Why Not Do a Whole Subdivision?

If you have a real estate investor success story to share, please do so through
our “Contact Us” page. Thank you.

I started out years ago buying lots on eBay and learned how to use internet resources so I could research properties without personally visiting them. One thing led to another and I eventually found an entire subdivision in a prime area with views of Sedona's Red Rocks but there was only one house in the entire subdivision. It was perched right above an 18-hole golf course and had a paved road up to the edge of the subdivision and power was already running through a third of the subdivision.

I was absolutely baffled as to why this was the case since there were homes on nearly every lot in the area except for in this subdivision. I sensed there had to be some problem and I thought if I could solve that problem then I was sitting on a huge opportunity. I did all kinds of research on the area and discovered the problem and how to solve it. I am a software engineer/systems analyst by profession, not a land developer, but after working on this project for almost two years now I learned a tremendous amount about it.

Most of the lots had in the past gone to the county auctions for back taxes. One person owned most of the entire subdivision and he got the stuff for really cheap. He had moved out of state and didn't plan to do anything other than sit on the land and wait for progress to knock on his door. Each lot was valued by the county at $800 and taxes were $14 per year per lot so it wasn't hurting him very much to sit on it all. He wasn't really motivated to sell but I just said tell me what you want for it and I'll go to work and see if I can get it for you. He gave me an agreement that allowed plenty of time (6 months) to coordinate with other owners to buy up as much as I could and put something together a lender would fund as a project.

Another owner had 59 lots and I approached them and we negotiated and they wanted me to simply cash them out or go away. They told me what they wanted and said when you have the money we will talk. I was very nervous because if I bought those lots and nothing else worked out then my money would be in the same trap I was trying to dismantle. But, I had an inner confirmation, like a sublime spiritual experience that said, “Do it!”

So, I did it. I sold some land that I just happened to get a call out of the blue with an offer $50,000 above what I paid from land in the area about a year prior. I did a 1031 exchange and bought the 59 lots cash. Once I had the two big owners of lots bought out the scattered patchwork of lots started coming back together into nice blocks.

Because the local private water company refused to include this area in their water district nobody could get water. Environmental setback
requirements for wells and septic systems prevented people from doing anything with their lots. Nobody could get a well and a septic system on just a quarter acre lot. This for sure was the major issue causing stagnation. In talking to the county planning and zoning I confirmed the solution was no more complex than to simply buy out as many lots as I could and put them back together in chunks in order to meet the requirements for a well and a septic system to build houses there.

Since I'm a programmer I wrote a very nice database application that helped me organize the entire subdivision project and I began to make offers with all the remaining owners that were there. That was a lot of fun as I listened to all the stories about the history of the subdivision. As it turns out it was a total scam and one lot was being sold to numerous people and the notes generated were also being sold to multiple mortgagers. It was mafia-backed and the guy behind it eventually came back from hiding in Brazil and got caught and ended up in jail where he was killed in jail. Unfortunately, there were a lot of bitter sentiments I came in contact with, but most people realized until someone came along and did what I was trying to do the place would never get out of its trap.

I learned a lot about human nature on this project. In time I had over 200 lots under control and I even started lining up agreements that I would lose a money on but because it complimented the whole I was willing to do it. People either gave me a very low “cash now” price or they got a higher price but for the higher price I had 6 months or more to coordinate things to justify it.

I was always open with people about exactly what I was doing and I think people found that refreshing. They will not have anger when they look back and see that I made a lot of money because I was truthful about what I was doing and they accepted it. They recognized the great risk I was undertaking and also recognized the great good that could come out of solving this huge mess. Many genuinely hoped I would have great financial success in the effort.

Some thought I was nuts and were happy to take my low cash offer and some wanted to play along and max out their return because they figured they had nothing to lose. I paid small options like $200 per lot so that my cash demand was minimized. Then, I started looking for a source of money to tie this all together because I didn't have the muscle to carry this on my own. I tried getting a commercial lending package but I lacked the credentials and history to use any conforming programs. Even on the hard-money lending side few would give me a loan based on future value and then their programs were geared towards future value of hard improvements that were constructed on-site.

It was very difficult to get people to realize that value would simply be created by purchasing adjacent lots to create a grouping that made formerly unusable land usable. Actually, what most of them wanted to do was take it over and pat me on the back like a good “bird dog” and send me down the road with $40,000 profit or something stupid like that.

Imagine a person who has millions at their disposal and some young 150lbs short skinny nerd with glasses and a big nose and feminine voice comes and lays this proposal in front of you. The look on some of their faces was almost comical now that I look back on it. I remember one guy's office looked like an African safari bounty treasure trove with all kinds of exotic things on display and he was a very large Polynesian mix with a commanding regality I could barely resist. I remember another guy who was constructing a REIT and was getting people to buy in and he showed me about 6 or 7 checks that he collected in the last few days alone worth over a quarter of a million and how he schmoozed me with lots of promises to give me a finders fee for lots more deals I brought him. He complimented me as one of the best “naturals” at bird dogging he knew and that I could make a 6 figure income if I worked for him. I wasn't looking for a “job”.

I must admit in the beginning I was really tempted to sell out and take the cash and run but I knew down inside I could do much better finding a lender. Without this it was a very weak negotiating position to operate from at best. I knew eventually when I sold after wrapping it all together with financing that I would have to leave a lot on the table for the next group to come along. I finally found a broker that deals specifically with hard-money and private money placements and he could see the great potential of the project and started going to bat for me to see if he could find a money source.

One day I was having a meeting with the Yavapai County Planning and Zoning and the lady told me that I should contact a company called Red Rocks Development because they were also active in the immediate area looking to improve things and unlock land values. I was a bit surprised because I had been working for some time and never heard mention of them. As it turns out they indeed had the same idea as me in a little subdivision that was just a little beyond the one I was working in. I was buying up Indian Lakes #1 Subdivision and they were buying up Indian Lakes #2 Subdivision. The county employee gave me their phone number and I contacted them. Red Rocks realized they would need to make improvements in mine to get to theirs so we decided that we should work together in a mutually cooperative manner.

Red Rocks Development applied a lot of pressure on me to do a joint venture with them but I was not comfortable doing that because I would totally lose control and I might never get any profit from the project based on the way it was presented to me. They told me I wouldn't likely get financing and that all of my work to coordinate purchase contracts would be lost and that I needed them. In the course of talking to a lot of people there were others who were willing to get involved but I had to joint venture with them under similar schemes where I would lose control and I may not see any profit for a long time. There were two people that found out about my project that were interested in just buying me out but their offers were not very appealing. I finally reached a point where I realized time was running out and so I approached Red Rocks Development and told them that if they wanted to take control of the land I coordinated that they would have to just buy me out. I figured it would be best for everyone if they could get the whole area pulled together so we put a deal together for them to buy me out and opened escrow.

However, much to my horror, the major purchase contract I had lined up had a problem. I had a verbal agreement to extend with the seller and I was working on getting it in writing from him when I was told about the problem. Unfortunately, I had committed in writing with Red Rocks Development relying on that extension but he informed me that he wasn't going to honor it because he had another offer on his land for double what I was going to pay him and he had gone ahead and accepted their backup offer in writing. I nearly died on the spot. I really nearly vomited all over the place. I only needed a two week extension but he had already signed an offer with someone else that took effect on the day after my original date expired.

This guy is a retired Christian Minister and we had developed a personal friendship to some extent. I was absolutely dumb-founded and fear just ripped through me like shards of glass. But, I was honest with Red Rocks Development that due to my foolishness to trust a man's word I would need them to pay me two weeks sooner than agreed or I would have to get a bridge loan of some kind. We still had about 45 days to work this all out and I continued now more than ever to look high and low for hard money to keep this deal together.

I finally had someone who said they were 95% sure they could but no loan commitment was possible for at least 30 days which put things right to the wire. I got a loan offer from someone Red Rocks lined up but I would have to pay heavy points and interest and reduce the sale price by $300,000 for them lining up this private money source. They also insisted that I accept that offer immediately without any provision allowing me to subvert them if I got my own funding lined up.

I was very upset about this but I realized I didn't have much of a choice to keep the deal secure. Each of our postures were we would just screw up all the work I had done to coordinate and both lose out but their point was they would sue me for everything I was worth for selling land I didn't have a proper position on. In time we settled for a $200,000 price reduction with the points and interest and I got a loan from their source for everything necessary to hold the deal together. So, I let the broker know I got strong armed and there was now no need for me to get my own financing to pull everything together.

As it turned out, the offer that persuaded the minister to violate his agreement with me came from a would-be buyer that I rejected an offer from and who I suspect was very upset with me for not allowing him to attempt to outbid Red Rocks Development. I didn't really want to sell out the project early on as much as I wanted to get financing and tie it all together and then start selling when I had a stronger and more appropriate position to sell from. I think his offer to the minister was merely to disrupt out of spite but it could also just be someone very determined to get what they want. It's sad what people will do, but I learned a very important lesson about never doing anything in writing without proper legal footing in writing.

The time to close came and most everything was in order and in the end run of things, after well over a year of hard work, I gained well over $1,600,000 of profit on this deal and I only had about $250,000 of capital laid out to do it all, which my home equity line of credit and the sale of that land covered comfortably.

That was a very wild ride and I could actually write a book out of everything I learned and experienced. Most importantly I've learned to
trust in my instincts and I also must give God credit because at many steps along the way I was given inspiration and help that tested my faith to the core.

I am very satisfied in sincerely believing that everyone in the subdivision has been bettered in a manner that they preferred. Those who wanted cash to get out did. Those who wanted to make more money and be a part of this made more money. Those that didn't want to sell because they were waiting for the stagnation to end now have much hope of real progress in the area. Nobody was hurt in this entire project that I know of and the subdivision will one day bristle with beautiful homes that soak in the splendorous red rock views of Sedona.

Jason Wharton
Arizona

To read more real estate investment success stories, please click the links below. Thanks.

We love your feedback and welcome your comments.
Please post below:

Why Not Do a Whole Subdivision?

Are you sure you want
to log out?