I have a very intelligent friend. Heck, some say his IQ is way up there near the genius level—but that doesn’t make him a smart real estate investor. Here was a lifelong engineer wanting to become a home builder simply because the market was so hot that no one could lose.One day he called me and asked for a favor. He wanted me to look at a vacant lot he was considering buying to build a spec home on. I quickly did a CMA and a NewHome Trends report to pull up comparables and headed to the site. I spend two hours with him walking the lot and the neighborhood. We went through a due diligence checklist I worked up for him. While most things looked fine, there were still a number of questions he would need to get answered by the local planning department.
When he told me what he was going to pay for the lot I said I thought he was paying full retail price—and maybe even a little more. Off the cuff I told him if he could avoid adding a fire hydrant in the street, sprinkling the home and get a sewer easement from a neighbor (to avoid pumping the sewage up to the main) then he might be alright. If he couldn’t accomplish at least two of these then he was overpaying for the Lot. I recommended he get his questioned answered and then determine how much lower he needed to reduce his offer by to be safe.
He was in such a hurry to buy that he didn’t take the time to check into the feasibility items I warned him about. He believed that even if he was overpaying for the lot, he could make up the difference with the appreciation that was bound to occur on the land during the time he was building the home.
Unfortunately, there were too many instances like this where people were so excited to buy that they ignored market signs and failed to do the proper feasibility before buying land and homes.
A proper due diligence report would have identified many of the problems the Buyer ended up encountering.
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