So, here you are, finally found that perfect property that you can turn into a profitable venture and launch your real estate investing enterprise. You can feel the excitement, your spreadsheet looks solid, you already told about it to all your friends and recorded a social media post about your success. But is it? A property can look like an excellent investment on a spreadsheet and become a very different deal once construction realities are uncovered. So, let’s slow down a little, and dig deeper to make sure the star is not going to turn into a dog.
The purchase price may be attractive. The neighborhood may support the finished product. The broker may describe the property as “development-ready,” “ADU-ready” or “ideal for expansion.” But those descriptions do not tell you:
Whether the proposed use is actually permitted
Whether utilities have sufficient capacity
Whether the existing improvements can be economically renovated
Whether grading, drainage or retaining walls will eat up all you profit
Whether plans are complete and approvals are still valid
Whether the construction budget reflects current conditions
Whether the project can be completed within the investor’s timeline and capital structure
Experienced investors do not evaluate a project property solely by asking, “What can I buy it for?” They ask a more important question:
What will it take—in money, time and risk—to turn this property into the finished asset described in the investment plan?
One of the first questions I always ask: if this is such a great opportunity, and the sellers already own the property with all the equity built up to date, why aren’t the sellers doing it themselves? Of course, there maybe some pain, background story, personal situations why the sellers walk away from the projects or properties that may seem like obvious profit makers to you, but knowing the story behind the property always helps you to identify some hidden problems upfront.
Before removing contingencies or committing substantial capital, investors should investigate the following ten areas.
1. Confirm What You Can Build
Do not rely on the listing description, conceptual rendering or seller’s interpretation of the zoning. Their job is to sell you the property, and, quite often, to turn the seller’s problems into your problems.
Confirm the property’s:
Current zoning and general-plan designation
Permitted and conditionally permitted uses
Density and unit limitations
Setbacks, height limits and lot-coverage requirements
Parking requirements
Floor-area-ratio (FAR) limitations
ADU, lot-split or subdivision eligibility (and time frame to complete subdivision)
Overlay zones and special planning areas
Affordable-housing or inclusionary requirements
Prior zoning violations or unpermitted uses
The fact that a neighboring property contains a particular use does not guarantee that the same use can be approved today. Regulations may have changed, the neighboring project may have received a variance, or its approvals may have been granted under different development standards.
Whenever possible, obtain written confirmation or conduct a preliminary review with the appropriate planning authority.
2. Investigate Title, Easements and Access
A property’s usable area may be significantly smaller than its recorded lot size. Many factors can reduce your 10,000 lot that you thought could be split into two 5,000 sf lots into one 3,000 sf buildable pad making the whole project unfeasible.
Review the preliminary title report, survey and available recorded documents for:
Slope severity, soils conditions, environmental concerns, FEMA maps
Current zoning and minimal lot sizes
Jurisdiction (city, county, etc)
Access easements
Utility easements
Drainage easements
Sewer or water lines
Road-widening reservations
Private road obligations
Shared driveway agreements
Maintenance agreements
CC&Rs and deed restrictions
Encroachments
Boundary discrepancies
Existing liens or assessment districts
Legal access and practical construction access are not always the same thing. A site may have a recorded access right but still be difficult or expensive to reach with excavation equipment, concrete trucks, cranes or emergency vehicles.
Ask whether the proposed improvements can be constructed and permanently accessed without relocating utilities, negotiating with neighbors or obtaining additional easements.
3. Verify Utility Availability and Capacity
A utility line near the property does not necessarily mean that the property can connect to it—or that the line has enough capacity for the proposed development.
Confirm:
Water service availability and meter size
Sewer location, depth and capacity
Septic feasibility when public sewer is unavailable
Electrical service and transformer capacity
Natural-gas availability, if needed
Telecommunications access
Fire-flow requirements
Required utility extensions or undergrounding
Connection, capacity and impact fees
Off-site improvements required by utility providers
For vacant land and infill development, utility work can materially change the feasibility of the project. A shallow sewer connection located in front of the property is very different from a connection requiring hundreds of feet of trenching, pavement restoration or an off-site easement.
Do not budget utility work from a map alone. Whenever possible, verify conditions with the serving agencies and appropriate engineers. Ask the seller to provide “Will Serve” letters from all utility companies, or make it part of your due diligence process.
4. Understand the Sitework Before Pricing the Building
Investors frequently focus on the cost of the house, units or commercial improvements while underestimating the cost of preparing the site.
Sitework may include:
Clearing and demolition
Export or import of soil
Rock breaking and excavation
Mass Grading
Soil stabilization or over-excavation
Retaining walls
Stormwater systems
Erosion control
Sewer, water and dry-utility installation
Fire-access improvements
Street, curb, gutter and sidewalk work
Construction access and staging
Landscaping and irrigation
Environmental mitigation
On difficult properties, the work below and around the building can cost as much as the visible structure. In my personal experience, after entitlement risks, site work or horizontal is the second biggest project risk category.
Before acquisition, ask:
How much grading is required?
Is soil being imported or exported? Can it be balanced on site?
Where will exported material be disposed of?
Are retaining walls required?
Can construction equipment safely access the site?
Is there adequate room for staging and material storage?
How will stormwater be managed?
Are off-site improvements required?
Could protected habitat, trees, wetlands or cultural resources affect construction?
A preliminary civil, soils and constructability review may identify risks that are impossible to see during a normal property tour. If the seller can’t produce any plans, reports, or any other essential documentation, always ask why (are they hiding something?), request longer due diligence period and price your purchase accordingly.
5. Review Soils, Drainage and Environmental Conditions
The condition of the ground can dictate the design and economics of the entire project. Depending on the property, investors may need to investigate:
Expansive or collapsible soils
Uncompacted fill
Slope stability
High groundwater
Liquefaction or fault zones
Flood hazards
Prior contamination
Underground storage tanks
Asbestos or lead in existing buildings
Methane conditions
Protected biological resources
Stormwater-treatment requirements
Wildfire and fire-access restrictions
A standard property inspection is not a substitute for the appropriate geotechnical, environmental, drainage or engineering investigation. The important question is not merely whether a condition exists. It is what the condition will require during design, permitting and construction. A soils issue may be manageable—but only if the foundation, grading and contingency budgets account for it.
6. Verify the Real Status of Plans and Permits
“Plans included” and “permits in process” can mean almost anything.
If the seller claims that plans, entitlements or permits add value to the property, request the complete project file and determine:
Which plans have actually been prepared
Whether the plans were submitted
Which agencies reviewed them and what where the results
Whether correction comments remain outstanding
Whether discretionary approvals have been granted
Whether conditions of approval have been satisfied
Whether permits are ready to issue or merely under review
Whether approvals or applications can be transferred
Whether any permits or entitlements are approaching expiration
Whether school, utility, traffic or development fees remain unpaid
Whether the proposed design still meets current codes
Whether the plans match the investor’s intended project
Whether all consultants have been paid or will you inherit their invoices for the work that they have done so far
A conceptual site plan is not an entitlement. An entitlement is not a building permit. An approved permit is not necessarily construction-ready if fees, utility clearances or deferred submittals remain outstanding.
Even if you have approved plans, doesn’t make them good plans. Take time to review them with your trusted architect or engineer and see if there is any room to value engineer the plans and find out how long any changes may take to get approved through the city. It might be worth spending a couple of month making corrections if it can save you $250,000 by removing a 12’ engineered masonry wall by making elevation changes on finished pads.
Investors should understand exactly where the project stands and what remains to be completed.
7. Inspect Existing Improvements Beyond Their Appearance
For renovation and value-add projects, cosmetic condition is only one part of the analysis. Dig deeper, investigate the condition and remaining useful life of:
Foundation and structural framing
Roof and waterproofing
Plumbing and sewer systems
Electrical service and wiring
Heating, ventilation and air conditioning
Windows and exterior envelope
Drainage
Fire and life-safety systems
Accessibility improvements
Unpermitted additions or conversions
Mold, water intrusion or pest damage
Code violations and deferred maintenance
An older property may still be a strong acquisition, but the renovation budget must reflect what is behind the walls—not only the finishes visible during the walkthrough.
Also determine whether the proposed renovation will trigger broader code upgrades. A seemingly limited project can become more expensive if the building department requires accessibility, structural, energy, fire-sprinkler or utility improvements. I’ve seen too many horror stories where a homeowner applied for a room addition and the city ended up requiring the home owner to upgrade the whole house with a fire sprinkler system and install stormwater drainage connected to the city stormwater system, which turned a $50,000 job into a $200,000 nightmare.
8. Build a Complete Project Budget
A construction estimate is not the same as a complete development budget. Don’t just rely on some ballpark numbers, like $250 per s.f. for finished construction. A realistic acquisition analysis should consider:
Purchase price and closing costs
Design and engineering
Surveys and investigations
Permit, school, utility and impact fees
Demolition and sitework
Vertical construction
General conditions and supervision
Insurance and bonding
Financing fees and lender inspections
Construction interest
Taxes and carrying costs
Temporary utilities and security
Marketing, leasing or sales expenses
Owner-supplied materials
Contingency
Closeout and warranty reserves
Be cautious when a budget is based primarily on a cost-per-square-foot assumption. Square-foot pricing can be useful for an early screening, but it does not capture unusual sitework, small-project inefficiencies, utility extensions, premium finishes or off-site requirements.
Every preliminary budget should clearly distinguish among:
Confirmed costs
Contractor estimates
Allowances
Owner assumptions
Excluded items
Contingency reserves
If the project works only when every assumption goes perfectly, it probably does not have a sufficient margin of safety.
9. Connect the Construction Schedule to the Investment Model
Time is a project cost, and sometimes it can be a major cost! The schedule should include more than the physical construction period. Investors must account for:
Due diligence
Design development and approvals
Agency review
Permit corrections
Utility approvals (SDGE is notoriously slow, account for it upfront!)
Financing and lender closing
Long-lead material procurement
Demolition and site preparation
Construction process
Inspections and utility releases
Certificate of occupancy
Lease-up, stabilization or sale (establish realistic absorption rate assumptions)
A six-month construction job can easily become an 18-month investment when preconstruction and closeout are included. Every additional month may increase:
Loan interest
Property taxes
Insurance
Temporary housing or operating expenses
Security and maintenance
Investor preferred returns
Exposure to market changes
Underwrite the credible schedule, not the most optimistic schedule needed to make the projected return appear attractive.
10. Stress-Test the Deal Before You Fall in Love With It
As investors, we are natural optimists and when the deal looks attractive, we want to see the positive side of things and we naturally spend time proving why a deal will work. The more valuable exercise is trying to determine how it could fail.
Test the investment under less favorable assumptions:
What if construction costs increase by 10%?
What if permits take six months longer?
What if interest rates or financing costs rise?
What if the finished property sells for 10% less?
What if rents are lower or lease-up takes longer?
What if an unexpected site condition uses the entire contingency?
What if the project cannot be built exactly as proposed?
Is there an alternative exit?
Can the property be operated, sold or redesigned without destroying the investment?
A strong project does not need perfect conditions to survive. It should have enough margin, liquidity and exit flexibility to absorb problems that are normal in construction and development.
Due Diligence – this is your first line of risk protection, it’s a MUST! Never skip on DD even if you are buying the property for half the price! Use DD period to reduce future risks, not merely to confirm your original opinion or assumptions. The purpose of due diligence is not to collect enough information to feel comfortable with a decision already made. It is to identify the conditions under which the property should be:
Acquired as proposed
Acquired at a lower price
Acquired with additional seller concessions
Extended for further investigation
Restructured through an option, seller financing or phased closing
Passed on entirely
Sometimes the best result of a Project Review is confirmation that the opportunity is sound. Sometimes it is a revised scope or negotiating strategy. And sometimes the most profitable construction decision is deciding not to build—or not to buy—until a critical issue is resolved.
Before You Remove Contingencies, Request a Pro-Tech Project Review
Pro-Tech Design & Build works with homeowners, investors, property owners and developers to evaluate the construction realities behind a proposed acquisition. Since we are investors ourselves, we think like investors and treat your projects as if we are the investors too, i.e. protecting the bottom line.
A pre-acquisition Project Review may examine:
Existing plans and available reports
Preliminary construction scope
Site access and logistics
Grading, utilities and site-improvement requirements
Existing building conditions
Apparent constructability concerns
Preliminary budget assumptions
Permit and approval status
Potential cost exposures
Recommended next steps and additional professional investigations
Pro-Tech does not replace your architect, civil engineer, geotechnical consultant, land-use attorney, inspector or financial advisor. We help connect their information to the practical question every investor ultimately needs answered:
What will it realistically take to build this project?
If you are evaluating a development site, fixer, rental conversion, ADU property, subdivision opportunity or value-add acquisition, contact Pro-Tech before your due-diligence period expires.
Request a Pro-Tech Project Review
Call 619-993-7799, email info@protechbuild.com, or submit a Project Review request through www.ProTechBuild.com.
Pro-Tech Design & Build Inc.
California General Engineering and General Building Contractor
License No. 1066416
This article is provided for general educational purposes and is not legal, engineering, architectural, environmental or investment advice. The scope of every property investigation should be determined by qualified professionals familiar with the specific property and proposed project.
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