Seth: Hey folks, how's it going? This is Seth Williams, and you're listening to the REtipster podcast. This is episode 180, and today I'm talking with my friend, Neil Clements, about all things subdividing.

So Neil is a phenomenal example of a land investor who has been killing it in the subdividing niche. I got connected with him a few months back when I was looking for the subdividers in the REtipster community, and I got on a call with him, and in an hour and a half or so, he just blew my mind. He gave me an incredible education about how subdividing works in Texas. I asked him tons of questions and he just nailed everything and really made it make sense for me.

And I wanted to share the love with all of you here. And Neil was willing to do that. And we're going to be going through this process of I'm going to do what I do best, where I just try to pick around and ask as many questions as I can to really try to understand the full scope of what's going on, how this works, who this is and isn't for, and on and on. And I think we're going to have a good time here.

So, Neil, welcome to the show. How's it going?

Neil: Great, Seth. I'm happy to be here. Thanks for having me on again.

Seth: Yeah, absolutely. So for those who don't know you, why don't you tell us your real estate investing background? When did you get into land and what were you doing before that?

Neil: Yep. So I came out of college and immediately went into real estate. It's one of the only things that I've ever done. And so that looked like for me starting off as a real estate agent agent about eight years ago, and then went to be a mortgage broker, went back to be a real estate agent once I moved from one part of Dallas to another, and quickly found myself flipping houses with a partner, doing rent houses, flipping houses, and that was near COVID time, about three years ago.

And so we had a very successful house flipping business, scaled that up very quickly. First year did about 20 flips, second year did 30 flips, and wanted to keep scaling from there. until recently, early last year, early 2023, took a one-month sabbatical, went to the beach with the family, worked part-time, even though I had a team back here in DFW that was still working, and really looked over the whole business. Where were we successful? Where were we not successful? Especially with the market recently changing and some deals looking like really good deals that we had bought that were no longer good deals now, now that the market had shifted late 2022 going into 2023.

And I looked back and saw that most of our profits came from land deals. And it's not that we had done a ton of them. We had done maybe a handful of them. But I looked at the profit that came from the land deals. I looked at the time that it took to do the land deals. I looked at how much did we have to spend to renovate the properties and had this epiphany that, oh my gosh, we're focused on the wrong thing.

And so I came back, shifted our team of cold callers, our operations, everybody that we have on the team and just said, let's have one singular focus. Instead of trying to do a lot of different things in real estate investing, let's go all in on land, specifically on land subdividing.

So I had an excellent year last year and looking forward to a really good one this year.

Seth: So you took the Land Investing Masterclass, right? If I remember correctly.

Neil: I did. Yes, I did.

Seth: Sweet. So did you start off just doing straight-up land flips and you're like, okay, I'm done with this. Let's go on to subdividing. Or did you get into this knowing, okay, subdividing is where it's at. That's what I'm going to start with.

Neil: Yeah. So I probably started off different than most people on a few different aspects. So first off, it was the second thing you said, which is I started off subdividing. And the reason I did it that way is because the first time we bought our first handful of flips actually had four to five acres on them. And so we came across laying deals very early in our house flipping business.

We quickly found out that this, I guess, ingrained concept in the land, just like it is in houses, that the smaller land that you have, the more price per acre that you've got, because you have more demand, more people can buy it. The bigger land that you have, the lower price per acre you have. There's less marketability, there's less demand, therefore you can't sell it as much per acre.

And so it's the same with houses. Lower square footage equals higher price per square foot and vice versa. And so taking that similar concept from house flipping just to land, we started to find that there were opportunities out there where, for instance, maybe you could buy 20 acres for $10,000 an acre and then sell one acre lots for $50,000 to $75,000 an acre.

And to put that in perspective, that's a purchase price of $200,000 and a sales price of $500,000 to $700,000, with not a lot of renovation needed in between.

And now, obviously, that's a home run deal that doesn't happen every single transaction, but that's the power of subdividing. And so we got into subdividing specifically to look for subdivide deals and not necessarily to look for properties that were extremely undervalued. Because, I mean, we're in the fastest growing metro in the nation being DFW and trying to buy properties that most of the people out there say, buy it at 40%, 50%, even 60% for but the size of properties that we're purchasing, you know, people just laugh at us.

And we've spoken to, in our cold calling efforts, about 20,000 to 30,000 people last year. And I can't tell you once that we even got a deal at 70% or 80% of market value, even though we actively offered at those amounts. Anyways, we came into it looking to subdivide and add value to properties.

Seth: So what percentage of market value are you buying them at? Like 90%, 80%, or 100%?

Neil: Yeah, so there's two ways to look at it. I mean, let's tackle subdividing a little bit, then I'll explain how we look at it.

So there's one area of subdividing where you can do big lots, meaning that you essentially take 50 acres and a 10-acre lot. You don't have to have any kind of approvals, no county involvement, an exemption. So that's easy because you don't have any risk. You can literally just survey it. You don't have to wait for anybody to approve it.

So on something like that, yeah, we can typically offer up to 90% of market value, potentially 100% of market value, just depending on if the spread hits where we want it to hit. I'll tell you about that in a second.

The other aspect of it is a platted subdivision where you have to get county approvals. And the reason that that's different is because if we go out there and say pay 100% of market value or 90% of market value for a property, having to have a platted subdivision doesn't mean we get automatic approval. And so therefore, it's not like on the big ones where we can just say it's actually worth, say, 30% more. It's not worth that extra margin until it's actually approved.

And so therefore, we either have to wait until it gets approved to close, or are we going to take that risk? But to backtrack here, your original question was, how do we calculate offers?

So we don't like to pay over market value, don't like to pay over 90%, 100% of market value, but truly our main margin is we want to have a 30% gross profit margin on every deal we do. And what that looks like for us is we've got to buy at 60% of the after-repair value. And so that leaves 10% cost for expenses. So if we pay more attention to what we can make the property worth more than what the property is currently worth.

And I liken that to apartment investors or to people who buy businesses who are not necessarily paying as much attention to what the property is worth in current condition based upon occupancy, based upon revenues, whatever they're evaluating. They're going to look at what's the future potential, what it's going to take to get there, and how much money is it going to take, how much time, how much risk, and calculate it based upon the after repair value.

And so similarly, we've put that approach toward land investing. And so that's more of how we calculate what is it going to be worth after we do this subdivide and how much money is it going to take to get there.

Seth: So in this whole thing of figuring out what your offer price is versus the improved or after subdivision value of that property. So how do you know when it is or isn't worthwhile to subdivide at all?

Like, say, if you were to buy a 40-acre parcel, split it up into four, and the net proceeds of that or the sale of the child parcels ends up being not that much more than what you could have sold the original parcel for.

Is there some kind of ratio you're looking for? Like, what kind of increase do you need to see in the child parcel versus the parent parcel in order to justify your involvement in doing this?

Neil: Absolutely. I mean, there's no set in stone number. My number I'm looking for is a 30% gross profit margin. And so that's just specifically running your net numbers versus what you sell it for, or 60% of what it's worth after you subdivide it. And that's how I calculate the offers.

But to answer your question another way is there has to be a difference in price per acre between a smaller lot versus a bigger lot in a county. And so we actually started recently running our numbers differently.

Previously, when we were targeting counties, you know, we just went into a county because of proximity, you know, because we can drive there essentially, you know, it's within three hours of DFW Metro. And so we said, okay. Here are 20 counties we can target. Let's call all of them.

And very quickly, we learned by doing that is that there are some counties that you have that spread. Again, kind of like we said, maybe 10,000 an acre on bigger pieces. You know, 10 to 20 acres, 50 acres, and on smaller pieces, you're at, say, 20,000 to 50,000 an acre.

There's a clear, massive value spread between lower acreage and bigger acreage, because that's how we create our profit. And so that's one reason to do it.

So the second reason to do a subdivide would be to sell a property easier.

And so although not more profitable, in almost all circumstances, there is more demand for a 25-acre lot than there is a 50 lot in most places in the U.S., you know, 25-acre lot, 50-acre lot versus 100-acre lot, one acre lot versus 10-acre lot, you know, however you want to slice it up, there is more demand at the lower end. And so you either do it for profit or you do it for days on market to be able to sell it faster.

But if we're going to take on a subdivide, it's going to be for profit. And it's going to have to be a very sizable chunk because the properties that we're looking at buying, our average purchase price is about $350,000. Our average after repair value is just about one and a half times to double that. So, you know, anywhere from 550 to about 750 and so we're not necessarily looking for skinny deals.

Yet another question you asked earlier about how do you know when to subdivide things like that. Subdividing it's not right for everybody and the other thing that I will tell you about it is that it's rare to find a good property that can be subdivided. And we can dive into that. What do those properties look like? But it's not easy to find. Let's say that.

Seth: Yeah. I mean, maybe we should get into that. Like, and I know this, this probably differs from state to state and area to area. Cause I know in Texas, the availability of water is a huge deal. That is not a big deal in other parts of the country, but that's just one example.

But when you're looking for the perfect parcel to subdivide, or maybe when you're putting together your list of property owners to contact, whether it's direct mail or cold calling or however you do that. So what does your perfect property look like? And what kind of of stuff would you just be like, absolutely not, this is never going to work; don't even call them.

Neil: Sure. So you're looking for the needle in a haystack, I will tell you that. The difficult part that we have found in running these properties is that you have to hand-sort them. In most of the areas, if I'm using DataTree or some other list provider, they're not going to give you, for instance, road frontage as the main, ideal goal that you want to have.

Because when we talk about subdividing, if you're talking about wanting to put in roads, you want to install utilities, you want to do all that. Well, you better have some deep pockets or you better have some good relationships with people who do. Yet the subdividing that we like to do already has the roads in place, for the most part, already has the utilities in place, water and electric, and has the ability to, with minimal effort, say $10,000 or $20,000 or less, has the ability to be instantly marketable.

And so, that's what we're looking for. Floodplains, in a lot of instances, kill that. Obviously, steep contours kill that. So we're looking for properties that we can instantly market as smaller. That is the best way to say it. Otherwise, you're not necessarily doing a minor subdivision. You start to get into a major subdivision, which takes a lot of time, effort, and money, and a lot more risk, in my opinion.

Seth: So it sounds like this isn't the kind of thing where you just, you know, go to DataTree and say, yeah, give me everything vacant land, 40 acres and up, and go. Like, you have to download it and then open up Land ID or something and go parcel by parcel and look at it and be like, does that make sense? Yes or no. No, because you got to understand road access and utilities and a lot of stuff you just can't really know without looking at it, right?

Neil: That's correct. And that's what makes it so difficult. And that's what kind of isolates the opportunity to the select few who are willing to do it.

And so we still we know an only prospect for subdivides where I mean, we'll still prospect for properties that don't need subdivision. However, you know, out of the, I think we bought 15 properties or so last year, those amount of properties that we bought, there was only one that was not a subdivide opportunity.

To give you an idea, the competition in our marketplace, and maybe this is everywhere, I don't know, I only target North and East Texas, Dallas, Fort Worth, and Tyler. But the competition in our marketplace is just unlike anything I've seen.

Now, I will say it's not as intense as house flipping or wholesaling, yet I did not expect for land investing to be this intense and for every single phone call we do to have to even, for instance, if we give an offer at 100% of market value, to even have to convince somebody that that's market value and to take it.

So, I mean, that's the struggle, you know, you would think if you're not in this industry or if you've never given offers that good, you would think giving somebody 90% to 100% of market value that they would all just jump for joy and be like, oh yeah, where do I sign? And the reality is in hot market areas, like I work in a lot of times, that's still not enough.

Seth: Yeah. Now, what do you think that is? Cause I'm pretty sure it's not that case everywhere where you could make an offer for 60% of market value.

Neil: I don't think it's that case everywhere.

Seth: Yeah, so is this just because it's Texas and it's growing like crazy? And I do think there are a lot of land investors there because of the relative ease of subdividing and that kind of thing. But I don't know, is it just because it's one of those hot markets out there?

Neil: Yeah, I mean, if you look at, a lot of people still have, I guess, COVID mentality, and not the disease. Yet COVID mentality and the fact of they think their property is going to get 10 offers in three days and sell for 10% above market value with no effort.

And the reality is, is that since late 2022, that's not what's going on. And so a lot of times we're in an uphill battle on what people perceive their property to be worth. And even after we're able to talk to them about what that looks like, they just don't agree or they have a reason they want to hold onto the property.

The other thing that we don't encounter much, we're encountering almost no distress, which is extremely foreign to me because, you know, in house flipping, that's, that's the name of the game is, you know, somebody has a rundown property condition. Somebody's in a hardship, such as foreclosure. Somebody needs to sell a house quickly for some reason or another, you know. In land, especially in our area, property values have shot up so high, so quickly. I mean, most properties in our area have doubled over the past three years from what they were previously worth.

So I think that there is just a lag between market perception and what people expect to get for their properties.

Seth: Do you ever even start the conversation with like 50% of market value or does it just start at 80% and go up from there?

Neil: Oh, no, it doesn't even start at 50. I mean, it's hard to say, but we even have people laugh us off the phone at 90% of market value.

And I'm not saying that lightly. I mean, we have two American cold callers in our office who are my acquisitions agents that make the calls and they lock up the deals. And we found them to be the best possible callers on the phone for the type of properties we deal with.

And even with that, I'm continually surprised every single day for about the past year, how often, you know, we just sit and look at each other like these people are absolutely insane as far as what they expect to get for their property.

And the other difficulty that we have is, and maybe this is everywhere, but in North and East Texas markets, it seems like land sellers and land real estate agents price their properties at just ungodly prices. You know, if a property is worth $10,000 an acre, they'll list it at $25,000 an acre and they'll flood the market with all these bad listings.

And so anytime we're negotiating with somebody, you know, we have to try to show them sold comparables and they just don't want to hear it, especially in Texas, because they can't see that data. So all they have is to go on as us because we're real estate agents, we have access to it.

But it's difficult to convince somebody in these areas to even sell for market value, much less 10% or 20% off market value.

Seth: Wow. It's fascinating. Has it always been like this? Or is this something you're seeing like this year? In 2023 or I don't know.

Neil: I'm relatively new to the game of straight land investing and not house flipping. And so even though we've had immense success, even though we've done quite a few properties at this point, even just in the last year, I can say that this is all that I know. know.

And we didn't expect it to be this way, especially based upon the education and the content that we'd absorbed in preparation for making this change. We didn't anticipate it to be this hard.

Now, a lot of people listening to this are probably going to say, yeah, you shouldn't know. But everything's harder when you actually start trying it. Yet truly, I thought it'd be easier. And maybe it is in other areas.

And that's maybe a point that you're trying to make is maybe there are other areas of the U.S. that are good for these subdivides that don't have as much competition. And I'm definitely all ears for somebody who knows of some areas.

Seth: As I'm hearing you say all this stuff… It does make some sense. I mean, Texas is like fastest growing, has a lot of stuff going for it. It's relatively easy-ish to do these kind of minor subdivides anyway. Not that there are no obstacles, as you know, but there's a lot of reasons why the stars and planets align and send a lot of people that direction.

But we actually had a conversation with David Hansen, I believe it was episode 176. He works in several different states and he's always doing like the platted subdivisions where it's a major subdivide. It's very involved. And he's kind of a genius at figuring out like, what is the best possible way to carve up these parcels so that we can get as many in there and have green space and sell this whole thing for that, you know, as much as you possibly can.

I think it still has a lot to do with the market, but is your preference to go after after minor subdivides?

Neil: Oh, absolutely.

Seth: Yeah. And I wonder like if things would shift, say if it was the other way around, it's like, no, my specialty is platted subdivisions. I'm not afraid of spending over a year to get this thing done. Like I'm the best at this and I will figure out how to make the most of it.

Like if you all of a sudden had that competitive advantage, this would be a lot easier because you can create money out of thin air by just being willing to go through these difficult steps and having the expertise to do that.

That's what David's situation is. But it sounds like you're more like a normal person where you don't necessarily have that civil engineering expertise and you don't want to deal with all that stuff. I certainly wouldn't.

But I wonder if maybe it's just about changing that recipe a little bit in order to find that competitive edge that most other people don't seem to have.

Neil: Yeah. I'd be curious to know with David what that looks like, because I know that there are instances, for instance, where we can pay, say, 150% of market value, where we could pay 200% set of market value. The instances are varied.

For him, I'm sure it's all about after repair value. What is the value when I've done? It doesn't matter what has worked now. The constraints for me is that when I'm getting a bank loan, my property's still got to appraise.

And so a lot of these banks aren't necessarily, they're not seeing the same value as I'm seeing it as a subdivision because they may acknowledge that the subject property is 50 acres, but they're not going to value it as five, 10 to acre lots, even if I send them the surveys. They just don't want want to take the risk on that collateral.

And so as opposed to if you have a major subdivision, you have a plat in place, you have all those approvals. Well, hey, now a bank looks at it as a completed platted subdivision. Hey, it is different. And so that could be it. And could it be possible that he's coming in here, somebody like him is going after these exact same properties that I'm going after and just doing more work on them, such as a major subdivide? It's very possible.

Seth: Yeah and I don't want to speak too much for David, but I believe what he said was like, they don't even get into this until they know they have a national builder who's ready to buy up everything. So by the time they're closing on it, the deal is sort of done in terms of getting the thing sold.

So maybe that gives a bank a different kind of asssurance, when it's like, hey this thing is literally worth this, here's the purchase agreement, it's done.

Neil: Yeah, that's super smart. I mean, my model would differ in the fact that I'm looking to stay as nimble as possible and looking to move as quickly as possible. And so most of our minor subdivisions, from the time we go under contract, we close within 45 to 60 days and then we're only holding them for at a maximum of six months. We're not necessarily installing a ton of utilities. We're not installing roads. And so, beyond the purchase price of the property, we're not shelling out a ton of capital.

And so for me, as I'm growing this from nothing to something awesome, kind of this first, second year of getting into it, my priority is quick capital return so that I could actually go out there and maybe do some of those bigger deals. But right now I'm trying to build a capital stack so that I have the opportunity to wait for a year to do one of those major subdivides. Because right now, it just wouldn't be in the cards.

Seth: So you may have already said this, but maybe we should talk about just some typical numbers on this thing. So like what is a typical acquisition price and the typical disposition price, what you're selling it for in the end?

And I think you said it takes six-ish months if it's a minor subdivide. Is that right?

Neil: Right, exactly. And the 60s months is specifically just days on market. It's specifically just advertising time for either going to market with a realtor or actually trying to sell the properties.

And so there's very little time, a week at most, just to really coordinate your photographer, maybe get property mode, maybe clear some frontage, just some basic stuff that really doesn't take much time. And so, with that, average numbers, if we're just trying to look at what does this look like on an average basis, I'll give you an example of what I think like a good deal would be.

So this is just an example of a deal that we're working, east of Dallas, in a smaller county. We're purchasing for a hundred thousand and we're selling it for 260,000. We've got to add a water line. So we're doing about 35,000 in repairs and all in our net profit on that is going to be 107,000 after you take out about 10% or so for real estate agent fees, closing costs, and holding costs.

And so I would consider that an excellent investment. Profit is 40% of ARV in that circumstance. And that's what I would consider for what we're doing a very average deal. Not necessarily a home run, yet also not a single. Somewhere in between, double, triple, a good, solid, healthy deal.

That's kind of what we average. Some of our bigger deals, we're looking right now at a deal that we're buying for a million, and we're going to do a major subdivide on it and ultimately make it worth about two and a half million, but that's going to take two or three years.

And so there are stuff like that that we are doing, yet that's really the one-offs. Those are the home runs. Those are the once a year, once every other year properties that you actually get to see on it. But my average minor subdivide is only maybe three or four lots.

It's not that bad. If you know the challenge, the challenge is finding the properties, right? I mean, because if you can find the properties and you can get them under contract to get a value, the actual end subdivide is not really that hard. Especially if you have a good real estate agent you're partnering with, a good surveyor, a good title company or attorney, you've already got really everything you need to do the deal and to do it right.

Where most people get in trouble with subdivides is specifically just having a lack of knowledge on what can be subdivided and it cannot be subdivided. Where people get in trouble is they buy a property thinking it can be subdivided without actually having discussed with anybody. Then they go to actually try to subdivide it, figure out they can't, and then now they're either upside down or they're just selling the property for breakeven.

Seth: So right there, what would a person need to do to avoid that, to buy a property thinking they can subdivide it and then realizing they can’t? What questions need to be answered for them to be 100% sure they can do what they want to do?

Neil: Yeah. I mean, so you've got to figure out who's going to give you approval. And so, and you need approvals. So for instance, if we're talking about Texas, you're 10 acres plus, there's a full state exemption that says if all your resulting lots are 10 acres plus, then you don't have to get any formal county approvals or anything like that. If you're outside of city limits.

Now, if you're inside city limits, you're always dealing with the city. You know, that could change. depending on jurisdiction. And so you've got to figure out what governing body has authority over your land. And are you going to be subject to what their rules and regulations are? Or are you going to be exempt?

The second thing you need to do is verify all utilities. In Texas, that means water primarily. Water is the big issue here, like Seth alluded to. Electricity, not as big of an issue, but still, we've got to make sure it's there. And then you've got to make sure your other basic due diligence for buying a piece of land, easements, floodplain, et cetera.

But the biggest thing that I would say for somebody looking to subdivide is you've got to add a layer of due diligence into your process of buying that you don't previously probably have, which is county approvals, city approvals, and what is that all going to look like.

And then if you're not verifying buying utilities such as water and electric on these properties, for subdivides, you're going to want to, because especially if you're subdividing into smaller lots, you're probably selling to somebody who wants to put a house on it to some extent. And so bigger recreational tracts, that's not as important.

But if you're subdividing into smaller pieces, you have to make sure that they can actually do what they want to do. And a lot of times, that's building for us.

Seth: Yeah, that was an interesting thing that kind of had this aha moment because I know like in states like Michigan and Florida and Wisconsin and Washington, perc tests are a really big deal. It's the kind of thing that can kill a deal if it doesn't.

And things like water, it's a non-issue. There's tons of water. Like there's so much water we don't know what to do with it. Whereas in Texas, it's the opposite where perc tests are never an issue and water is always an issue.

So, and it's not like, say if there's no water and correct me if I'm wrong on this, Neil, but my understanding is that if you find out there's no water, that doesn't mean you can't subdivide, it just means you're going to have a really hard time selling that.

Like, it's almost like, why do all this when you know you're not going to be able to sell it because there's no water, right?

Neil: Well, to some extent. So it all goes down to, are you talking about exempt subdivisions, big parcels, or platted subdivisions? Because big exempt subdivisions, yeah, you're just going to have trouble selling it. No big deal.

Smaller platted subdivisions, the county or the city is going to… you actually have to submit proof that you can get water. And so if you're wanting to take, say, five acres and the five one-acre lots, just for example, the county is going to want to make sure you can get water and electric access, and they're going to need actual signed documents from your water provider and electricity provider saying they agree to provide water.

The answer is it depends, but it depends on what kind of subdivision you want to do. I mean, I was talking with a colleague yesterday who was just asking me, hey, can I subdivide this property? What would it look like? And she was looking at a five-acre property, tried to divide it into two or three different lots.

And I looked at it pretty quickly and just said, hey, you're not going to be able to do that. She said, well, why is that? Well, first off, it doesn't have the road frontage. You need to look at those regulations on how much road frontage is needed per lot.

You also can't just survey this out with a surf pair. Like you got to get a plat. It's inside city limits. You got to get city approval. You got to run it by them. You got to verify water. You got to verify electric. Sometimes counties will have you verify drainage runoff to make sure you're not going to flood somebody else's property by putting houses there.

And so when you do a platted subdivision, which is kind of teetering on major minor, you know, somewhere in there, if you're not doing roads, it's a lot more extensive. And you really got to know your stuff. Or you need a long due diligence period to make sure that you don't get stuck with a property you don't want to buy.

If you're doing an exempt subdivision where nobody has approvals over it, you're kind of more in the wild west and you just need a really good real estate agent surveyor.

Seth: Yeah, this was another huge thing I learned from Neil the first time we talked was when he was explaining this whole exempt subdivision thing about basically how to find like, what are these rules? When are you exempt from having to go through all these requirements and get county approval to do this subdivide?

And he showed me line by line in the document online. Here's where you go do it. And I actually made a video explaining how to do this with Claude, the chatbot. You can probably do it with a lot of different chatbots now.

And I actually discovered it's easier than I thought it was to do this in Michigan, just by following what Neil showed me how to do. I'll include a link to that in the show notes for this episode, retipster.com/180.

But this kind of goes back to if anybody out there heard the episode with David Hansen in 176, he was explaining what he has to do is basically read the county's zoning ordinance and rules and all this stuff and understand it better than the county does so that he is the authority and he knows exactly what he can and can't do. And if people challenge him, he can say, no, your own rules say this.

How much time do you have to spend going line by line through county and township and city regulations to understand this stuff? Like, do you not have to do that much anymore because you stick to the same few markets all the time?

Neil: So we still do it every time. And I'll give you an example of why.

And the time that we do it is we do it right before we call a county. So especially if we're exploring a new county, I'll read the subdivision guidelines and I'll send my acquisitions guys a summary of what we can do in the county.

Because the acquisitions guys are going to be running their after repair value and giving offers based upon the margins we want to hit, based upon what's allowed in that county is exempt, essentially.

And so there's a county in our area in Texas, and there's actually several counties in Texas that can not only do 10 acres, they can also do five-acre exempt subdivisions, which is really neat because especially in areas where there are high demand for that, that’s fantastic.

And so in this specific county, we put under contract a property that was 25 acres. And our intention was to make five five-acre parcels. Well, in our due diligence process, we originally saw five acres was allowed. Our project manager called the county and the county told him, the provision says greater than five acres.

And oh my gosh, my heart sunk because what they said is we interpret that as 5.01 acres per lot. And you have five acres, therefore you cannot do this. That killed our deal. Oh my gosh. I mean, it's just little things like that that you get the nuances of.

And so to answer your question, yeah, we absolutely read it every single time because we've also seen other counties that don't even have any subdivision regulations, especially getting out toward West Texas. There are actually quite a few counties that are small enough that they don't want the hassle of dealing with your subdivisions. They don't care. And you can do literally whatever you want.

And so knowing those subdivision guidelines and knowing which counties you can do what and cannot do what, you could actually make a business, and we have made a business off of taking advantage of those exceptions and counties that have unique offerings like that.

Seth: Yeah. Makes you wonder, though, like a big component of what makes this work is the fact that there's demand for these newer, smaller parcels that you create and they just kind of sell relatively quickly.

If the demand suddenly dried up, this would kind of not work anymore, right? In a place like West Texas, is there demand for that kind of thing? Like, does it make less sense to do it out there even though it's easier?

Neil: Yeah, I mean, that's absolutely what you got to watch. You've got to know that there's probably a reason that they don't have subdivision regulations. And it's probably because they don't have an issue with it because not many people do it.

So on this whole issue of demand and how important that is to this whole strategy of subdividing, whether it's major or minor or exempt. So like, what is the risk that demand would dry up? It seems like this is not a huge risk in Texas, at least in your area. As long as I've been aware of what's going on there, it seems like there's always high demand for it.

But say if you're working somewhere else, I look at the six-month timeframe or maybe the year-plus timeframe it takes to do this with like a platted subdivision. What is the risk that, okay, this made sense when we started it, but something changed in the meantime, and now it doesn't make sense, and they're subdivided.

And, you know, is there much of a risk of that, or could you catch it before it gets to that point?

Neil: No, of course, there's always a risk. The advantage of the model that we use with the minor and exempt subdivisions is that, you know, our contract period is maybe only 45 to 60 days.

And so from the time we go under contract, if we can't predict the market 45 or 60 days out, we're in trouble. And nobody can predict what's going to happen. We saw that with 2020. We saw that with 2001, 2008. All the times that the market shifted drastically very, very quickly. We can't predict the big “black swan” events per se.

Yet even in events like that, land demand has historically stayed there, especially if you're able to pivot to an owner finance strategy, or if you have good capital backing you to where you can make those pivots.

And so I'm not necessarily worried too much about that. The people who I think should worry about that are the people who are doing very long-term and large-scale major subdivisions, who, from the time they go under contract, have to spend a year to maybe 18 months to get approvals for that. You brought a massive risk.

I mean, imagine, Seth, if you went under contract on a property, summer 2021, the absolute peak of the market. And then you look and you had to spend a year, maybe 18 months to get that plotting approval. You know, the market really started dipping April or May 2022. Especially in Texas. And so the market that you bought into and now you did this major subdivision on, things have changed drastically.

You spent all this time, all this effort. And so if you didn't have a good contract or you don't have a way to get out of that contract or you don't have competent attorneys on what you're going to do on that, not to mention the time and money wasted, you could be in for a pretty big loophole or a pretty big trouble there.

So my worry, and that's the worry that I have with being a home builder, that's the worry that I have with doing those big subdivisions is demand can change at the snap of a finger. And if you don't have good, competent attorneys that can get you out of contracts like that, that could be big trouble for you.

But with how fast we do things, I'm not as worried about it.

Seth: Now, going back to something you had said a while back, you were talking about a property, like one of the home run deals where you bought it for a million and it's going to sell for two and a half million, I think you said, and it's going to take two and a half years. So why is that taking so long? Two and a half years is a long time. What's going on there?

Neil: Yeah, and that's probably an overestimation. Yet, it's outside of city limits, yet it's in a city's ETJ. Have you ever heard of that term? Extra-territorial jurisdiction?

And so basically what that means is that the city, and it's a pretty big city in East Texas, has decided that anywhere surrounding us within a certain number of miles influences our city. And so therefore, we're going to have to control what happens in it. And so even though no tax is paid to the city, they still control development in that area.

And so you go from previously being able to maybe do something exempt or dealing specifically with just the county, which is my preference in every circumstance—county is a lot easier to deal with than cities—and now you move it to having to get full approval from a relatively large city in East Texas that is known for not being easy to work with.

So once you get to that, our process is going to look like listed on market day one with with some preliminary marketing materials right after we buy it, spend six months to a year to attract… our main goal is RV parks or mobile home park because that mobile home park is next door. And so our main objective is to attract a similar investor who is going to, an in-builder or buyer who's going to want to do that.

And then we'll partner with them, us take on the expense of actually doing the subdivision of the development and go through all the hurdles with the city. And ultimately, probably, I would say, six months of back and forth, maybe nine months of back and forth, get that approved and get to the closing table.

And so that's overall a time period of say a year and a half, two years to do that. And I went ahead and got a 30-year loan on it. Just in case, man. You never know what's going to happen. But that's an example of just what I'm being told by a commercial real estate agent that we're going to partner with on the deal and what I've seen other comparables in the market take to actually get full market value.

And so a lot of those big subdivision contracts like that, the work is not necessarily done until the builder is selected. Very similar to what you said, David had told you, you know, you don't want to get the work done first because, well, what if the builder doesn't like it? Or what if the person, the end buyer says, well, I would have done this differently.

You could have a preliminary plan, but you also want to get their input too, because they're the ultimate end buyer. So they need input on how they like to do things.

Seth: As you were talking there, a thought just came to my mind. I know that in Texas, the availability of water is a big deal in order to make that property useful. So there are actually some improved property types that don't require water at all.

I'm thinking about my self-storage facility, like we don't have water there or there's other solar panel farms and that kind of thing. I wonder if you do come across these properties that are not worthless, but they're worth less because of the lack of water.

I wonder if you could just look at it from those other angles of, well, we couldn't build a house here, but we could do this. Maybe it's useful for that.

Neil: No, I love that idea. That's a really good idea. I mean, the challenge with most of the properties that we are doing deals on is that they're in relatively rural locations. And so they're far enough away from a major population center to not make sense for self-storage.

Yet solar is absolutely something we're looking into in every single project we go into contract on. And so we go ahead and list that on a service that markets solar listings. We also send it out to five or six guys who do solar that I know to get bids. And so yes we are actively pursuing those opportunities because they are incredibly lucrative whenever they hit. I haven't had one hit yet, but I had a friend who had one hit and it's life-changing money.

Seth: Yeah. Well, it's actually like, you're right about self-storage in terms of like the rural markets and that kind of thing in terms of that playing a part in it. But I'm kind of going on a tangent here, but I've been researching, you know, higher end RV and boat storage and that kind of thing where it's like an improved garage type thing you stored in.

And apparently, the population matters a lot less for that. What is important is that the facility is really close to a highway and really close to a gas station where RVs can pull in there and people can air up their tires and get gas and that kind of thing.

And it's kind of opening up my mind a lot because the lens that I've always looked at self-storage through where it's like, okay, there can only be so many square feet per person in that area. It's like, throw it all out. It doesn't matter. All that matters is that it's not all that matters, but the things that do matter is proximity to a highway and that kind of thing.

So, but it's just making me wonder, like, there's probably tons of different uses for certain properties that would otherwise be less useful if you didn't know about what makes a good version of this property use. I don't know if you're able to follow what I'm saying.

Neil: No, I completely follow you. And I think that's really intelligent. I mean, our ability as land investors to make money is going to be only limited by where we can see the demand.

And so you're absolutely right. I mean, you know, whereas I look at a property, I see a really cool subdivide. Somebody else looks at it, sees a major subdivision. Somebody else looks at it, sees an RV park. Somebody else looks at it and sees exactly what you just talked about. You know, everybody has their own playbook that they want to run. And the more plays that you have in your playbook for whatever situation comes up, the more money you're going to make.

Seth: Absolutely. I almost wish there was like some kind of an AI thing where you could like plug the property, like upload the DataTree profile report. And it could just like, you know, do its magic and think of all the possible uses based on where it is. And I don't think we're there yet, but hopefully someday somebody makes something like that.

So going back to something you said earlier about how, you know, you don't even start by offering these people at 50%. Like you get laughed out for being offered 90%. So that implies that the conversation starts with a pretty high offer and you go up from there or the deal just dies.

So what if you did start by offering 50% knowing that you won't get the deal then, but like, you're going to have to go up and up and up, but at least you're like anchoring them at that lower price instead of just anchoring them at a 90% price?

I mean, I'm kind of with you. I think I would be doing the same thing you do. Like once I get laughed at by enough people, I would just stop trying. But I don't know. What if you did? Would that make any difference, do you think?

Neil: Yeah. So we started off the first three months of last year when we were doing cold calls, we started off at offering 65%, went up to 75% of market value. The challenge was that we didn't get any deals within three months.

And as soon as we started evaluating these properties differently, we started calculating our offers based upon ARV in a gross profit margin versus current market value and just offering, you know, say 65%, 75% of it, that's when our acquisitions really took off and we started putting under contract a lot of properties.

And so, you know, out of the 15 deals that we closed last year, a majority of those were last six months and most of them were last 90 days of the year. And so our acquisitions ramped up. And now we also were doing more phone calls. And also cold calling takes a long time to ramp up as far as actually starting to get those under contract. Maybe mail's the same. I'm not as familiar with it, but it takes a while.

It's interesting to think about what-ifs. I can just tell you what we've done. And I can tell you starting off that low did not work for us. Now, we're always trying to get prices out of people before we tell them our price, of course. And we're actually pretty successful at it, probably 90% of the time.

The issue is that, say a property is worth $300,000, people are telling us they want $400,000, don't call us back unless you can get me $400,000. And we'll call them back and offer them 200. And they'll say, I told you not to call me back.

You know, I mean, it doesn't mean we don't call them back, but it's just, you know, here's how our offer is calculated. Here's how we see it. Here's the potential in the property. And it’s not resonating, not hitting. And so that's the difficulty.

Is there any merit to offering 50% in these areas? Hey, man, I'm sure that there are other people who are buying deals at 50% in these areas. For some reason, that's just not us, though.

Seth: Well it's almost like… When you said originally you started at 65 then you went to 75 you weren't getting deals, again, this is a what-if game, this is probably pointless even. But like what if you started at 50 knowing I can go up to 100 and it can still work but I'm still going to start at 50 I’m going to make them think that that's a valid starting point? And I know they'll say no, but we'll go to 65, we'll go to 75, we'll go to 85. I wonder if you might end up in a lower place as a result of starting so much lower?

Neil: It's a good perspective and it definitely be something I'm willing to try. I don't have any guess to what would happen. All I can say is when we tried something similar previously, it ultimately led to fewer conversions.

I mean, the difficult thing is, I mean, some of the more recent properties we're buying are actually up in the $600,000, $800,000, a million. For properties like that, obviously, you got a pretty good offer on there.

I mean, overall, I think there are two factors that contribute to why we have to offer so much. So one is that we're dealing with extremely sophisticated sellers. They own assets worth $300,000, $500,000, $700,000, $1 million. Absolutely more sophisticated than the person who owns a $50,000 piece of land. There's no doubt. And so with sophistication, I believe, comes a higher price.

And then two, with the demand and the growth in this area… The other problem that we hear a lot is that, hey, I just got a mailer, and my mailer offer was $350,000 when we can maybe only offer, I don't know, $350,000 as well. But they're like, yeah, I wouldn't take $350,000.

And so I can tell you for a fact that there are other people in Texas doing the same thing that we're doing who are blasting people before we get to them with cold calls, but they're blasting them with mailers. But the people that we get would say, oh, I'd never call a mailer. I'd never talk to somebody who sent me mail, but you're really a nice guy, so I'd rather sell it to you. I can hear you. I can see that you're trustworthy.

And so that's why we like cold calling. But it's an interesting thing.

Seth: Do you ever do seller financing? I know you get bank financing a lot. So like what percentage of your deals that you buy end up going the seller financing route?

Neil: Not many, unfortunately. That is something that we're looking to implement more of this year. We just put a property under contract yesterday on seller financing. So that was an excellent deal for us. And then we bought another, we bought one more last year.

And so I'm thinking in terms of probably one out of 20, one out of 30. So yeah, I mean, 5% or less for seller finance. We're actually selling more on dispositions on seller finance more than we're acquiring on seller finance. And I love holding those notes that will do that all day.

Seth: Do you prefer to do that on the disposition end? Like if you could have your choice, would you rather do seller financing or do you want to get cash first if you could?

Neil: No, I'd get cash first.

So as we kind of talked earlier, I'm in the building phase. And so I'm looking to scale as quickly as possible. And so the thing that is holding me back from scaling is absolutely access to capital. 1000%.

And I know that I could probably get unlimited capital at say 50% profit split or whatever profit split it would be. It would not be hard to find. But I'd rather take the full profit and fund it here and try to scale up a little bit slower, but albeit build up a much bigger capital stack a year or two from now. So that's what I'm trying to build up.

Who knows what's going to happen in this market and this economy with this year coming up. And so I'm just trying and build up capital stack to go to town when something happens.

Seth: Yeah. Totally. Now, I think you said you did about 15 of these deals this past year. Is that right?

Neil: Correct. Yep.

Seth: So how much are you making doing this?

Neil: Our average profit last year per deal was 150,000. And that's gross. That's not net. That's gross. But that's after all like cost of goods sold and everything before staff.

And our median profit’s about 110. And so some of those skewed a little bit higher, but we're making about $100,000 per property that we do. We're very fortunate to have a very high net profit last year, over seven figures. And looking forward to this next year, try to do the exact same thing and maybe double or triple that.

And so the craziest thing is that, I mean, we really focused on this May of last year. That's a full six months ago. Now, we had some success in land before that and subdividing before that. Yet, I have never seen an opportunity like this. Being a realtor is a fantastic income opportunity.

It's not necessarily where I want to be forever. Being a house flipper was a fantastic income opportunity yet it was very difficult compared to land flipping and doing these subdivides and doing these land flips, I mean drastically easier than being a realtor or being a house flipper. And I'm making three to four times the net like net profit on every single land flip that we did on every single house flip that we did.

And when we put it like that, I mean, it's just, there's no comparison. And a lot of people, you know, you and me included, are saying, hey, it's getting competitive. There's a lot of people out there. You know, we're having to decrease our margins. But I hope what people are taking away from today, and one of the reasons I wanted to get together with you, Seth, again and talk about this, is…

There's more than one way to do this game. And as things get more competitive, we have to find ways to add value to properties. The days of offering 30% or 50% on a $200,000 property, buying it for $70,000 to $100,000 in my market area are long gone.

And so if you want to work in extremely high demand areas, you've got to find ways to add value to properties that nobody else is looking at, whether that's building self-storage like you did, Seth, whether that's subdividing properties like I'm doing, or whether that's doing major platting. Whatever you're doing, you got to be adding plays to your playbook or else this competition is going to get you.

Seth: Yeah, man. I totally agree with that. Do you ever think about, or does it ever seem enticing to like, maybe I should go to a less demand, less competition area where it's easier to buy deals, but maybe take longer to sell?

Like, does that thought ever cross your mind? Or is it like, no, I prefer the high competition, difficulty of finding deals, low market value. And I prefer being able to sell them at a good amount of time.

Neil: I've heard from several people that a land investor's biggest struggle is selling properties and selling them quickly. A lot of times acquisitions…

Seth: Sounds like the opposite for you, right?

Neil: Yeah, it is. And so that's where I'm very fortunate. And so with me being a realtor and me having access to MLS and all these areas that I work in, and us having an operations team behind the scenes with a full-time person here, and then also a VA in the Philippines, with us having that kind of support, our disposition effort, I mean, maybe takes me a handful of hours a week to be able to sell these properties.

And that's not an exaggeration. It does not take long or much effort from me.

Seth: That's awesome.

Neil: I would rather have that dispositions effort and have the ability or have the hardship be on acquisitions, because once I sell some of these properties, get some capital back, I'll just reinvest it in the acquisitions.

And so I would prefer a market that is fiercely competitive to one where I can do these subdivides and I can just keep on funneling acquisitions, acquisitions, acquisitions, and then selling them pretty easy.

And so now I will say it also doesn't make sense… so we don't target, for instance, like a Dallas county, a Tarrant county, Dallas and Fort Worth, Collin County, like Mckinney… We don't target these suburban areas either. So there comes a point where too much demand is too much demand. So we have found some sweet spots in some counties that have less demand.

But for me, in the most rural areas we work at, which would be, say, two and a half hours away from Dallas, you can still have 10- to 20-acre properties selling in a month or two. That's considered slow in a lot of areas. Maybe three months, four months, worst case.

And so it's hard to find an area in North Dallas or North Texas or East Texas that doesn't have a ferocious demand for land. It's actually hard to find.

Seth: Do you know Logan Fulmer?

Neil: I've heard his name. Yeah.

Seth: Yeah. So we interviewed him, I think it was episode 177. And he goes after properties in Texas that have a lot of title issues, like intentionally going after them and fixing the title issues. Sometimes it takes years.

But one of the examples that he talked about recently was when he bought a landlocked parcel in Texas for 5,000 bucks and then sued for access, put a road into it. All of that cost him like 150 grand. And then he sold it for $500,000.

I wonder, is there a lot of landlocked property in Texas near your area? I wonder if that might be a way of somehow seeking out the landlocked ones, even though it's a huge pain and a lot of cost to build a road to it. Maybe it's still worth it if it makes you come out ahead.

Neil: My objective, and this is kind of a recurring thing that we've talked about a little bit, is it's a good idea. There's no doubt. Just like major platting is a good idea. Just like building a self-storage facility is a good idea.