How to Do Your Due Diligence on Land Deals

Dan Austin: [0:00] There. Welcome back to another episode of the Collecting Keys Real Estate Investing Podcast, the podcast where we talk about how to make massive income, not just passive income. And what that really means is we're talking about being a business owner, talking about how to run an actual business that makes income, and not just passive income, like everybody else that got into real estate several years ago said, including myself, I just want enough income, I don't have to work ever again. Reality, we all figured out that that was a myth. So you need to learn how to be an entrepreneur, because at the base of it all, there's two types of people that get into real estate. One is a lazy person that just doesn't wanna work, and they wanna get enough income to cover their expenses, so they can kinda do whatever they want, work at will. The other one, which I like to think most of you are that are listening to the show, for that want to be an entrepreneur, and real estate was that like easy entry way into this business, or into entrepreneurship, not the easiest business, but it's an easy way, a low scale way, so to speak, low barrier to entry, and then we all find out it's actually pretty difficult, and that's hopefully why you're listening to this podcast, a little bit of entertainment that we might share with you. Speaking about making massive income, I got a super good deal that I wanna break down with you guys, land. You know, for a bit, last month, I felt like we've been, like, doing trailers. Like, I was a trailer boy through and through for the last month.

Dan Austin: [1:20] I swear every deal I was trying to sell was a mobile home, or a piece of land tied to a mobile home, or or just something, mobile homes and parks. In fact, we we have one listed right now, a mobile home and a park, which we don't do very often, but it was such a good deal. Super clean. It was a it's a whole tail deal. But back to my point here, land. Now, right now, I have copious amounts of land deals, some good, some bad, some amazing. One we've been working for a little while that I wanna talk about is a lot here in the city of Spokane, and I wanna talk about it because it actually kind of dovetails into another deal that's a little bit more complicated. But nonetheless, they're both really good opportunities. And with that, I realized there's actually kind of a little bit of due diligence that needs to go into these things if you're going to be educated on land, because one thing we have in America is a glut of land. There's land everywhere, right? And so some of it is gonna be worth more than others. For example, a land per square foot wise in the middle of a city in a growing population is gonna be more valuable than 10 acres, you know, 20 miles from the city center, assuming that it's just there's land everywhere around your 10 acres. Right? And then you'll go to another side of town where they've got 10 acres that's worth a ton of money, and it's just there's just location does matter, especially when it comes to land, you know, location, location, location, certainly applies. But as I've been underwriting these deals, so I've been working with our investor buyers, I just thought it would be a great time to talk about this stuff, and and I know there's a lot of folks in the scale community that honor weekly coaching calls, and they bring up what different land deals all the time, and I just wanna share at least a little piece of what I know that I hope will help you guys really quickly analyze deals, because if you're like us and you're doing enough marketing, you will get a lot of land deals that honestly are garbage, or even rural properties that have a house on it.

Dan Austin: [3:13] Sometimes they're just not good. I'm not saying they're always bad, and don't say that, but you need to be able to get to know fast on some of these deals, you don't spin your wheels or spend too much time on them. So, anyhow, let's dive right into this one. It came into our CRM, and it was interesting because it's in a trust, and the guy that wants to sell it, he's like, hey, man, I don't benefit from the sale of this at all. The money goes to the state, there's a lien on it, and I don't know the whole story. Either way, he has no dog in the fight, but he's like, hey, make me an offer. If it gets approved, whatever, go ahead. So we start underwriting the deal. I I look at it and immediately, when I'm doing like just the high level pass, I'm like, where is it at? This one happens to be in a pretty good ZIP code in a part of Spokane that's very, very desirable, and it's a standard, like, infill lot that was platted, like, years ago, and there's an adjacent like national homebuilder, D. R. Horton, that had built a development in the area, like a 22 lot development. And the reason why, like, this was I guess 2022, and then the reason why that this one was left out of that, it was platted, left out is it was owned separately in this trust, and so it never got sold off with the rest of the land. There's not a ton of land here, but also in that part of this area is like the road ended, and then there's a gravel road. So for anybody to ever like extend this, it's gonna take a pretty good capital investment, because you, you know, you have to like do all new curb, sidewalk, pavement, all that stuff.

Dan Austin: [4:42] Well, twenty twenty, twenty one, twenty two, the market was going crazy, national homebuilders were basically buying anything that they could, and just shoving these little twenty, thirty unit lot developments up, at least in our town, wherever they could amongst all the other large, large developments they were also doing. So they had enough money, it made sense, at least back then, it felt like it did. Anyways, they extended the road. The cool thing is is this lot was then part of this road extension, and now has a sidewalk and everything to it. So I'm looking at it, and I'm saying location is awesome. It has the road infrastructure to it, which just makes it like, I could build the same house on this lot. I'm thinking about it from an investor standpoint. I could build the same house as D. R. Horton did, and it's gonna sell for probably close to what they sold those things for. Now that was a few years ago, but, you know, prices are gonna still be in our market the way I'm looking at it. It's three years later. Prices have kinda gone up in a sense. Building costs maybe come down a little bit. So I'm thinking house next door of this lot literally sold for 500 k. There's 21 other comps, and the one good thing about homebuilders, national homebuilders, is they tend to build the same freaking house over and over again. So you can look at square foot, bed bath count. They're all pretty much of the same. Same quality, same finishes. We've got basically over that two year period, houses sold four seventy to 500.

Dan Austin: [5:56] So now I know as an investor builder, those are the comps for this land. Feel super good at it about it because they're right there, and I could just build the same house. Anyways, so okay. So now I'm like, okay. Now price obviously comes into to play here, but we just gotta figure out is this a good deal or not. The next, like, levels of due diligence you you really get into on land, the thing that I think trips people up the most is like the unknown cost of land development. So now if the land is on a steep hillside or it's got tons of trees in it or it's on a big gigantic rock, all those come with different costs associated with getting a house on the lot. And really, it's don't over complicate this thing, just step back and think about it from this perspective. Everything above the foundation, a builder can dial in, and I know this is going through my own build experiences on new builds, it's like, I can get an exact quote on the framing of the house to the penny, I can get an exact quote on drywall, because there's a plan that I have printed. I say, what's it gonna take you to do this? And those guys know exactly what they're doing when they're quoting you. Now, you'll get variations in quotes, but that person, that sub is going to do it for the price that they give you, because they know everything's going on. It's not like flipping a house where, you know, they don't know that you gotta jack up a house before you put new floors in, right? Like there's many, many less unknowns. But most, all of the unknowns come in the land development, which is also why land development is the most speculative, and the most risky in real estate.

Dan Austin: [7:25] So, once you get a concrete foundation in the ground, everything else is known. So to that end, you just need to look at what's it take to get a concrete foundation, and so that goes back to the question, is this a flat lot? Okay? If it's a flat lot, it's obviously gonna be cheaper to excavate. If it's got a, like, almost no trees on it, if no trees, even better, you don't have to cut trees down. Is it on a giant rock? Because if it's on a giant rock, you can still build a house there, but you're gonna pay excavator time. You're So gonna have to go pay a guy with a big excavator and a rock hammer on that, like a jackhammer, to jackhammer your below your frost line, which is we have that issue here in the northern climates, you know, so 30 inches below your frost line, plus the depth of your your footings, which are like eight to 10 inches, if you're just doing like a no basement slab on grade or crawl space type scenario. So you can also find that out by going and looking at the lawn and be like, does it look like do I see big giant rocks or rock outcroppings here where like you can't just dig over the excavator? If so, that's there's still gonna be some unknowns there, but this is what your investor buyer is gonna be thinking is like, okay, if it's a thousand dollars a day for a jackhammer, whatever it is, call your excavators around town, they'll tell you exactly what the hourly rate is for that stuff.

Dan Austin: [8:37] And you can kinda estimate, you know, hey, how much would it take to do this many feet in the foundation if you had to go all in rock? Call an excavator. They'll tell you. They'll be like, well, yeah, it'd probably take me a week of eight to ten hours a day, thousand bucks a day, $10 is just to get that excavated, not including backfilling or anything like that. So you can kinda like build the idea of that just quickly by doing that. The other thing when it comes to the ground is environmental. In some cases, in residential areas where you've already got a development going on, you probably don't need to do an environmental study. But there are some cases where you do like an environmental to see or at least a test to see like, was this ever considered like a dumping ground for anything? And you you'll be very surprised like, so in Washington state, we had a volcano erupt back in the eighties, I think it was, maybe late seventies, Mount St. Helens. And that was 500 miles from Spokane, but it dumped feet of ash in Spokane as well. And so what the city did back then is they took all the ash, because it's not like snow doesn't melt, they pile it up on a lot or a big giant area, kind of near where this lot I'm talking about is on in Spokane. Well, there's a developer here now building apartments on it, and he has excavate all that ash out, which now there's trees and stuff growing, it looks just like dirt, but it's not it's not structurally stable, so they're actually having to excavate like feet, like ten, fifteen feet in some areas of ash, take it off-site, and then bring in new structural soil that can be packed and all that sort of stuff. That's a massive expense, and my guess is it took this long for that property to be valuable enough for people to wanna take all the extra excavation costs. So now on this little city lot that I'm buying that's 50 foot by a 164 foot, we can take that on a microscale.

Dan Austin: [10:21] Like, is there any reason from an an environmental standpoint or a soil quality standpoint? And one of the ways you can know that is you can just look at the other houses around, and does it seem like it makes sense, you can talk to other builders and developers in the area if you know like, who did the did the work, that's super helpful to just to get that like qualitative information from people. But it's generally pretty apparent, but in some cases, can do an environmental studies, pay 4 or $500, at least get some level to make sure it's not an old dumping ground. I don't know exactly what a soil test would cost in some areas, because it will depend on the type of the size of the lot and all that sort of stuff, but you can get a soil test. Like, on this lot, I'm not going to. That would be like an extreme situation. If it's on a hillside, you're probably gonna have to do some testing because hillsides are super hard to build on and are susceptible to bit like water, like erosion, really bad water erosion, or just instability, and then you have to do like pile driving, like 30 feet into the ground to have a stable foundation. So those are extreme examples, but they are things you should think about when you're doing your due diligence. And then the last piece on the due diligence for land that is important, that's underground, that's an unknown, is the utilities. The good thing about this is you can get a known cost.

Dan Austin: [11:29] So for this lot, I looked, I saw in the road, I can turn on our city's GIS, and saw water and sewer, but I noticed that there was no taps going into this lot, so I called the city development services department, and they're like, yes, there is nothing there, so you'll need to talk to engineering who designs this sort of stuff, blah blah blah. Well, we have a connection fee associated with utilities, which is awesome, because you would think that in a town that preaches that we have a affordable housing issue that they wouldn't have huge connection fees for housing, but they do. In some sense, it doesn't make sense because someone's gonna pay for this big giant sewer system. Right? But anyways, it's like 7 or $8,000 just to get a permit to connect to that. Doesn't include cutting the asphalt and connecting to it, which we have to do. So then the next step is, okay, I know what I need to do. I need I know the water and sewers where I want it. If it's not there, then you may need to pay to extend it, and usually when you have to do that, if you have to extend the mainline, it's usually for what we're looking at, worth it, unless you're talking about a big development that's gonna be multiple units and all that sort of stuff. But anyways, going back to the connection fees, you're gonna have some level connection fees, and you're gonna have to you can go get an excavator and be like, hey, I need to extend it to the lot.

Dan Austin: [12:40] Here it is. Show them a picture of where the water sewer's at. Oh, yeah. If it's pretty standard, yeah, I just gotta run it this this far, it's gonna be this much. We're gonna have to have, you know, an asphalt cut. We're gonna have to dig down this deep. Your local excavators, generally speaking, will know most of that sort of stuff that you need to know on that front, and they can just give you a pretty good quote. So you can kind of find out what your city costs are gonna be for connection fees, and then what your excavation costs will be, so you can make mark that as more of a known. The unknown part could still be the digging conditions, but again, most of the bigger excavators and contractors in your area are gonna know. They're gonna say, oh, that part of town. Yeah. I've heard it's pretty rocky or, oh, yeah. That's all sand over there. That'll be easy digging. They usually know, and if they don't know, just talk to enough people that that you'll find out. So now you've gone through that, and that's just what I did, and I said, okay, this is a great lot, however, we're going to have about, for us, I think it was gonna be about 20 ish, $25,000 to get utilities to this lot. This lot probably retails, given that it has utility stubs in the lot where there's a a water stub, electric stub, there's not gonna be gas here, but if you have gas in your area that's needed, you have that. And then, of course, sewer. 110,000, that's about retail value. So take that minus, we'll just say, $25 for the utility connections because if it needs those, then that's just like doing a rehab on a house.

Dan Austin: [14:01] Right? What are the repair costs? This is the repair cost. So essentially, we're at $85,000 is what I could pay today and have it at retail value. Well, I'm an investor, so I wanna have some margin on the land, and if I'm going to sell it to somebody, which we're going to end up probably doing, we need to have some margin on that, we're gonna have some selling costs and all that stuff. So either way, we negotiated it down to $36,000, so that we have the margin to actually sell this thing and make a profit down the road. And you're like, probably thinking like 36,000 to 80, like, that's a great deal. And it is, but there will be some other costs, so we're gonna close on this one, because of just the the situation with the actual land ownership. What we like to do, it's in a trust, there's some legal issues going on with that sort of stuff, and we just wanna make sure the deal goes through. So so we'll have some capital costs, But the cool thing about that is though, because it is a cheap deal for us, right, we'll pay say $40,000 out of pocket for it, we can close on it and just list it, and so now we're not just looking at investor buyers, we're looking at people that are like, I wanna build a house, and I already have a builder, and I just need the land, and this is in a pretty desirable area.

Dan Austin: [15:09] So now maybe maybe we could sell it to somebody that is a builder for 80,000, but there might be some that just falls in love with the area or their mom and dad live in the same neighborhood and they wanna, you know, the grandkids to be able to watch mom, you know, mom and dad's house, they'll pay maybe 90 or 100 for it. So there's a little bit more emotion tied to it and less of an investment tied to it. So there's some some pluses and minuses to, you know, having to close on a deal like this, but we're so confident in the location and the price we have it at, we feel really good. So this will be a great deal. I know I'm blabbering on here for, one of our Friday episodes, but I wanna wrap this up with the connection to this lot is the seller actually owns the lot next door, and it has a house on it, but the lot next door is like a it's like a full acre, so it's a really big lot, and the backyard of it fronts the road behind it, which is where the lot we're buying is fronting. So the one next door, they can do what's called a boundary line adjustment, and basically draw a line on the back of their lot. And what that allows them to do is not get a full survey. They can just the city gives them the ability to just draw a line and say from here over, that's a new lot, we'll give you a parcel number. Well, they wanna sell us that lot. And they think that lot is worth two lots, and they think it's gonna be worth $200,000 because they know, like, retail value.

Dan Austin: [16:26] Hey. It's a $100 per lot. Retail is kinda where they're thinking, and they're saying that because the lot's not going to be as deep as the one next door. So in their mind, like, okay. It'll be a little worth a little bit less. And so for context, the lot next door is 50 feet wide, which is the standard frontage for a city lot where we're at. A 164 feet deep, which is a little deeper. Usually, it's like 120 feet is a standard city lot. Well, the one next door, they wanna make it 80 foot deep and a 100 feet wide. So their point is you could have two fifty by 80 lots if you choose to subdivide it. Okay. So now we're looking at a totally different deal. Okay, so now we're looking at this deal, and we're saying, what can we do with these lots? They were saying a 100,000, or 200,000 is what they wanted, they thought that was still a good deal for us, and then we got them down to like 170,000 on price. I personally think it's still a little high, but we gotta go through the same due diligence process. So on this one now, let's say we we said $25,000 to get connected to utilities, estimated it's a little high for our market, but I'm just using that as a round number. So now we if we wanna do that to two lots, that's $50. And then we also have to split the lot, which I know this because I've done it before. It's gonna cost us all in probably twelve to fifteen. So we're $65,000 into these two lots that will maybe retail for a 100,000 each, but likely a little less.

Dan Austin: [17:51] And so when you do the math on this, it just doesn't quite make sense. And when I'm doing my due diligence on these lots, the last point I wanna make here is what is the highest and best use for the lot? So the lot next door, I could technically put a duplex on it because in the city of Spokane, we could basically put any amount of units on any lot we want right now, but it's not a duplex area. It may not make sense. And then there's not a lot of people that I know buying duplexes, brand new builds that we're gonna need to sell for $700,000, and it's only gonna gross rent for, like, probably 4 to 4,300. So the highest and best use is probably to for me to sell it or build something on it and make a profit as they build on it and have the massive income now. The lot next door, I'm going through it, I'm like, gosh, it's got a lot of frontage. Frontage is a big deal, but it's not deep enough. So if you actually look at how you have to build a house, and when you're working in city limits especially, they're gonna have setback requirements. So you don't get to build a house on a 50 foot by 80 foot lot that's 50 by 80. There is in the city of Spokane, a setback of, I believe, it's 25 feet from the back of the curb to the front of your garage. So you can't have any house the first 25 feet. So I'm at an 80 foot lot. Right? So that now gives me, what is that, 20 what I say, 25 minus 80 is that puts me at 65 feet, and then I need a 15 foot setback from the backyard, meaning from the edge of the lot, the only structure like that could be back there is gotta be 15 feet away.

Dan Austin: [19:20] So now I'm at a 50 foot house. Now I'm gonna question myself. Am I am I doing the math right? Oh my gosh. So I said 80 foot deep minus 25. That's right. 55. I said 65. So now I'm at a 40 foot deep house, and I have five foot side setback. So, essentially, my house can be 40 foot wide. So if you think about that, you're looking at a 1,600 square foot rancher that you could build because you could do 40 foot wide by 40 foot deep. And from what I know, that's not a really you're not getting the full 1,600 square feet out of that. Like, a lot of the houses that you see being built are about 40 by fifty, forty by 60. So you're already gonna be like, if you're trying to do like a ranch or a two story, you're already gonna be kind of an odd shape. Builders don't love that, they want things that are easy, especially right now. We don't have a lot of spec builders just buying up lot lot land. Like in twenty twenty two, twenty three, I knew dudes that were just like putting it in their inventory. They had millions of dollars of infill lots in their inventory, because they're like, I'm just gonna build it as as I can. Just the confidence isn't there right now from a spec build standpoint. So now you're now you're already saying, okay, it's a little weird.

Dan Austin: [20:27] So I went down the path of, well, we can do townhomes now. So what if I did 10 townhomes? Well, the parking is not there because there's no alley access, so that's not gonna be easy to do. So I'm trying to find the highest and best use of this lot. And it could be that it just needs to be sold as a single lot that's gonna have a really big side yard and a really narrow backyard to make up for it. And that's what the builders I'm talking to right now are looking at it. However, I have a couple other builders that like to do really cheap spec homes, and I think they would build on a on a 50 foot by 80 foot deep lot, because they have really, really low build costs, they can shove something in there. It's just gonna be a little awkward, but because their costs are so low, this is what they do. They're happy to take on something like this, at least that's what I'm speculating. So I do think we'll have to some renegotiation with the seller on this price to get what we need out of it. But I just wanted to use that one as an example, because not only is due diligence important, but doing, like, the highest and best use analysis. Because sometimes you might come across a lot, maybe it's a little rural. It'd be cool to have a custom home on it, but because of the area, the highest and best use might be to drag a mobile home on it, and you can make a lot of money really quick. If you can make a $100 in two months or a $150 in fifteen, sixteen months, what do you wanna do? You're probably gonna go with the the one that's in two months.

Dan Austin: [21:45] So use that highest and best use and how it feeds into your business during that analysis. I will stop blabbing on because I think this episode is getting a little long for a Friday. If you have any questions, hit me up on Instagram at investor man dan. If you're lucky enough to have my cell phone number, you can always call or text me as well, and I'm happy to go into more detail. I know I I got a little down the rabbit hole in some of these, but the key with these land deals is doing that due diligence upfront, knowing where to go, and then looking at the highest and best use. And I guarantee you, you will feel much more confident when you see land coming to your CRM, when you know how to quickly analyze those. Once you figure out who those right people are to talk to at the city, at the county, whatever, the contractors, excavators, you will quickly build just like you did, I'm sure, with your ability to look at a flip deal and analyze the rehabs you use. It's the same process. Just talking about dirt instead of two by fours. So have a great weekend. We will catch you guys all next week. So see you.