Today I’m talking with Mike Marshall about land entitlements.
Believe it or not, I didn’t know hardly anything about the concept of getting land entitlements until about a year ago because, for most of my land investing career, I had never done any improvements or development with any of the vacant lots I’d flipped. I just bought them for really cheap, did nothing to them, and then resold them for a higher price.
That’s all good and fine (and there are a lot of advantages of taking that approach), but what if you DO want to develop your land? Or, even if you don’t develop it yourself, but you want to obtain all the necessary approvals from the local government so that the next guy can start developing it – how does this process work?
This is called the entitlement process. Land entitlement is the process where a real estate developer or landowner obtains approval from the local governing body for their development plans.
When a property receives its entitlements, it brings certainty to the equation, so you know a property can be used for a specific purpose and developed a certain way (so you don’t have to buy a property without knowing if you’ll be able to use it for your intended purpose). This certainty actually adds value to the property.
I’m talking with Mike Marshall because he’s an expert in this stuff. With nearly 20 years of experience in the land entitlement space, he knows all about how to entitlements to add value to a property without ever having to touch it. Whether it’s subdivisions, change of use permits, zoning changes, or full-scale development, Mike knows how to help investors navigate the regulatory waters on their pathway towards entitlement approval.
Links and Resources
- Tolosa Property Group (Mike’s Website)
- Land Entitlement Explained
- What Is An Phase I Environmental Site Assessment?
- 105: How Josiah Pulled Off a $68K Land Deal (Expectations vs. Reality)
- Land Investing Masterclass
Episode 112 Transcription
Seth: Hey everybody, how’s it going? This is Seth Williams from retipster.com. Today, I am talking with my friend, Mike Marshall about land entitlements. And believe it or not, I know hardly anything about the concept of getting entitlements until about a year ago because for most of my land investing career, I'd never really done anything with any of the vacant lots I flipped. I just bought them for really cheap, did nothing to them, and then turned around and resold them at a higher price.
And that's all good and fine. And there are certainly some advantages to taking that approach. But what if you do want to develop your land? Or even if you don't want to develop it yourself, but you want to obtain all the necessary approvals from the local government so that the next guy can start developing it? This is called the entitlement process.
Land entitlement is a legal process where a real estate developer or landowner can obtain approval from the local governing body for their development plans. And when a property receives its entitlements, even if you don't end up developing that property, it brings certainty to the equation.
You know a property can be used for a specific purpose and developed in a certain way so the next person doesn't have to buy the property wondering if they'll be able to use it for their intended purpose. If you can get it there for them, it can really make an impact on the value of it. And even just the marketability of it.
I'm talking with Mike Marshall because he's an expert in this stuff with about 20 years of experience in this whole land entitlement space. He knows all about how to get entitlements that add value to a property without ever having to touch it. Whether it's subdivisions or changing the use permits or zoning changes or a full-scale development, any of that kind of thing, Mike knows how to help investors navigate the regulatory waters on their pathway toward entitlement approval.
Mike, welcome. How are you doing?
Mike Marshall: I’m doing great. Thank you. Thanks for having me.
Seth: Yeah, absolutely. I will just start from the very beginning. What are some examples of when land entitlements would be required? Is this just for building a new building or when does this kind of thing come into play?
Mike Marshall: Sure. In general, people think of entitlements are really associated with the physical development of some kind in the property. I would say though at the beginning that every jurisdiction is different and so not every jurisdiction will require entitlements for the exact same process for the exact same request. So, it does vary across the landscape, but there are some general commonalities.
The most basic end, if you want to just have an existing lot and you want to build a single-family house on it, that will usually require some sort of entitlement. It's usually referred to as a site plan review or something along those lines. At the most basic level, a single-family house will require that.
Moving up from there, if you wanted to do a lot split, like a simple subdivision, that would require an entitlement. And it kind of keeps going up there in terms of intensity of development, all the way up to commercial buildings and regional malls and all of those things. So, everything that is essentially development-oriented is going to require an entitlement of some kind. And so, when I say development, that's usually going to be some sort of vertical development coming up out of the ground that's going to trigger an entitlement of some kind.
Seth: And by the way, Mike wrote literally the best article on the internet about all this stuff. So, I'm going to link to it beneath this video, if you happen to be watching this on YouTube. In that article, we listed out several different examples. I think one of them was putting in a road. That kind of thing. Is that just for private roads? Because when I think of a road, I don't think of a vertical development necessarily, but that still could require entitlements.
Mike Marshall: Yeah, absolutely. The road would be associated with the actual entitlement approval as a whole. So, if you're doing a subdivision that requires a road off of the main access road, that would be part of the subdivision, that would be part of the entitlement. So yeah, that would be wrapped in together.
Seth: Okay. Gotcha. What does this entitlement process typically look like? What steps are involved? How long does it take? How bureaucratic is it? And I'm sure this is an extremely broad question. I'm sure it varies a lot depending on where you're doing this and what's required and what you're trying to develop. But any 50,000-foot view of what the process looks like?
Mike Marshall: Sure. Yeah, absolutely. And you're absolutely right. It does vary across the board and it does vary based on the type of project that you're working on. But let's just say a single-family house, for example, on an existing lot. That may take somewhere in the realm of four months to get through the entitlement process.
And in terms of what the process looks like itself, generally, what you're looking at doing first is, you want to do like a pre-application meeting and sometimes they'll do that before you even own or control the property. But you're going to go into the local jurisdiction. You're going to meet with their staff. You're going to have this pre-application meeting. You're going to give them a general idea as far as what you're proposing. You're going to try to figure out, are there any red flags that are going to kill my deal right from the outset. And you want to know that obviously preferably before you actually close on the property. That's really the first key step.
And sometimes you go to that step and it kills the deal and that's good to know because then you get to move on to the next one. But if you kind of go through that part of the process and you're still getting green lights from the jurisdiction, then the next thing is the actual application submittal itself. And when you do the application submittal itself, it's really important to understand that you have to do a complete application package going right in on day one.
And the reason for that is there's a lot of states that have laws on the books that basically say, you can submit this incomplete application and the jurisdiction has up to 30 days to let you know that the actual application is incomplete. And during that time, they're not obligated to process your application. So theoretically you could lose a month just sitting there waiting for them to determine whether or not your application is complete.
They want to be really, really clear about that. And they do have some middle checklists that will kind of lay it out. This is exactly the roadmap that you need to follow to be able to get a complete application. These are the materials that you need to submit and everything. So, they do make it clear, but it is important to get that going. So, once you submit that, then the next step is that they're going to actually go and route this out. They're going to send your project out all to the other effective divisions or departments within the city. So, maybe it's like the fire department or engineering division or building and safety.
All of this is really funneling through the planning division. So, all your submittals will go to the planning and zoning division. They're going to route it out during this step to all those other divisions. And there's going to be a time period in which they have to review that project.
And what they're going to do is they're going to come back to you maybe in about like four weeks, something around that range. They're going to have a set of comments and it's going to be, “Here's the list of things that you need to address that are issues with your proposed project.” And when you get those comments back, now you're into the next phase where now the ball is in your court as the applicant, and now you have to address all of those comments.
So, it kind of becomes a punch list, so to speak, and you're going to be able to address all of those comments in a recent middle package. That resubmittal package now is going to go back to the planning division again. And hopefully, at that point, you've addressed all their issues.
Now at this point is kind of where you can either progress in the process, or you could kind of end up in this endless loop. Because if you don't address their comments, then they're going to come back to you and they're going to say, “Okay, you need to address these other outstanding comments.” And you're going to keep going round and round until you actually address their issues.
Assuming you have addressed their issues, then the next step is that they're going to draft a set of conditions of approval. And those conditions of approval are going to be just that. It's going to say, “Hey, your project is approved, but there are certain conditions that need to be met.”
So going back to your previous example about the roadway, they're going to say, “Yeah, your subdivision (for example) is approved. However, one of the conditions is that you build out this roadway and here are the dimensions and here are all the development standards that are associated with building out that roadway.” That's one of your conditions of approval. So, they'll have those listed there.
And then once you review those conditions of approval and you accept those conditions of approval, you usually have to have a notarized document saying that you accept those conditions. Once you submit that approval to the planning division, at that point, now you have an approved project.
So, that's kind of like a standard process for something that doesn't require a higher-level review authority by the planning commission or the city council.
Mike Marshall: Yeah. It's funny we're talking about it now because I'm literally right in the middle of a project that is going through the exact steps you're talking about. Where on the 21st of this month, a couple of weeks from now (editor's note: from the recording of this interview), we're doing the official site plan review with the township. And it's just crazy how slow it is. It kind of blows my mind, at least with the township I'm working with. They need tons and tons of time to review this stuff. We basically put together a site plan for how we're going to develop this parcel. And we have to submit it to the township and their civil engineer who then reviews it and makes sure that everything makes sense with the township's rules. And then they come back to my civil engineer and they kind of hash it out.
And if we don't get it done by the 21st of this month, guess what? We got to wait another month until they meet again. What I'm learning through this process is the importance of taking the initiative. Be the one to get on the phone and make the call. Don't assume that they've received anything. Don't assume that they're going to get back to you. Just treat them like they're a child and really just hold their hand and make sure it all makes sense, get their confirmation in writing so there's no confusion about where things are at and what still needs to happen.
And if you kind of go in with that mentality, I think it helps as opposed to just sending an email and assuming that they got it and everything makes sense on their end, because something's probably going to go wrong if you do that.
Mike Marshall: A hundred percent. You hit so many great points there and it's true. I always tell people, it's like a game of tennis. You got to keep the ball in their court. So, if you get stuff that's on you, you got to take care of it quickly, get it back to them. But like you said, you can’t make any assumptions. You have to go in and really, like you said, hold their hand.
Not to speak too negatively, but there's really no motivation or anything for them to really push your project forward. The only time that there's a motivation for them is really when you have to play the politics side of it and go to a planning commissioner or a council member or somebody like that and have them push on their staff to get your project moving forward. Without that a lot of times you're going to run into exactly what you're experiencing.
Seth: And I know like in my particular deal that I'm working on, when I bought it, it was a residential parcel of land and I got it rezoned to commercial. That was the first step. And now the next step is what I'm doing right now. The site plan review, like getting the entitlements.
Zoning versus entitlements, they're not the same thing, but I feel like a lot of people understandably could confuse the two and think they're synonymous somehow. So, what is the difference between zoning and entitlements?
Mike Marshall: If this whole thing were a game, so to speak, zoning would be the rules to the game. And then the entitlements would be you winning the game. That's like the reward at the end of it. Zoning is kind of like the regulations and it tells you here's how property is to be developed within this jurisdiction. And then the entitlement itself is the actual approval. It's the vested right that's granted to the property owner to develop their property in the fashion for which it was approved. Those are the two distinctions.
Seth: It's kind of like zoning is like a big, wide bucket. Like you can do something commercial here, something along the lines. And then entitlement is like, you can do this very specific thing. We've seen exactly what you plan to do and that is okay.
Mike Marshall: Absolutely, that is correct.
Seth: What if I get a site plan reviewed and approved, but then something changes to that site plan? It's like, oh, I actually want to move the building over here now. Or I want to use gravel instead of asphalt or something like that. At what point do you have to then go back and get another approval on that change?
Mike Marshall: It depends on the degree or the severity of the change. And so, most oftentimes within the zoning code itself, they'll have parameters that are set to address that issue. Sometimes it might be a percentage thing. So, it says, if you change up to 10% of the project and that's very vague, but it'll say 10% of the project, it can be done administratively. So, there's no other review process. It's almost like a memo-to-file type of situation.
However, if you go above 10% and less than 50% of a change, then it's something else. And then more than 50%, you have to go back through the whole process again. So, it's a matter of the degree of severity. And then you're also looking to get the interpretation of the actual staff at the county or city.
Seth: What would happen to a person, say in my situation, if I got it changed from residential to commercial, and then I just started building something without getting any entitlements? Would there be fines involved? I don’t know, what recourse does the township or city have against somebody who does that kind of thing?
Mike Marshall: Usually that would be considered unpermitted construction because you can't even get a building permit without the entitlements. The way that the whole development process works is that you have to get your planning approval first, that's your entitlement. Then you'll usually have to get your approvals from the engineering division for your grading or your dry and wet utilities. And then the last thing is you're going to building and safety for your building permit. And that's what most people are usually familiar with.
You're not going to get a building permit issued without getting engineering or planning approval. But when you try to start building without those, then yeah, it becomes like a code enforcement case. It's an unpermitted construction. Theoretically, what they'll do is they can do a stop work, so they can put a stop work on the property. And if somebody were to continue building technically in most jurisdictions, it's a misdemeanor and they can have the sheriff or somebody out there and try to enforce that.
And then ultimately it could be fines that are levied against the property. And then ultimately from there, it could be even a lien placed against the property or they could technically take legal action against the property owner. It usually doesn't end up being to that degree. It's usually resolved far, far before that, but technically they have that authority.
Seth: Some people have this idea that if I buy land, it's my land, I can do whatever I want with it. Nobody can tell me what to do. It seems like that's almost never true. Somebody needs to give you the thumbs up before you're actually allowed to do anything significant.
My wife and I were watching the show “Life Below Zero” where it shows these people in Alaska. One of the things that I was talking about, why they live up there is because nobody tells them what to do. And they live truly in the middle of nowhere, like way far away from any civilization. It makes you wonder if they even have zoning up there? Can they literally do anything? And nobody's going to come. They are so far away. It doesn't even bother anybody.
Mike Marshall: Yeah. The most notorious in terms of urbanized area is the city of Houston, actually for zoning regulations.
Seth: Yeah, I’ve heard that.
Mike Marshall: But the thing that's important is that everybody understands that just because there's no zoning, it doesn't mean that there are no restrictions because it can come from various places. Even if there's no zoning on a property, for example, even Mobile County, Alabama, as I was looking out there, and the unincorporated area there, they have no zoning out there. But that just means that there's not a zoning control. So, you can actually have restrictions that come from CC&Rs. You can have restrictions in terms of... there are notes on the subdivision map itself that can restrict certain things.
And then it also depends on what you're proposing to do. Just because there's no zoning doesn't mean you can have a helipad right in the middle of this property. So, it depends sometimes on your use too, that might trigger regulations and stuff.
Just because there's no zoning, it doesn't mean there are no constraints or controls and you cannot do absolutely anything. But again, the more rural you are, obviously, the more opportunity there is for that.
Seth: Yeah. Do you know what a typical cost is to get entitlements? If you just buy a property and you want to get entitlements to build, I don't know, a house or whatever, fill in the blank? What kind of costs should a person be thinking about before they even start going down this road?
Mike Marshall: In terms of the types of costs, there are going to be entitlement fees that are paid to the city or the counties. That's one type of cost. And again, they do vary across jurisdictions. What they're supposed to do is they're supposed to charge a fee that is commensurate with their cost recovery. So, it's not supposed to be a profit center. It's supposed to be associated with the time that staff spends on that typical project. And in that sense, it does vary because obviously, salaries in California are going to be different than salaries in Mississippi, for example. And so, as a result, those fees do vary.
That's one type of fee. Then it's going to be your professional services fee. And that's going to be maybe like your civil engineer, depending on the project and architect, as you get into more complex projects, you may end up having consultants that are like environmental consultants, biological, noise consultants, things like that.
But at its most basic level, say this is for a single-family house, you're only going to be looking at a civil engineer and you're probably going to be looking at an architect as well. And in some cases, if you're not going to do the work yourself or do the project management yourself, you may need to have a project manager that's involved too.
For a single-family house, it's to give you a ballpark, like a single-family house in the jurisdiction I live in for the entitlements, it's probably going to cost you in the realm of like $2,000 for the fee. And then you're probably going to be into it for another $5,000 to $10,000 for the civil and for the architect as well. So that's kind of like a general ballpark. And again, that's just for a basic single-family house.
Seth: Yeah. Just to give people an example for myself with the project I'm working on, I've probably committed to $35,000 just in various due diligence in site plan and fees to the county, that kind of stuff. But not all of that was required necessarily. Some of it was just stuff that I chose to do.
For example, the phase one environmental, that's wise to do, but I don't think the township would say “You have to get a phase one.” It's just, I chose to do that. But for my civil engineer, for the work that they've done just on the site plan and engineering, I've paid them $12,000 for that. And then the township I think it's a couple thousand dollars there. For the zoning change, that was $600. I feel like there are a couple of other things too. I got a geotechnical investigation and a topographical survey. I guess, needless to say in my situation, probably like $15,000 to $20,000 is what I have into it so far.
I wouldn't have been comfortable paying for any of that if I wasn't already really sure that this was going to work. It was a deal that made no sense. Kind of like what Mike was saying earlier, where the first step is to have this conversation with the municipality to find out, “Am I barking up the wrong tree? Is there any hope of me doing this?” If it just doesn't make sense, they're going to tell you pretty quickly that it doesn't make sense and why. Or if they say, “Well, maybe there's a 60% or 70% chance this will work, but I don't know.” You could then ask, “Okay, well, why not 100%? What makes you unsure about that?” And really just figure out what the level of uncertainty is.
Mike Marshall: To give you an idea as far as the difference in prices, you're saying $600 for a zone change where I'm at, you actually have to pay closer to $42,000 for a zone change.
Seth: Are you kidding me? Why? Why was that so much? That's in California, right?
Mike Marshall: Right. That's in California. Everything that's associated with that. But one of the reasons is that the way that the zoning code works in a lot of states or a lot of jurisdictions is that it's also tied to their general plan. So, when you change the zoning, you actually have to change the general plan at the same time. Their perspective is you're changing two documents at once. It requires a different level of review and everything. And so, that's how they do that, but still, $42,000 is pretty excessive.
Seth: And I know in my situation, the $600, again, that's just for the zoning change, nothing else. But also, it's a township that I don't want to say it's out in the boonies necessarily, but it is absolutely not like Southern California or any place in California really. It's in West Michigan. It's not part of any big city or anything like that. So, the whole township office is basically like a giant barn. It's not a super complicated thing. So, its costs probably do have a lot to do with the different levels of bureaucracy you have to go through to get the changes done.
Mike Marshall: Absolutely.
Seth: That's a good segue to another question I had was, when you're talking about $42,000, that's a heck of a roll of the dice to buy a property thinking you can do this and not actually knowing if you can use it for your intended use. So, that was a really helpful initial thing we talked about, about having a conversation with the planning division, first of all, just to find out what the chances are, but that's still not a guarantee.
How does a person get comfortable doing this? Should they just have a plan B exit plan? If it doesn't work out, I can do this other thing and just resell it? Or do they get an option on the property and use that time to try to change it and then just walk away from the purchase if it doesn't work out? How do people navigate that?
Mike Marshall: I think one of the biggest misconceptions is that people think that projects get denied all the time because they see that in the news or they see that in the paper or whatever and they think that projects are getting denied left and right.
The reality is that most projects will actually either die very early on in the process like the pre-application meeting or something like that, or what happens is all the issues get worked out and kind of massaged as it goes through the process to the point where everybody that's making the decision has some comfort level with it. And so, that being said, if you're getting green lights going in, that doesn't mean that there are not going to be issues as you go throughout, but there is a likelihood that you're going to get some resolution because you're going to work those things out.
There are certain things that they have that are called findings. Certain findings need to be made to be able to approve certain entitlements. They change and they are different by different jurisdictions.
But for example, one of the biggest ones is like, “Hey, is what they're proposing consistent with the general plan for the city, or sometimes called the comprehensive plan? Is it something that is consistent with the city's vision for what they want to see?” And if you can make that finding, then you're in a good place. And so, if you can make the series of findings that are required, that's a really good way to get you some certainty too.
The other thing I'd say is that ultimately there is no absolute 100% that it's going to get approved. What you'll often see is that you'll probably see the project gets delayed in terms of its processing timeframe, as you're trying to work out those issues.
The goal of the whole thing on the front end is to be able to identify the real project killers, the big red flag stuff that's going to really kill the project. If you can identify and get over those, and toward the end of the process, you're talking about the amount of landscaping required, or you're talking about the architecture, for example, those are all things that can be worked out. They're all very important, but they certainly can be worked out.
It's about doing your due diligence. It's about being very clear about what you're wanting to do, communicating well with the city staff, getting stuff, the things that they're asking for as quickly as you can get it because that's going to help push your project along too.
Seth: Yeah. Do you see people getting options on properties to buy them time to do this? Is that a common strategy or do people just buy them with the hope that it will work out?
Mike Marshall: Yeah. I see more often the case. I do see the option strategy sometimes, but more often than not, the one thing that is a little bit unique when you're dealing with development is that it's very common to put in an entitlement contingency. And so, whether you think it's going to take you six months, a year, 18 months, whatever it is to get your project entitled, you'll usually include some sort of entitlement contingency that says that you can get out of the contract in the event that the actual entitlements are not approved.
Some owners don't like that because they feel that their property is tied up during that time. But in a lot of instances, you're talking about property that's been sitting for a long time. And so, they're willing to kind of roll the dice with you and put that contingency in. Sometimes what you'll see too, is that kind of a hybrid approach where they'll have benchmarks that are associated with that as well, where they'll say “Yeah, we'll do this contingency, but within a hundred days we're going to ask that a portion of your earnest money goes hard. And then other days another portion of it.” So, it kind of phases over time.
Seth: Do some sellers want a higher price in return for waiting like a year to get this kind of thing done?
Mike Marshall: Yeah. That's part of the negotiation too. I was just dealing with one recently, that was exactly what it was, it’s just a conversation. A conversation over $50,000 on a property that's over $1.4 million. And it's a situation where we're just negotiating that number. They want more money. We want more time on the due diligence side without the money going hard. And so, you're getting down to that final nuance of getting that contract done but yeah, you'll see that oftentimes too. Because from their perspective, they're taking a risk and so, they feel that they should be compensated for it. And it's hard to disagree with that.
Seth: On the other side though, if you can't get the entitlements, it’s literally not worth as much as they want. So, it's like, I don’t know.
Mike Marshall: Yeah. Yeah. And the other thing too, that I've told people in the past is that if you feel as though there's enough value in it, if you feel that there's the possibility of getting this project entitled, and you want to charge that premium, then you should go get it entitled yourself. You go take that on yourself. It’s like an apartment owner that wants to charge you a price based on pro forma numbers.
Seth: Yeah. Exactly.
Mike Marshall: I'm not going to pay that price. If you want that price, then go add value and do all the changes that you need to do then we'll talk. I'm not buying a stabilized asset. I'm buying some opportunities to add value. So, that's my take on it a lot of times.
Seth: Yeah. I know in my case I normally would never do this kind of thing, but I had bought my property as a residential one, just going out on a limb, assuming it would work out. But the reason I was okay with that is that I had a solid plan B. If it didn't work out, I could sell it for probably more, even as a residential property. So, it's like either way I can kind of come out ahead because the price was right. But once that price is just getting up there, that complicates things a little bit in terms of what the buyer can accept.
Mike Marshall: Sure. The one thing I'd say too is that I'm always talking about adding value and most land investors are out there like you're mentioning early on, are buying at that really good discount. And I'm not advocating my approach versus that, I'm saying do both. Go out there and buy at the greatest value that you can buy. And then just know that you have the opportunity to create better margins by doing this or something else.
Seth: A lot of the land flippers who just buy lots do nothing to them and then resell them for more. What should they be looking at in terms of spotting opportunities for, “Hey, maybe I could get entitlements here?” If there's an obvious, highest, and best use for it, but it's not entitled yet, they could do that. What should they look for in terms of, is it worth all the hassle to do entitlements for this?
Mike Marshall: Yeah, if you're looking at it from a rezoning perspective, if you're looking at a residential property that's adjacent to a bunch of commercially zoned property, then that's a really good tell that, “Hey, this is an opportunity to rezone this one in the commercial.” But you're never going to see those. You're never going to see a jurisdiction approve what they call spot zoning.
So, if you're in a whole line of properties that are all zoned residential, and you want yours to be this commercial island, they're not going to approve it. It has to be consistent with the surrounding land uses. In terms of rezoning, that's one thing I'd look for.
Subdivision is a big thing. It’s just looking for large acreage, right? The larger acres they have, the better. Especially, if you're looking at large acreage in close to urbanized settings because in general you're going to have smaller lot size requirements as you go into the urban core and that happens and you come across larger acreage closer to the urban core, there's a greater propensity for it to be a subdivision opportunity.
Seth: Yeah. It almost kind of reminds me of somebody who says “I'm going to put ceramic tile in this kitchen in my house before I sell it because that's going to make it better.” But maybe the buyers don't want ceramic tile. Maybe they want something else or maybe they don't want granite countertops or green paint, even though you think it's great.
So, it almost seems a little presumptuous to go through the steps of getting it entitled when you don't actually know if that's the end use, unless it's super obvious. Like there is one use that makes sense for this and it's not currently there, so let's get it there.
Mike Marshall: The one thing that I advocate is to really kind of work the process in reverse and try to identify a buyer before you even go into this.
Mike Marshall: If you go and you're just using the home building idea you're going to have a variety of local home builders and I'm not talking about the big D.R. Horton's and these big guys, I'm talking about more regional builders.
And so, if you were looking at a property and you are kind of doing your due diligence, and you think that there's an opportunity to do a value play in that, I would just contact the local builders and say, “Hey, look, I have a potential opportunity. This is what I'm looking at. What would you actually buy this property for?”
And the way that they work at it is they kind of do what's called a residual land value type of analysis. And they're looking at it going “Well, we know that the property is built out as a single-family house, it's going to sell for $500,000. We know that our cost of construction is maybe like 60%, 62%. We know that we're looking at a fixed profit margin for our business of 10% to 12%.”
They'd go down and they work that out and they can figure out what their max is that they can actually pay for that property. So, they'll know that going in. And if they can kind of give you that idea, then that tells you a couple of things. One is their demand. And then two, what the price point is because that'll help you in terms of what you try to get it at.
Seth: When I was talking with Josiah in episode 105 of the podcast, he said something very similar to that. It wasn't for the purpose of getting entitlements, but he did find a builder and just get a really specific idea of like, “What would you pay for this?” And kind of use that to back into his offer price. So, it’s a good strategy, especially if there is an obvious, big builder nearby that would be able to use that kind of property.
If I have a property and I think it makes sense to get the entitlements, but I don't want to do any of the work. I just want to find somebody and pay them to jump in and do it for me. Is there such a thing? Are there companies that do this? I know, for example, my civil engineer, they do a lot of stuff. It's not just civil engineering. They'll go to the township for you, change the zoning for you, and they'll do surveys for you, environmental stuff and geotechnical and all this stuff. Do you find a big engineering firm like that that offers an array of services like this? Or is there another kind of specialist that can do this kind of work for you?
Mike Marshall: Yeah. And that happens a lot where it's like the civil engineer or the architect will take on that role, but I'll refer to them as the project manager where they're going in and working face to face, or are the face of the project with the city. And so, that certainly happens when you're in like the single-family type of project or you're getting to smaller subdivisions.
But as you get kind of more advanced when you're getting into rezoning and things like that, then you start looking at really needing a project manager that's maybe like a land-use consultant who specializes in those kinds of things, because it's a different game at that point. It's not just the technical side of it. It's also understanding of land use in general, understanding the zoning code. And then also being able to work the relationships necessary to kind of help get your project through. So that land-use consultant really becomes your project manager and they become really important at that phase.
Seth: Who are all the different players that should be on your team in terms of helping this happen? Do you need an attorney or a surveyor or a civil engineer? Who are all the different people that are typically involved in this kind of thing?
Mike Marshall: Yeah. I would certainly hold off on the attorney for as long as you can because of just the costs associated, but then also if they're not needed, sometimes they kind of muddy the waters, a little bit truthfully. But what I would say is that as you get into the really complex one, it's certainly wise to have one on retainer. And there are attorneys that do this project management role as well. So, if that's something that's appropriate for your project, you can certainly do that.
But with almost any project, you're going to need a civil engineer, or if you're doing some subdivisions in some jurisdictions, they don't require a civil engineer. You can get away with just a land surveyor. Some types of subdivisions in Texas, for example, and there are other places as well, they just require a land surveyor, not a civil engineer. And then you oftentimes will need an architect. So, I'd say the big two are really the civil engineer and the architect. As a project gets more complex than you might have specialty consultants that come in based on the circumstances.
Seth: I’m curious how risky it is. Have you seen a lot of cases of people who went out on a limb, bought the property, did all the work, spent all the money and it still failed and they just had to hang their head and walk away? How often does that kind of thing happen?
Mike Marshall: I don't see it happen where they are turned away, like for like the actual entitlement application. And they find out in the middle somewhere that it's just not going to work and they turn around and walk away from it.
What I see very often is I see people will buy property, not knowing what it can be used for and they make assumptions based on surrounding land uses. And then they find out that the zoning code doesn't allow for their use. And there's really no way to rezone out of it. There's no way to get any kind of change. The jurisdiction is not supportive of it. And so, they end up in a scenario where they have illegal or unpermitted land use. And now you're back in that code enforcement conversation again. And it can get ugly in those situations.
Seth: Yeah. I guess what I don't love about the process is that I'm somebody who likes to bet on unsure things. Like there is no way I'm going to lose on this because it's worth way more than I'm paying for it on closing day. It can only go up. That's kind of my mentality usually, but I think you just have to let go of that a little bit because you have to spend money to get the people involved.
And you can certainly have these conversations that will be very revealing ahead of time that don't cost anything. Just asking the township or the city, “Am I crazy for doing this? Or could this work out?” And they'll tell you. But it's still not 100% certain. There's still money that has to be spent. And it's possible that there will be waste there. But I think that's just the name of the game when you start getting out of that hardcore land flipping space.
Mike Marshall: Yeah, I agree with everything you said. It's certainly not 100% certain. There are ways to mitigate or manage the risk or at least to decrease it to a level where somebody is comfortable with it. But I would just say that if you cannot find a way to do that, to where you're comfortable, then it's certainly not something to engage in.
My big point is that it's not for everybody. There is not any part of real estate that is for everybody. Everybody has their own unique attributes and skills and something that people are great at flipping property and are rehabbers and everything. And that's awesome. And some people have a different mindset that's maybe more oriented to legal stuff. And so, that would be somebody that would be really into this kind of stuff. But you're right. You can't eliminate the risk. And if it's something that you're not comfortable with, surely you shouldn't engage in it.
Seth: I know there's this whole concept of when you get land entitlements, it does add certainty to what a person can do at that property. Is there a way to quantifiably predict how much value that certainty will add to a property or is it kind of wishy-washy? It just depends on who the buyer is.
Mike Marshall: It is. If you're going to go from the perspective of not identifying at least a type of buyer, then you're going to have a little bit of a problem. So, that's why it's important to kind of work a little bit backwards in it. I was giving the single-family house for example before, but even if you go to an assisted living facility, you really want to have an idea for what those are actually selling for once built.
You want to have an idea for what that's going to be so that way you're going to back into it. So, it's a lot of reverse engineering so that you can have an idea as far as what it's going to be. And then at that point, it's again, what kind of deal you can get on the acquisition side too.
Seth: Do you have any concrete examples of when a property's value increased from X to Y because the entitlements were there, or is it never quite that cut and dry?
Mike Marshall: I see it after the fact. My favorite example is something that's a change of use permit where somebody went in and they had to get a conditional use permit on an existing commercial building. And basically, that building was vacant and used to be a furniture store at one time. The furniture store went out of business. Now that space is vacant for a year or two, and they wanted to put it in like a flooring business, which seems like it's very similar.
But again, these are the weird nuances in the codes in each jurisdiction. They went and had to get a conditional use permit to be able to allow for that flooring use to go in. So, the investment group went in and they bought this property for, I think it was about $650,000. They put about $25,000 into it in terms of the entitlements, because there was no architect needed, it was an existing building. There wasn't any civil engineering that was needed because it was an existing building. I was just basically the cost of the land use consultant and stuff like that.
So, they put in $25,000. They go around and sell it to a lumber liquidator’s type of business and they sell it for $1.2 million. They're into it for $675,000 and sell it for $1.2 million. That's a pretty home run kind of example.
Seth: That's a great example.
Mike Marshall: It gives you an idea of what is actually possible.
Seth: Yeah, that's awesome. Other than the obvious benefits for the landowner or the future buyer who's going to buy this thing, are there any other ancillary benefits for the community or the neighbors or the township or a city or anything like that?
Mike Marshall: Sure. For the city, there's definitely benefits in terms of added revenue for taxes. If the property increases in value, there's going to be an increased tax revenue that comes from that. If you get commercial uses in there, there's going to be increased sales tax revenue that'll come from there as well. Then obviously if you're going to be improving one building, your neighbors hopefully are going to feel as though they're supportive of it because it has the opportunity to improve the value of their properties as well.
That's a two-sided coin too, because if it's a use that is obnoxious for some reason or impactful then it could have the alternate result in terms of being like a negative impact. But that's what the whole planning process is about. Identifying and mitigating potentially negative impacts. Theoretically, by developing a property, you're improving the value of the other properties as well that are surrounding.
I think the last thing I'd say is just more from an intrinsic point of view. It’s that by doing this you feel as though you are kind of having a hand in creating positive change within your community. You now have the ability to do something that's positive.
The most clear-cut example, when I'm here in California, we're going through a massive housing shortage and the state is struggling to find ways to create legislation, to streamline this development process. And so, the things that I'm talking about have the opportunity to put more housing on the ground. And obviously, there's just like an intrinsic reward that's associated with that, to the benefit of housing people as well. And so that's something that I try to push too.
Seth: I'm not even close to the finish line on my project, but it is fun to just think about, “I'm not just flipping something. I'm actually changing it.” It's similar to a house flipper who buys a dump and when they're done with it, it's beautiful. Being able to actually see that change is fine. And that's why they make TV shows about this stuff because it's cool to see the transformation and cool to see something go from something that's not that cool to really amazing at the end. So, it's fun to just be part of that.
Mike Marshall: Yeah, absolutely. It just kind of allows you to be creative and find nuances that are within the rules themselves and find ways to do things that are creative and have a positive impact. And so, that's definitely a benefit too.
Seth: I know I mentioned earlier on, you've been doing this for about 20 years. What exactly has your role been? How do you know all this stuff?
Mike Marshall: Yeah. I started out actually working inside the planning division of a local city, and I did that both here in California and in Texas. That's how I kind of got the experience of what this whole zoning and entitlement world is like. And then just gradually I'd have people that I worked with internally, they'd say, “Hey, I'm working on a project in another city. Is it something that you can help out with?”
And so, I just started helping out on the side and it just started kind of growing from there. I started doing that kind of half and half for a long time to the point where I could do it full-time. And that was the whole goal obviously.
During that whole process, I started flipping land myself. And then to the day where I'm at right now, as I do a lot of consulting work, helping land investors, finding these opportunities, and actually bringing them through to fruition. And so, that’s my evolution.
Seth: Do you have a website or a service where you help people do this kind of thing?
Mike Marshall: Yeah, yeah. I do, on our website. Our company is called Tolosa Property Group. So, it's tolosapropertygroup.com. And on that website, we have a few different things. We have some courses that we've done. We have a lot of free information that's on there, on our blog as well. But we also have consulting services that we make available for this kind of thing. So, it could just be one-off consulting where somebody just has a question, they want to talk over a certain property, or if they even want to talk about project management roles and stuff like that, there's those kinds of things as well.
Seth: We have a version of his course about rezoning properties in the Land Investing Masterclass. It was actually very helpful to me when I was going through the rezoning process. I followed a lot of what he said there, and that experience matched up very much to what he said it would be like. And at least for me, it is something very intimidating when you've just never done this before. You don't know what you're doing, and you have to fill out all these weird confusing forms and have all these conversations that you're just kind of fumbling around. You don't know what you're doing. And then you have to sit in front of this zoning and planning committee and they just grill it.
And without having some kind of guidance on that, or just having somebody set my expectations, it would have seemed a lot more insurmountable, but going into it and just knowing what to expect. It goes a long way. Your website is tolosapropertygroup.com.
Mike Marshall: That's right.
Seth: Yeah. I'll include a link to that beneath this video or in the show notes, depending on where you're watching or listening to this. Mike, is there anything else we should know about just the general subject of land entitlements, or does that cover pretty much everything?
Mike Marshall: That really covers everything. The thing that I just really tell people is that entitlements provide certainty and that certainty is what creates value. And that's the whole thing about entitlements.
Seth: Yeah. It's one thing to own land, but when you don't actually know what that's usable for, it creates this kind of information gap about is this going to be valuable to me or not? And getting that nailed down, it goes a long way. Thanks again, Mike. Talk to you later.
Mike Marshall: Thank you. Take care.
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