Categories: Podcast

96 – How to Evaluate a Development Deal with Jason Hsiao

Synopsis:

Jason is a real estate investor and developer and spoke to us about development in episode 77. In this episode, we’re gonna do something a little bit different. Recently, I’ve been getting a lot of off-market development deals, but I don’t know what to do with them. So I ask Jason to walk me through the steps and he takes to quickly evaluate if a development deal is good or not. It was a pretty fun exercise and it’s something that I never saw on any other podcast or YouTube video so I want to share it with you today.

Key Points:

Go out there and do calculations. Budget around $270 per square foot for your hard costs and another 20% of that for your soft costs. Go to the city websites and planning department and talk to the staff there. They’re super friendly and you shouldn’t be intimidated if you have a legitimate question. A good architect and general contractor are the most important teammates you need. So get your referrals and work with the right people. A lot of this stuff is tedious and boring, but that’s where profits are made.

Show Notes:

Steps To Doing A Development Deal

So for development, the first thing you would probably look at is the market. There’s a lot of factors like who are the major employers? Is the market growing with houses and schools? How do the communities, in general, feel about development?

How Does Jason Look At The Pipeline That City Planners Have Approved?

Every city is a little bit different. Some do a much better job than others. That’s the reason Jason likes Sunnyvale. Sunnyvale has essentially published a spreadsheet on order planning projects that the planning department has in the pipeline and what states they are, who the planners that sign or what the status is. A lot of cities too, they’ll have some kind of GIS mapping that they show you. You can kind of see a little bit of the big picture quickly where or what’s drawing other people’s attention.

What Is GIS?

GIS stands for Geographic Information Systems. It’s mapping software. Some cities utilize their software to essentially overlay or point out where the interesting developments are going on.

How Does Jason Calculate Costs

Costs vary by cities. It depends on the foundation and how nice are the things you are putting in. Soft cost depends on the size of the development. If it is just one house, it will be around 20% of your hard cost. These include your architect, engineers, permits, and whatever other fees that you might have to pay with the city. This can go about 15% but will not go down to 10%.

Breakdown Of Costs

The architect will be the big one. Engineers won’t be as bad but a lot of it goes to cities like the impact fee. It takes different forms for example like traffic impact.

What Kind Of Fees Do You Pay The City

There’s a school developer fee, regular permit plan checks as a park impact fee, traffic impact fee, legal fees to set up the fund to raise your investors and all that demolition when you’re ready to tear the buildings down.

Once The Paperwork Is Done, What Do You Ask For?

Do some quick math, you want to see if this is a good deal or not. Once it is actually under contract, there’s a lot of work you still have to do to make sure that this lot is developable because there’s a lot that the eyes can’t see. So for bigger development, the first step is you need to do a tentative tract map and that spells out “where am I putting the units and some preliminary designs on”. They’ll check for the appropriate setbacks that they spelled out. And a lot of these other requirements how residents are supposed to be pulling in and out. They’ll do some preliminary reviews with the entire thing.

When You Got your Tract Map Approved

Usually, at that stage, you don’t need to go to Planning Commission, it’s like when you’re actually having your regular mapping approved, you’ll go to Planning Commission. And then if that passes like they’re okay with the schematics of your design and where you’re going to put the townhouses after all these are approved, then you go for a plan check with all your construction design documents that your architect and all the engineers have put together for you.

Timeline For The Process

There’s a lot of variables. One is how quickly the city works. Two is like how good your architect is. If your architect is crap, you’re going to have a lot of comments and a lot of changes you have to make. Jason estimates around 9 to 15 months depending on the city and its variables.

Three Big Stages to Build A Home

The first part is dealing with the planning department. And that’s still very more on a high level. Where are the designs? Where are you putting the townhouses? How are people getting in and out? Do you meet all the requirements in our zoning standards or our zoning ordinances? Once you get past that, you go deal with the building department and the building department are going to be nitpicking on, does your house have appropriate voltage or plumbing wise, what kind of material you’re using or subsidies have very strict like your roof supposed to be at a certain angle and all these other things. Some neighborhoods are even pickier. They say you can only use three kinds of roofing material, then, once you get through planning, you’re dealing with a building department, that’s when you actually get your building permit. Once you have the building permit, then you’re dealing with the GC and the contractor to actually getting it built.

Things You Should Know About Development

Jason’s exact words.”So for development, we’re talking of bigger projects. If you just want to build your own dream home or you watch too much HDTV, the process is actually not that hard. I tell people my story of how I just go down to the planning department and figure this stuff out. Yeah, it’s kind of a struggle initially but I didn’t think it was that hard. It is definitely tedious, a little bit reading through the zoning code or municipal code and all that. And I would say the toughest part starting out to is knowing how the numbers work or what numbers to use. I think the first few major steps is understanding the market. Am I being too aggressive or just too risky of a deal? I think a lot of times, it is much easier to talk to a human being. They can walk you through all the steps on what you might need to include in your application. If you have a good architect and a good GC, it will make your life so much easier and way less gray hair.”