What is the Land Development Process Step by Step?
Updated: Oct 12, 2021
A goal without a plan is just a wish - Dwight D. Eisenhower
It's no secret that the real estate development process is very complicated changing from city to city. Which is probably why most industry leaders refuse to write on the subject.
Every real estate deal and project is different making the industry dynamic and exciting.
Some developers will finish a couple of small fourplex's each year, other developers will develop entire master planned communities with thousands of lots, parks and some mixed-use. The gap is huge.
Industries that fear massive job loss to technological innovation or automation are industries that have jobs with repeatable systems. Finding a repeatable system in real estate is nearly impossible since there are so many variables that are always changing.
I spent the early part of my career following a basic process that has helped our team develop over 6,000 lots throughout Central Texas. This same process can be followed on projects big and small but the details will change from city to city.
In this post, I’ll simplify the process while being as detailed as possible.
The breakdown of what we’ll cover:
1. Land Acquisition
2. Feasibility/Due Diligence
So, let’s get started.
1. Land Acquisition: Where grit wins deals
Entire books can, and have, been written on the importance of this subject alone, but we’ll condense it since we’re looking at the whole development process.
To preface, it’s important to know how you will fund a project before searching for land. Projects most commonly fail because they are underfunded, or the developers do not understand the capital stack.
For more on this check out this article.
Finding developable land at a reasonable price in this market is a challenge. Deals can be found on sites like Loopnet, Crexi, Zillow, etc. but they’re rare since acquisitions guys from across the country have alerts set for every time a new parcel is listed. In short, the competition is fierce.
If you want to find land in a seller’s market, DON’T TALK TO SELLER’S.
What I really mean is find off market properties.
Start by going to your local county tax appraisal district’s property search website and using city gis maps. Zoom into the area you like and start clicking on different parcels. With the gis maps you can overlay zoning, future land use, floodplain, and utility CCN’s. If you’re lucky, your city will also have water and sewer lines in the gis so you will not have to reach out directly (you will have to reach out and ask about capacity eventually).
If you have questions about a zoning district or utility CCN, the city planning department is a phone call or email away. Most planning departments are very helpful and it’s good to build relationships early.
Once you find land that fits your parameters, it’s time to find the owner, contact them, and get a price.
Pro Tip: Try using a free skip tracing tool like TruePeopleSearch.com to find phone numbers.
This step may sound easy, but you will have to rinse and repeat a hundred times before finding land owned by someone willing to sell at a fair price. At this point, you can proforma early numbers and if the project pencil’s, send out a letter of intent.
Some developers and investors will send out hundreds of LOI’s a year.
Others will not send an LOI until they have performed tons of due diligence.
This is a business strategy decision and there is no “right” way to approach it.
2. Feasibility/Due Diligence: Where disaster is prevented
After negotiating with the seller and contracting the land, it’s time to do more thorough research. Countless projects have failed or lost money because the developers get cocky or greedy and skip part of this process.
In 2009 Faontainebleau Resorts went belly up on their 60-plus story 3,780-room hotel in Las Vegas because they couldn’t raise enough capital to complete the project. Granted, nobody could have predicted the collapse (except Michael Burry) but you get the point.
The true goal of feasibility is to uncover every reason why you shouldn’t move forward with the project, then assign a cost, and narrow down timeline. It’s always good to have a feasibility checklist to ensure that no stone goes unturned.
Below is a list of items that must be considered, but every city is different so be sure to consult with local developers and refer to city ordinances. A more exhaustive list can also be found in the Real Estate Rooky Developer’s Package.
· Preliminary Layout
· Development Agreements
· Impact Fees
· Utility Capacities
· Offsite Requirements
· Land Purchase Sales Contract
· Zoning Status
· Geotechnical Reports
But wait, how much research/feasibility should I do before closing on the land?
This is probably not the answer you want, but it depends on your risk tolerance.
If you and/or your company have little experience and are heavily leveraging the project, you should cram as much into your feasibility period as possible.
If you are well capitalized and have a partner with development experience or know the area exceptionally well, you may be able to safely get away with less.
The bottom line: each task you complete during feasibility slightly decreases your risk since you haven’t purchased the land yet.
Pro Tip: Vet several consultants that specialize in each area before contracting. Drilling core samples may seem simple, but an experienced Geotech will know each area and what to look for. Saving a few thousand dollars up front on due diligence could cost you big in the long run. Also, if you want to irritate geotechnical engineers, call it “dirt” rather than “soil”.
3. Development: Where time is of the essence
Once you close one the land, development begins. Now is the time for any necessary development agreements, rezoning, acceptances, approvals, permits, etc.
Below is the general step-by-step process of development specific tasks. Again, consult with local developers and read through city ordinances to understand the exact process for your municipality.
Pro Tip: Development ALWAYS takes longer than expected. If you think the project will take one year to get approved, double it and see if it still pencils with your proforma.
Some cities are more development friendly than others making the process much easier.
I manage several projects through Temple, Belton, and Troy in Central Texas and Temple is very development friendly. For example, the City of Temple will cover the cost of gravity sewer extension for up to 2,500 feet, they will split the cost with the developer from 2,500-3,000 feet, and the developer is responsible past 3,000 feet.
Most cities have a long term master plan with wastewater treatment plants and lift stations placed in strategic locations. Over time, they build-out most of the sewer and water infrastructure and have developers fill everything in.
This approach is not efficient and as a developer it is important to understand the difference.
4. Engineering/Construction: Where ideas become reality
It’s no secret that development can take a very long time but the most fulfilling part of any project is finally breaking ground to see your plans take shape.
Like Louis Zamperini said, “A moment of pain, is worth a lifetime of glory.”
Developers who are just starting out typically hire 3rd party engineering firms and contractors to design and build their projects. Some large companies will do engineering, construction, or both in-house to minimize cost and streamline communication.
Among a very long list of other tasks, your engineering firm will detail subdivision layouts, prepare site plans, complete grading & drainage design, complete utility design, and assist with preliminary/final plat approval.
Traditionally, developers have delivered projects through design-bid-build. Once construction plans were completed, they were given to several contractors to bid out the work. The contractor with the most competitive bid won the job.
Recently, there has been a shift and the best projects come from engineers and contractors that work together to deliver the most efficient and cost-effective designs.
Either way, the project eventually gets turned over to a construction company that will order materials, track milestones, and build-out the project.
5. Sale: Where money is made
The real reason why most people are, or want to become developers, is the opportunity to make great money. As they say, with great risk comes great reward.
Most subdivision developers are not builders. They do not “go vertical” and build homes. Most subdivision developers buy large tracts of land, design a subdivision, subdivide the land into lots, build out utility infrastructure and roads, dedicate ROW’s to the city, and sell lots to builders who eventually build homes.
This is not a new concept, but industry vets don’t share their knowledge publicly. Why would they?
Regardless, lots are sold once substantially complete. This can be negotiated between each builder and the developer, but in general it means a list of requirements have been met.
To list a few:
· Subdivision Plat Approved
· As-Built Construction Plans
· Streets and ROW's Dedicated
· Operable Water/Sewer Taps
The important question we need to answer when selling lots is what to price them.
As it turns out, lots are worth what builders are willing to pay for them. The best way to find out what builders are paying is by talking to other developers.
Inevitably we have costs that factor into what we price the lots and these can also be considered in a proforma where you back into a competitive price. Your proforma will be used several times throughout the life of a project and each version should be saved.
Conclusion: The secret of getting ahead is getting started
Developing land is like conducting a symphony.
An orchestra has four different sections and 40-60 total instruments. Each instrument plays a crucial role in ensuring the harmonious sound of the symphony while a conductor oversees it all.
Developers manage the city, investors, banks, engineers, surveyors, contractors, attorneys, and other consultants to keep projects on track.
Do you have what it takes?