leased up, should be approximately $586,000.
After some negotiating the following transaction was agreed upon -
Mr. Able will purchase the Apartments by creating a First Mortgage to Mrs. Calhoon for $200,000 secured by his land. He will also give her a First Mortgage on the Apartments for $184,000. This will provide a substantial monthly income to Mrs. Calhoon and will get her out of the problem with the Apartments.
Mr. Able now has the tax shelter he is looking for and once the Apartments are upgraded and leased out they will provide more than enough income to pay Mrs. Calhoon’s notes.
You as the Real Estate Agent should receive a nice fee from Mr. Able, your client.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
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