Often it can be illuminating to review the misfortune of other builders as a means of making ones own building tribulation and failure somehow more palatable, relatively speaking. Maybe there is some portion of shadenfreude gained from these case studies, I’d prefer to say this isn’t true, but most likely my wife would dispute me. Despite the presence or absence of that strange phenomenon, I find the land deal debacles of others frighteningly illuminating, and useful as a priceless teaching exercise for those of us exposed to the vagaries of the land speculation marketplace, and of course one of my favourite topics, the hideous behaviour of ‘USED LAND ®’ salespeople in these matters.
Our overview for today is of a very nice Kensington parcel, featured on this website some time ago, at 615 2 Ave NW ( http://tinyurl.com/y2mmdh23 ). Dormant, (or fallow?), for a few years (was listed in 2017 for a few months), while burning through much costly property tax and financing, the land is being marketed again by a wonderfully not-forthcoming USED LAND ® seller. I guess over the past nearly five years it has gained value despite the recession. For those too bored to recall the history of this land, first it was purchased in 2014 for $1.15M, design work was completed, and a five unit building was approved by the City and later overturned on appeal. The USED LAND ® seller then immediately listed the failed development site and chose to mis-represent it as a five unit development prospect, while the ink was still drying on the appeal board decision report refusing the five unit proposal. I felt shame and humiliation on behalf of the USED LAND ® seller, but I got the sense that neither the USED LAND ® seller or the Calgary Real Estate Board considered development misrepresentation a valid concern. A duck’s back, I guess, is absorbent only when compared to the permeability of the USED LAND ® sellers suit jacket. The allure of the juicy commission on this property, priced today at a bargain basement $1.245M ensures a full goretex wardrobe?
The purpose of this post, however, is to illustrate how costly holding onto this failed development site must be for the builder, and to urge caution to those considering a similar purchase. So many risks and pitfalls show up after the purchase, the land must be bought at a price that the gremlins can be affordably bribed to vacate. Yet this one clearly was not, and the bills are piling up as we approach year five. The largest has to be the opportunity cost. Sure this land may have a mortgage on it, necessitating a hefty monthly nut, with little in the way of revenue to offset it. But the cost of capital is a builder-killer, and a five year hold could well be insurmountable to all but the most deep pocketed builder. At a cost of 7%, this property is bleeding around 80 grand a year, in funds that can’t be used to build elsewhere, or in funds that can’t be borrowed productively toward finishing active construction that will lead to sales revenue.
To a small business that prides itself on being fleet footed and capable of switching strategy with the trend of the market, this five year hold has to hurt, and no end to the suffering is within reach. I wonder if they now realize that had they dumped the lot in 2017 by tearing off the bandaid to discover the real value, the bleeding would now be over? The scar tissue remaining would be better than the anguish of slowly bleeding to death?
Prospective land buyers, particularly new builders, often ask me what I think of properties, or inquire about how to get a ‘deal’, as if I have some surplus of amazing opportunities (I don’t, but this year so far has been better than most for identifying deals). Real deals are few and far between, and the duds are absolutely everywhere. So how does a person distinguish between the two? Experience counts, as some land just gives you an excited feel about its potential while others are cringeworthy. The higher quality land will retain value, thus is less risky to hold onto, yet often there isn’t a huge differential between the golden nugget and the junk. They key of course is to not overpay, but you can’t know if you’ve overpaid until you’ve finished selling the completed units. I have observed so many train wrecks in recent years on all kinds of property, it amazes me that anyone wants to start building. Yet they do, so here are some random thoughts.
Choose the grade A location - when one parcel must later be marketed as four finished townhomes, favourable leverage is created by the best land. It is easier to find four buyers in a great location than four buyers willing to accept an awful location at a lower price.
Consider access and utility needs - too many buyers search out the deal but have little notion of the storm water infrastructure underground that needs to be connected to. This huge factor can make a great deal turn sour. Be friendly with a civil engineer to reduce some risk. Look at what Enmax/Atco/Roads indemnified crew will be needing to do to connect your property and how cars can access the garages.
Prepare to be hit with offsite levies and surface improvement - the City makes the rules and you will pay. Is your land deal good enough you can afford to pay for asphalt, sidewalks, streetlights, and storm upgrades? Or is it more likely that once you pay for the true costs of building there is simply no margin left to justify the business case?
Know what the ceiling is on unit values - If other similar units have sold for X, you likely cannot sell for X plus Y, despite how wonderful your paint colour coordinates with your cabinetry, and how fabulous your floorplan flows. You must plan your specification according to reality, not fantasy. Your valuation of the land must be corroborated by the proven value of the end product.
The market you buy in won’t be the market you sell in - given the lead time for a new build, difficulty in financing, and delays beyond your control, by the time you are ready to sell the finished homes, governments will have changed, rules will be altered to distort the market, and input costs will fluctuate, sometimes by a lot. I’ve found that most changes will be a kick in the nuts rather than wind beneath your wings. The price you’ve paid for the land protects your nuts from being crushed by the markets boot. Politics will not help you, because developers are evil and well connected businesses have relationships you can’t possibly foster in time to save your project.
Prepare yourself to detach emotionally from the stresses - You must be able to navigate this minefield of risk by minimizing the personal damage inflicted upon you by the stress. One of my builder friends calls it ‘brain damage’. He's right. Temperamental snowflakes need not apply to this endeavour and expect success.
Become a person who can make decisions - this doesn’t mean refusing to change course, inability to take advice, or making quick or rash decisions. You must develop an effective process that leads to a well reasoned decision, and once made go after it.
If you fail on these general principles, you may find yourself in a real bind, with no avenue to relieve the pain. What I’d suggest is not to do what the 615 2 ave owner has done. Learn from these case studies as I try to and you can survive, remain opportunistic and capitalize when the right land deal is identified.