If you’ve missed some of the prior articles, basic guidelines on successful investing are in my book “Stairway to Wealth” available at LuLu.com.
Continued from Part 18: Adding living area is what developers do, and it had a long history. She remembered that site at the edge of town, the one that used to have a large furniture store on it, with its own parking lot. A couple of years after the store closed someone bought the lot and built a high-rise condo project on it: 18 floors, five condos per floor. You can bet that putting 90 high-rise condominiums on a lot formerly occupied by a furniture-in-a-box retailer did something to the density factor! Emily knew she lacked both the tract record and the money to do anything as grand as that, but maybe she could find a property somewhere that she could do something with.
She started driving different routes as she went through her daily errands, driving through neighborhoods she’d never been, but found nothing. Later, she began driving further out to the suburbs looking for anything she could work with, but still nothing struck her. Then, as she was driving the side streets home one Saturday afternoon, she stopped at a new listing. An “Open House” was going on. She parked down the street – the closest spot she could find – and walked back to where all the people were.
There was nothing special about the listing, and Emily wasn’t interested in the property. It was just your usual “two on a lot”, but it made Emily’s light bulb blink. “Why not buy an old SFR on a big lot R-2 lot! Get Hiram to build a second house in back! Give the lot greater density!”
Shazam!
Don’t be Careless
Emily had never developed property before, so this required some serious thinking in the manner of Don Corleone: “I’ve spent my whole life trying not to be careless.” Carelessness could cost Emily all the profits from her previous two investments. She’d be back to nothing, and that was certainly an unappealing thought.
It didn’t even have to be carelessness, as in “Oh, I knew I should have done that but I ignored it”. She would be careful to ignore nothing, and besides, she was a watchful woman where money was concerned. She would wait an extra week to get her hair colored. She may skip the highlights. She’d never pass a dime on the sidewalk.
More than likely the surprises that could impoverish her would be risks she knew about but could not prevent, mistakes that happened and she couldn’t unwind, or blunders she did not have the money to correct. There were probably more, but these were enough to occupy her mind at the moment.
That evening, after returning to the bedroom she still rented from Banana Pudding, Emily put on her running shoes, changed the television to the Hallmark channel, and stepped aboard the treadmill she’d bought used from Craigslist. She’d seen the Hallmark movie twice already, but that was ok because she didn’t have to pay attention. She just liked the background noise. Emily got into her bubble and began to concentrate on how to solve her big problem: how might a newbie become a profitable developer?
Have a Plan
She’d been impressed with parts of the Scott Adams book, How to Fail at Almost Everything and Still Win Big, especially the bit about having a system. Adams defined a system as a series of actions that had a 50% or better chance of success. Once you found / copied / developed a system, Adams wrote, you did it every day. You continued until it worked.
Emily had neither friends nor family that could teach her anything about the systems used by successful developers. None of her family was that financially adventurous. But she hoped she could use her head and maybe work out some kind of a system one step at a time. It did not have to be perfect. It just had to work. Then, over time, she could refine it.
Her grandmother used to say, “You have to start somewhere, either with the horse or the saddle”. Emily had many places she could start, but she had a management personality and tried to pick a reasonable place to begin that didn’t incur immediate expenses.
Clearly, she had to have a properly zoned lot. One way (but not the only way) of finding an appropriate lot was to drive areas that had existing small apartment buildings: duplexes, triplexes, and quads. And of course the most obvious was the neighborhood her current fourplex was in.
After work the next day Emily drove each street in her fourplexes neighborhood twice: once up the street (looking at all the buildings on one side) and once down the street (where she scanned the other side). A couple of times she pulled to the curb and stopped so she could jot down some thoughts in her notebook.
- There were a variety of properties in the area: there were old SFRs; two-on-a-lot; three and four “stacked unit” buildings, and a decent number of larger apartment complexes she estimated at 15 to 40 units.
- Some of the old SFRs were squeezed between larger complexes to the right and left. The SFR owner must have been asked to sell at least twice, when the large projects on either side were in the permitting stages, but refused. He wound up with a house he could only rent because no family wanted to buy an old house on a small lot squeezed between those big multi-unit buildings. So selling the house as a Single Family Residence was off the table. And due to zoning restrictions the lot was only big enough to put maybe one or perhaps two more units on it. Hard to sell; hard to build more than one or two additional units on it. Those two characteristics greatly reduced the marketability of the property. But if a second SFR was built at the back of the lot, that second unit might make a big difference in total value. Two rental houses are worth more than one, she thought. That would make all the difference.
The more Emily thought about those “squeezed” properties, the more she liked the idea. As it was there was little reason for a buyer to be interested in a property like that, so Emily hoped the “as-is” price would be very reasonable. It would probably have to be if the sellers really wanted to sell.
A non-speculative investor would buy such a thing based on (a) the largest fixed rate, long term loan he (in this case, “she”) could get plus (b) the minimum down payment the bank required. Even then, if the building didn’t pay for itself and kick out a little spendable Emily would pass. She would just extend her search until she found a suitable property offered by a realistic seller.
Filtering the Area
You want to find a property with certain physical characteristics? That’s what the MLS is for. To gain access (even second-hand) to the MLS, Emily looked for real estate agents active in the area. She stopped in front of a good sized condominium building and noted the names of two agents (from different companies) that had listing signs in front. Good enough to start with.
She called each of them and said that she was a possible buyer of an affordable three or four
bedroom house in “that” general area. She explained that her mother has always lived
independently but now she’s older, and Emily gets worried, so there would have to be
apartments close by, preferably on the same block.
She made appointments with each agent, on different days. Emily wanted to interview them and choose the one who appeared most capable of handling the assignment. She might even work with both of them, if there was sufficient reason. On the other hand, she had no qualms about rejecting both of them if it were necessary. Emily remembered how unmotivated Stu D. Chicken had been, and she didn’t want the success of this venture riding on the shoulders of someone like him.
Double Checking
It’s not good enough to simply drive past a couple of older multi-unit buildings and to conclude that the zoning must be adequate at least for a duplex. Generally that’s the case, but the zoning could have recently been changed and the existing buildings grandfathered. So we’re talking money here, and Emily wanted to make sure.
She drove into the city-owned parking lot next to the Building Department. The office she was looking for was on the second floor. There was a woman with a baby carriage in front of the elevator. Emily took the stairs.
There were a couple of people in front of her. They looked like contractors. One had his plans spread over the countertop. A City employee was looking at them while the contractor was explaining something. Emily couldn’t quite hear what the conversation was, although she tried very hard. After all, she was curious.
The other fellow was standing near the counter, waiting with a roll of plans under his arm.
It was more than thirty minutes before Emily got her chance at the counter. There was no reason to prevaricate with the Building Department. She needed their knowledge and she wanted them to be eager to offer advice. She’d noodled this around for the last couple of days and concluded that people who had the power to approve her plans would probably be willing help.
Emily told the counter-person that she hoped to buy a house where she could build a second house at the back of the lot. She said she’d need all the advice he could offer because this would be her first project.
Emily gave the counter-person the names of the four streets bordering the area she was interested in. He was, naturally, familiar with the area. He offered to pull the zoning maps and overlays and they could take a look at the maps together.
He left the counter, returning in a moment or two with a map book. Opening it to the proper page, he used his finger to trace the four streets Emily mentioned, just to confirm the area. Then he began explaining to her the meaning of the color overlays.
It turned out that the zoning in most, but not all, of the area accommodated two or three units per 5,000 sq. ft. lot. He explained to her that while the zoning affected a general area, each lot had a specific “use code” revealing what was approved for that individual lot. For example, a Use Code of 100 might mean a SFR but Use Code 101 would indicate a SFR with a permitted pool. If Emily bought a lot with a SFR on it, she could apply to change the use code. She would need to do it while her plans were checked and permits issued. Emily hadn’t known any of that, but mentally filed the information away for the future.
She didn’t want to drive here again and wait in line if she didn’t have to. She asked, “Is there a way to call you if a question comes up later?” He immediately gave her his card with his name, position, and office phone number on the front. He wrote his private cell number on the back. Emily caught a look from him and wondered if maybe he was interested in her. She glanced at his left hand. No ring, not even a white circle.
It had been ages since anybody had noticed her in that way and she became a little unsettled. She recognized the mating dance and was flustered because she knew she was rusty. It was totally unexpected and she didn’t want to blow it. Every girl needs to be loved by someone. Whether she loved him in return was nice, but her mother never thought it entirely necessary. As she took the elevator back to the first floor she started to name their future children.
Maybe she’d get her hair done early this month.
This article is for informational purposes only and is not intended as professional advice. For specific circumstances, please contact an appropriately licensed professional.
Klarise Yahya is a Commercial Mortgage Broker, BRE: 00957107 MLO: 249261. If you are thinking of refinancing or purchasing real estate, Klarise Yahya can probably help. Find out how much loan the building will support. For a complimentary mortgage analysis, please call her at (818) 414-7830 or email [email protected].