A few months ago I bought 34 acres in Northern Colorado. The land was only $90,000, which I thought was a steal. I made an offer the same day it came on the market for full price and it was accepted. I did have to buy a water tap with the land that was an additional $28,000. My plan for the land was to look into creating a subdivision, but I knew I got a good enough deal that I could flip it as well. After a couple of months of researching subdivisions, talking to the county, talking to the water department, and many other specialists I have decided not to create a subdivision. There would be a lot of profit if I were to create a subdivision, but the time and money it would take are not worth it.
▼ Continue Reading Below
What was my plan for the minor subdivision?
In my county in Northern Colorado, you can create a minor subdivision if it is less than 9 lots. A minor subdivision is less involved than a major subdivision and much easier to create. My plan was to create 7 lots that would be about 5 acres each and sell those lots. The real estate market in Northern Colorado has been going crazy the last five years, especially for country properties. I felt I could sell five acre lots with water from $125,000 to $150,000 each in this area. If you are wondering how I was able to buy 90 acres for $118,000 (with water), but 5 acre lots would be worth $125,000, well I told you it was a good deal!
What would I have to do to create a subdivision?
In order to create a subdivision in Weld County where the land is located, I must have a few things in place:
- There must be a source of water for each lot
- There must be a paved road in the subdivision
- There must be a geological survey done
- There must be a survey and plat map created
- There must be a drainage plan
- There must be an HOA
- The local fire department has to approve the needed hydrants or other fire suppression
There are other minor things needed, but these are the major requirements. Along with providing everything listed above, I would also have to go through a 6 to 12 month process with the county to get the subdivision approved. I would not know for sure if the subdivision would be approved until about halfway through the process. The county commissioners have to approve it after a few hearings for the neighbors and other interested parties.
How much would it cost to create a subdivision?
The cost to create the subdivision would be over $300,000, not including the cost of the land. The biggest cost would be the water. Here is the breakdown:
- Water: $220,000 (6 water taps at about $30,000 each plus I have to build a water line through the land)
- Road: $50,000 (I did not get a solid bid, but from what we could estimate it would cost at least this much to pave a road through the subdivision)
- County fees: $10,000 (this would be for hearings, permits, and to have an analysis done)
Just those three items would be at least $280,000. I am sure there would be many more minor things needed that would add to the costs. My total investment would be at least $400,000, but most likely closer to $450,000.
How much money would I make if I created the subdivision?
If I were to sell the lots for $125,000 each, that would be $875,000. I would have selling costs and carrying costs for each of those lots. I would guess it would cost me at least $50,000 to sell those lots after title insurance, real estate agent commissions, and closing costs. I could possibly make $375,000 on this project, which seems like a lot of money on the surface. When I got further into the project, a few things worried me:
- I noticed some other lots in the area were selling for $150,000, but some were not selling for $100,000. I looked into this more and found the local school districts played a huge role in the demand for lots.
- It takes a while to sell a lot. I talked to other agents in the area and they said they had a hard time selling lots, but had no problem selling new houses. Building houses would be fun but even more involved and risky.
- It may take me two years to complete this project and sell all my lots.
While it is possible I could make $375,000 or more on this subdivision, I also may only make $200,000 if the lot prices aren’t as high as I think they are. Two years is a long time and our market could change for the worse in that time. If the market tanked, I could be stuck with unsold lots for years. I do not think this would happen, but you never know.
Is the risk and investment worth the potential profit for the subdivision?
I would have $400,000 to $450,000 invested in this project with a potential profit of $200,000 to $400,000. I was able to finance part of the purchase of the land, but most of this money would be cash out of my pocket. Basically I would have more than $300,000 invested for at least a year since I would not have to build the road or pay for the water until the subdivision was approved. Not only do I have to look at the investment return, but the opportunity cost. If I have this much money invested into the project, I will not be able to flip as many houses or buy more rentals for a while.
I have ten flips going at the moment. I have sold 6 flips in 2016 and bought 6 more. I figured that if I used $300,000 to invest in the subdivision, I would lose out on at least 7 flips a year. I average about $30,000 in profit on each flip which is $210,000 a year I would be missing out on. There are other positives with flips as well.
- I can flip a property much faster, which would reduce my exposure to market changes.
- I have a much better idea on the market value of flips versus lots.
- I have much more experience with flipping.
While I might make $200,000 to $400,000 on the subdivision, I might lose that much money or more by doing fewer flips. Plus I think I will still make at least $25,000 on the land if I were to sell it now as a quick flip. In the end it did not make sense to pursue the subdivision because of the risk, the uncertainty, the time it would take to sell lots and the manpower it would take to go through this process.
While it would have been cool to create a subdivision and sell lots, I was a bit relieved when I decided not to. My assistant and I had been spending a lot of time on the project, and we had barely gotten started. The more we learned, the more risk we saw and the rewards were just not worth it. I guess that is why so few people develop land, and why there are not many new subdivisions being built in our area even though housing prices keep going up.