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I am a potential first time home buyer in San Diego, California and like most buyers these days in Cali I find the market to be pretty expensive and I am trying to come up with innovative ways be able to afford a house.

One of the idea was to see if I can buy land and build my own house. It may or may not be cheap. Maybe it would be way pricier than buying a home on Zillow or from a builder, however, I wanted it to be my own conclusion, rather than it coming from someone else. I decided to do my own research and crunch my own numbers.

Currently, if you want to buy a brand new 2500-3000sqft house in a good neighborhood of San Diego, it may cost around $800K. From my research, I found that it costs somewhere around $200/sqft to build a house. Of course, that is a ball-park figure.

I came across a 1.9 acre piece of land (83000sqft) for $600K in a very good neighborhood and school district. 83K sqft can accommodate at least 10 houses.

Looking at the numbers it looks like a bargain but it has been on Zillow of 4 months. I would definitely like to go and check on this land, but how can such a deal have no buyers for 4 months? Could there be something wrong?

What could be potentially wrong with this? Am I missing something very obvious?

  • I'm not sure what math you're doing to conclude that this is an amazing deal. $200/sqft to build a 2500sqft house means $500k in construction costs. Add the price of the land, and you need to spend $1.1M in total, significantly more than the $800k you list as a good price for such a house. Can you clarify why, specifically, you think this deal is too good to be true? In particular, why is it attractive land to you, given that you can't buy it and build a house on it for less than you can spend on a new house? Or are you just curious why someone hasn't put multiple apartments on it? – Mike Haskel May 9 '17 at 23:25
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    Can it be subdivided? Are there zoning restrictions that make it undesirable? Is it on a flood plain? Could it be some fantastic deal that no real-estate investor in the region has picked up on? Maybe, but probably not. – Hart CO May 9 '17 at 23:36
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    Building houses is not easy. If you're able to do so on time and on budget with no prior experience, you should immediately quit your job and go into the industry. – Glen Pierce May 10 '17 at 5:38
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    To add to @HartCO's comment, if there is nothing on that plot, there is also no water, gas, power, etc. -- which you may need to add to the cost of building a house (on a plot that has such utilities). – KlaymenDK May 10 '17 at 10:41
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    Re "83K sqft can accommodate at least 10 houses": Maybe if you're building an urban slum. – jamesqf May 10 '17 at 17:40
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A bank may not like loaning money to you for this. That is one snag.

You listed 500,000-600,000$ for a monster of a house (3000 sqft is over three times the average size of homes a hundred years ago). Add in the price of the land at 60K (600K divided ten ways). Where I live, there is a 15% VAT tax on new homes. I can't find out if California imposes a VAT tax on new homes.

Anyway, returning back to the topic, because of the risk of loaning you 660K for a piece of land and construction, the bank may only let you borrow half or less of the final expected cost (not value).

Another huge snag is that you say in a comment to quid "I came up with this conclusion after talking to someone who had his property built in early 2000s in bay area for that average price". Let's apply 3% inflation over 15 years to that number of 200$/sqft. That brings the range for construction costs to 780K-930K. Even at 2% inflation 670K-810K.

Edit:

OP later expanded the question making it an inquiry on why people don't collaborate to buy a plot of land and build their homes. "Back in the day" this wasn't all that atypical! For example, my pastor's parents did just this when he was a young lad.

Apart from the individual issues mentioned above, there are sociological challenges that arrive.

Examples:

  • How much customization can each person do to their property (house placement on a lot, design, etc...)
  • If family eight wants to build an ugly home, can the other nine veto the design?
  • At ten effective lots, what happens if one fails?
  • Do y'all need to use the same construction company?
  • Can one find nine other families to do this with?
  • Who gets to live besides who? Who decides that?
  • If the proposed lots cause inherit cost differentials in construction (ex one needs landscaping or one has rocky soil), who picks up the excess costs? The group or the individual?
  • If the lots aren't identical, should the ones with the richer chunks pay more? How do you even determine that? Especially if a discovery is made that upsets that calculation.
  • Who gets what lots? (Imagine a 5x2 layout where the back five have access to a natural, beautiful stream. Or maybe five are on the main road and the other five have trees)

These are the easy questions.

  • Your questions within the answer are part of what has to be agreed to up front. If I chipped in, and then found out the best plan created the 5x2, I'd go nuts. The wood facing lots have higher value that the tree facing. This is why the better option is for an investor to develop and sell off lots or houses one by one. The tough issue and I'm guessing the major issue is that the lot doesn't produce land that perks well enough for 10 sub lots. (BTW - 3000 sq ft is not monster in many areas in US. Some towns have minimum size homes per zoning.) – JoeTaxpayer May 10 '17 at 23:22
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Obviously you're missing that there is no house on the land so the cost comparison between a house and land isn't terribly valid.

The land might not have connections to the municipal sewage/power/electrical and may need zoning changes and permits for those connections.

You're missing that you don't know how to design and build a house so you'll need to hire people for those tasks; then live through the process, headaches, and probable budget overruns.

Edit: You're also missing that lending for speculative land development is significantly different from lending for a single family home.

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    @CoffeeBean, so just after the dot-com bubble burst, call it 15 years ago, it cost about $200/sq.ft. to build a house in the bay area. Something makes me think the rate would be a little different today. – quid May 10 '17 at 5:03
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    @Philipp True, but mysteriously subcontractors tend to be more expensive in areas where home values are high... – D Stanley May 10 '17 at 13:41
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    @Philipp adding onto D Stanley's point, wages and the cost of material can rise with inflation. – Lan May 10 '17 at 14:55
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    @Philipp thanks for italicizing building, it really helps. Recessions tend to impact labor and material costs, and this $200/SQ.ft. estimate is derived from the epicenter of a recession AND not doesn't include 15 years of inflation. (I went for caps over italics). – quid May 10 '17 at 16:18
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    @CoffeeBean: Your comment on this answer indicates to me that you have not put enough effort into thoroughly researching/thinking this through. I personally think you would be in way over your head on this. – Wesley Marshall May 10 '17 at 21:41
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The estimated cost of $200 sqft of living space is achievable by builders who are following one the their standard plans. They build hundreds of homes each year across the region using those standard plans. They have detailed schedules for constructing those homes, and they know exactly how many 2x4s are need to build house X with options A, F, and P. They buy hundreds of dishwashers and get discounts. That price also includes the cost of the raw land and the required improvements of the property.

You need to know the zoning for that land. You need to know what you can build by right, and what you can get exceptions for. You don't want to pay $600 K and then find out you can only build a 1 level house and you can only use 1/4 acre.

You would need to start with a design and then have the architect and the builder and a real estate lawyer look over the property. Then they can give you an estimate of what it would cost to put that design on that property.

83k sqft? I mean it can accommodate at least 10 houses.

It depends on what is the minimum lot size. If the maximum allowable density is three houses per acre you can get 6 in 2.2 acres, but if the minimum lot size is supposed to be 5 acres, then you will need an exception just to build one house. And exceptions involve paperwork, hearings and lawyers.

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Let's think like a real estate developer.

First you need to check with the zoning commission the restrictions for the area. Let's say that the plot is actually suitable for 10 homes.

You buy the land. You also need to finance the build itself. If you don't have enough cash you need to acquire financing from banks and perhaps from other sources as well, because banks won't loan you the entire amount.

Next you need to divide the plot into 10 pieces, making sure that each piece has driveway access to the street and plan access to utilities (water/sewer/electricity/broadband/phone lines). Plan the size and position of each house.

Get building approval. This is a process that can take some time, especially if they have follow-up questions.

Get a builder to build the houses, including ground work and preparation for utilities.

Get approval for the finished houses. A building inspector will check that the houses follow the permission and all laws and regulations that apply. This step can entail time and added cost.

Get a real estate agent to sell the new homes. Often, the selling process starts in the planning phase and early buyers are able to influence both the layout of the house and the finish.

Your cost estimate included a profit of 140k for each house. From that a builder needs to subtract financing costs, real estate agent costs, any costs that you forgot to factor in, budget overdrafts, contingency costs, and salaries for your staff and yourself.

I estimate the project time to 1.5-2 years.

So, we have an $8M project with a gross profit of $1.4M (not including all costs). Net profit probably just a few hundred thousand. Or less.

Real estate developers with local knowledge would be able to make a much more accurate estimate on both time and cost. My guess is that they have, and since the plot hasn't sold in a while, either the price is at the upper end of what makes a profitable project or there are other restrictions that limit the number/size of homes that can be built on it.

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The basic answer is that you are comparing apples and oranges. On the one hand, you are considering a case where someone buys a single already-built house. On the other hand, you are considering a case where someone buys a large piece of land, builds 10 houses, and (presumably) sells or rents the 9 they're not living in.

Those are two totally different endeavors. It might be reasonable to compare the cost of a plot of land sized for a single house to the cost of a similar plot with a house already on it. But you can't directly compare the cost of buying 10 houses worth of land to the cost of one house. As other answers have mentioned, building 10 houses involves a massive amount of work: an architect has to design a house, somebody has to get permits to build it, someone may have to get water/power/sewage hookups, somebody has to physically build it -- then multiply all that by 10 for 10 houses. Once you're done, you still haven't recouped your investment. You just have 10 houses. Now you have to sell them, which is a whole other job in itself.

Because the things you're comparing are so different, the potential buyers for the two cases are also completely different. This explains the "inconsistency" between the asking price and your perception of its value. The two kinds of properties are in two different markets. The people looking to buy a single home are just regular people looking for a place to live (or maybe trying to get a rental property). The people looking to buy a 10-house plot are real estate developers with a whole different set of concerns. There could be many reasons why the land hasn't been purchased yet, but you can't compare it to the cost of comparable houses, because almost no one who is looking for a house is going to consider buying 2 acres of land instead. It's like asking why filling up your car with gas is so much more expensive per gallon than buying a gas station and giving yourself free gas. They're just not the same thing.

But given the size of the land, I can join forces with other people which are also in the market and totally bring down the land price per piece to say 100k?

You can do that, but basically what you'll be doing is forming a real estate development company of some sort. This opens a whole other world of possible snafus (for instance, how ownership is to be divided, and what happens if the owners disagree on appropriate development of their portions).

It is absolutely possible to make money by buying land and building houses on it, especially in California. People do it all the time. But it's not something you should attempt if you don't know what you're doing, and it's definitely not the same thing as just buying a house to live in.

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You can hire a builder to build for you on a lot that you would be happy to live on with utilities already connected. Subdividing a large piece of land gets a little more complicated.

What easements exist, and what new easements would need to be created when connecting utilities? Would all of the lots already have street access, or do you need to dedicate some of the land to building a new road in the subdivision?

Also, I edited your post because 83,000sqft is 1.9 acres. Building homes on .19 acre parcels (assuming no need for a road to take another 15% of the lot) reduces the value of the homes that you are building. You should run the numbers with 6 houses and see how attractive the math looks. Also, you should look for updated numbers on cost to build. Custom homes are likely closer to $275-$350 (where an architect is involved with drawing the plans).

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