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The Ground Game Podcast
Welcome to The Ground Game Podcast, where land investing meets real talk! Join your hosts, Justin and Clay, both 7-figure land investors and seasoned entrepreneurs, as they dive deep into the world of land investing, team building, and personal growth.
The Ground Game Podcast
Episode 26: Deep Dive, 150-Acre Land Subdivide Deal Review
🎙️ Welcome Back to The Ground Game Podcast! 🎙️
Episode 26: Deep Dive, 150-Acre Land Subdivide Deal Review
In this episode, hosts Justin Piche and Clay Hepler dive into the intricacies of land investing, sharing their recent experiences and challenges in the field. They discuss the importance of data scrubbing, effective marketing strategies, and the need for adaptability in a competitive market, ensuring your land investing business remains successful.
Key Highlights:
Personal Updates:
Justin and Clay kick off the episode with a candid discussion about their current challenges, including issues with data scrubbing tools and team dynamics, setting a relatable tone for the conversation.
Understanding Market Dynamics:
The hosts delve into the changing landscape of land investing, discussing how increased competition and market fluctuations can impact deal flow. They emphasize the importance of targeting the right lists and maintaining a proactive approach to ensure success.
The Importance of Professionalism:
Justin and Clay highlight the necessity of a professional approach in land investing, stressing the significance of having robust systems and processes in place to achieve consistent results.
Data-Driven Decision Making:
They discuss the critical role of data in empowering both landowners and investors, explaining how better access to information can influence pricing and negotiation strategies, ultimately leading to more successful deals.
Building Relationships:
The hosts share insights on the value of networking and building relationships within the industry, which can open doors to new opportunities and collaborative ventures, reinforcing the importance of community in land investing.
Value-Add Opportunities:
Justin and Clay explore the importance of identifying and creating value in land deals, encouraging listeners to think beyond simple flips and consider long-term strategies for growth.
This episode is packed with practical advice, personal anecdotes, and actionable insights that can help you navigate the complexities of land investing. Whether you're a seasoned investor or just starting out, this conversation is essential for anyone looking to understand the current market and thrive in the world of land investing!
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Justin's Socials:
Clayton Hepler (00:00)
Hello and welcome to the ground game podcast. This is your co-host, Clay Hepler.
Justin Piche (00:06)
And this is your other co-host, Justin Piche. We're here to show you how to win the ground game.
right, man. Another week. What's been going on for you?
Clayton Hepler (00:28)
Dude, we were talking about this. So we're doing this scrubbing process that we have been scrubbing using one of the main, I'm not gonna talk about the tool, but one of the main tools has been problematic for us. We found that there's inconsistencies in using this AI scrubbing in one of the big land tools.
And so we brought on scrubbers to scrub our deals before we do high volume outbound for them.
So we were just talking about earlier, like that's a big constraint for us. And we have a member of our team right now that's, we've been dealing with this constraint that's just not super proactive. you know, we hired this person to a position that was above their capacity. I've been talking about this for a couple of weeks, but we're trying to find the replacement, right? And get this person back in a seat that really fits what their skillset is, right? And so, you know, just,
dealing with some some marketing some data stuff and you realize this more and more that that's the ballgame like the data is the ballgame
Justin Piche (01:37)
you
Clayton Hepler (01:40)
And so hitting the right list, targeting the right lists and making sure that when you reach out to people that you're talking to the right people is kind of everything. And so it's been top of mind as we get into Q2, like that's a big priority. Our marketing is a big priority and in producing like a big outcome, which we'll talk about Q2 goal setting, I'm sure in an episode coming up, but a big outcome for us is getting a 35 to 40 offers per week. Right. So that, that would, know,
Justin Piche (01:46)
you
Clayton Hepler (02:10)
virtually guarantee consistent eight to two to 12 months or eight to 12 deals per month, right? Given a most land investors are at a five to 9 % close rate on most deals. Depending on the type of deal you're targeting, like this is not everything, but as a general rule, you're between five to 9 % I found for most people. And so if we can get into that number of offers per week, we, you know, we're hitting consistently about eight to 10.
Justin Piche (02:23)
you
Clayton Hepler (02:40)
deals a month. Long-winded way of me answering your question.
Justin Piche (02:41)
Yeah, man, it's it's hard
Yeah. Yeah. I mean, it's hard. Yeah, it really is. It's so funny, too, because I have a lot of conversations mostly with coaching students and just other folks in the land space. And when you're doing low volumes of outbound marketing and you have some dry spells because this business is super cyclical and you're not able to generate enough leads, it feels like you're doing everything wrong.
When in reality, you might not be doing everything wrong. There's probably just little things that need to be tweaked, but it's hard to tell when you have like a low volume of leads coming in because you're not making many offers and you just feel like, like you don't see the light at the end of the tunnel. And I feel like I give a lot of people this feedback, which is it's easy to say, just throw money at it and do more outbound marketing. But there is a level of this business that when you're, when you're actually executing at scale, you can produce consistent.
kind of results. And then you actually have the insights to do kind of what you're doing, which is targeting a specific amount of offers to make per week by and then going further back into your data and figuring out, hey, what is the right type of data? How do we scrub these things better to generate higher quality leads so we can make this number of offers? But if you're at a really low volume, which I know a lot of folks are because they're just starting and there's no there's no shame in that at all. Not even a little bit. I don't want anyone to think, man, Justin's talking bad about.
No, no, no, everybody has to start somewhere, but just know some of the problems that you have as a land investor, mainly on the lead flow, number of deals you're doing, are a product of your outbound top of funnel type stuff. without generating enough inbound leads, it's hard to even focus on what do need to optimize on the data side. So it's nice that you even have that problem, right? Of like, hey, how do I optimize this on the data side?
Clayton Hepler (04:34)
Yeah. Well, dude, one thing was interesting. Some guy reached out to me and he was like interested in getting private coaching. And he's like, I think I need like a sales coach. Right. And so I had a conversation with a really good guy. Right. And, um, he was like, I sent on a bunch of texts last year and, and, and, and I got three deals. Right. So I was happy with it was my first year. got three deals, whatever. ended up being good deals, but I sent out a certain amount of texts and, and this is what happened. And so.
then I started to break down like, okay, so you can expect this amount of texts to get a qualified lead, this many qualified leads to get an offer, this many offers to get a deal. And I broke it down and he's like, that was the exact number of people that I texted to get three leads or three deals. And so he was like, I want to be taught how to be a better closer. And I said, you know, how many, how many offers did you make last month? He's like probably four or five. I'm like,
There's the problem, right? Like the problem, but we think a lot of times too, like when we're like isolated, you and I even talk about this stuff, Like internally, we're just checking temperature. Sometimes it's just like you go to the doctor because you feel sick and you're like, and the doctor's like, actually you're just fine. Like this will pass. And sometimes you just do a temp check and people will do temp jobs. Like you said, your private coaching clients, people would message me on social media to do a temp check or in general.
Justin Piche (05:35)
Yeah.
Clayton Hepler (06:00)
And sometimes like the temp check is just a quick conversation. It's a snap back to reality. The guy's like, dude, you need to like quadruple your lead flow or quintuple your lead flow in order to get to where you want to go. Right? It's all about starting with the end in mind and you can get there in a lot of different ways. But having like a colleague or community or people that you can really go back and forth with at your level or a little bit above is really, is really helpful. dude, I think that brings us to the point.
Justin Piche (06:15)
you
Yeah, real quick.
Well, one more kind of thing. just was thinking about how you're saying that on the volume. And maybe this is probably, you know, this is my business. So everybody's is a little bit different. But thinking through, we're hovering somewhere around 20,000, like outreaches in a day, like cold outreaches, trying to get in contact with a lead in a day. And then from that, that generates somewhere around 10 % like of
Clayton Hepler (06:32)
Yeah
Justin Piche (06:57)
conversations or at least like discussions or at least some sort of like no get lost or maybe or whatever conversation and then from that we're generating about 1 % of those as as like qualified leads. So about 20 some maybe even a little bit less 15 20 20 per day of like qualified leads that are coming across. So from 20,000 Outreach is down to about 15 to 20 20 leads per day.
And then that is resulting obviously in quite a few offers and quite a few contracts. But I don't know. Maybe somebody will be able to take that information and be like, wow, I'm only doing 500 outreaches per day. And so I can only expect three leads or one lead. I don't know. It's just a quick little thing I just noticed in my business.
Clayton Hepler (07:47)
Well, you're right. there's is a consistency's across your your sort of lead flow. And a lot of times, dude, like across your business, a lot of times it's like, what
is the thing that we can control the most of and give us a highly likelihood of us closing deals. it's having opportunities talking to people, right? Talking to sellers. The more people we talk to, the higher the probability. And you can fix everything else downstream. Closing is things that are happening downstream versus the upstream stuff. But I want to talk about today something that we're going do a little exclusive. Training is probably not the right word.
to say what we're about to do, but we're going to do a deep dive.
Justin Piche (08:30)
This might be one where
somebody actually wants to watch the YouTube video that we post from this.
Clayton Hepler (08:38)
Well, mean, you know, they do say we have radio voices, so a radio faces. Faces for radio, faces radio. Yeah, no, so let's do it. Let's jump right into it. So we're going to we're going to deep dive a deal that Justin is working on today. I'm going to I'm going to jump in as the investigative journalist, ask Justin some questions. You're to pull it up. We're to talk it through. And then it's going to a little bit of a shorter episode today, but it's going to be punchy.
Justin Piche (08:43)
No, Face for radio.
Clayton Hepler (09:09)
So we can get you guys some show you guys some value here we'll go into some nuances of how to acquire a multi-million dollar deal
Justin Piche (09:16)
All right, so think I'm sharing my screen right now. For those of you who listening, I'm sharing a land ID. This is a 34 lot, 150 acre subdivide that I am in the final stages of closing. Right now, we should be closing in here. We're waiting on one kind of big aquifer study, and I'll get into that a little bit as we get into this deal.
And once that comes back good and we get our lot density from the groundwater board, we will close and proceed with this this deal. But this is hundred and fifty acres in Burnett County, Texas, which is about an hour ish hour and a half northwest of Austin. I'm working on it with a partner, my partner Ben. And the way this deal came across or apart or came together rather was through a personal relationship that Ben had.
And Ben got connected through some family connections with a broker in the area that had a pocket listing essentially for this back parcel, which ended up being about 100. We thought it might be, you if you look at the land ID land ID shows this bigger parcel, it's 150 acres, but it is in fact only 106 on this back parcel. So through that, we went out and went to go visit the property. It was incredible. We're around on side by sides, got some good views. I think I posted a couple of pictures on Twitter on
or X or whatever on Instagram when I was out there. I brought my dog Scout. She got some cactuses in her paws, but it's just beautiful hill country land. Just incredibly incredible. And the beautiful thing about this property, I'm to go 3D real quick, is that it sits up on a high spot. And so if you can see. Kind of from the 3D, you've got you've got views here to the northeast, you've got views to the northwest and
Clayton Hepler (10:56)
Yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah.
Justin Piche (11:03)
I took some photos over from and videos over from like this little area right here on the edge, kind of like got over here, walked down here. And you can even I think you can even see Marble Falls, Texas a little bit from from the edge of the property, which is pretty cool. So in terms of like a unique product for people, a lot of folks who are moving out to the hill country, that's what they want views. You know, they don't want to just be like down low and see nothing but cedar trees or whatever. But.
they want to see views and so that's what this this property had. So the initial ask was 1.8 million. We ended up making an offer.
Clayton Hepler (11:38)
Are you
talking, are you saying, are you saying, let me just interrupt you, everybody. Are you saying 1.8 million for the back portion or the whole thing? Got it. So at that point, when you saw that offer, okay, cause this is important, right? Cause people will get deals that come across their desk and they will look at a deal, Justin. I'll say, you know, guilty of charge, guilty of charge. ⁓ well, that just doesn't have the, I don't.
Justin Piche (11:40)
Yeah.
The back, just the back. 1.8 million for the back.
Clayton Hepler (12:05)
It doesn't have the road frontage. doesn't have this. It doesn't have that. There's no way I can go a crate, right? So there is limitations or barriers. There's these fences that we put around our minds to prevent us from actually executing. So when you got that, what were it's going through your mind when you're saying, okay, like...
Justin Piche (12:17)
Yeah.
Yeah, so the first was there's no road frontage. There's easements. There's no road frontage in Texas. There's an exception to the subdivision regulations that if you're doing 10 acres or greater, you don't necessarily need to build county spec roads, chip and seal or asphalt or any of that stuff. You can you can you can build a private road or a Kalichi road, as folks call it, kind of a crushed limestone road.
Clayton Hepler (12:26)
Right.
Justin Piche (12:47)
If you're going 10 acres or up. So the first thing that popped in my mind is, OK, well, we've got 100 acres. We can create 10 10 acre lots. How are we going to get access? And then what will those lots sell for? So we did some comp analysis and the numbers just didn't quite work for a deal like this at the 10 acre size. And it didn't. To me, that doesn't mean, oh, no, the deal is totally dead. It just means we can't pay one point eight million for the deal. Frankly, like that's all that's all it really means. It means that we have to come in at a lower price. So
It didn't kill it, but it was kind of like a little disheartening after going out there and looking at it and then looking at the detailed comps and figuring out where you're going to provide access to and from. Now, the folks that are selling the property to us, they have an easement here. You can see as I'm zooming in this this kind of gravel, it's a caliche road that comes in here and then it cuts north into their property. And so they had agreed to give us a full easement, full access along their easement to the back of this this property. But this is a pretty long.
I mean, it's a really long road. If I measure this from the paved road back to the parcel where we're actually drawing the property lines, 40 to 40 almost, yeah, it's almost a mile of road just to get back onto the property. There's also an easement here, but they didn't want us to use this easement. goes through somebody else's property. So this is kind of where the access was going to be. So OK, not great, whatever.
Clayton Hepler (13:54)
Almost 3000 faith of 4000.
Justin Piche (14:15)
The numbers basically worked for 100 % cash on cash return with our initial estimates doing 10 acre lots at 1.6 million. And the other thing is we didn't know whether or not this was 150 acres or 106, which it ended up being 106. And so we actually gave two offers. We gave an offer for the 150 and an offer for the 100 in there. And it just basically was like based on title and survey, whatever this ends up being, our offer will adjust based on the acreage in there.
We kept underwriting and looking at the numbers and basically came to the determination that we weren't going to be able to move forward at our 1.6 price. But there was also this 40 acre property listed on the market from the same broker. And this was listed at 1.25, 1.3 for 40 acres, quite a bit higher price per acre. But the beauty of this property is it has paved road frontage and
It just lays really nice. It's kind of flat and rolling. It does have views. It has a high point over here. So it has views in the northeast direction, which is really nice. And when we started looking at this and cutting this into smaller properties, and we went through a ton of iterations, let me tell you. First, we were looking at just cutting four tens. Then we were like, well, what if we cut seven and a half, so you made them a little narrower? And then we kind of crossed that threshold of going from 10 to lower, which put us into a
Chip and seal road that we'd have to build we couldn't do like a dirt road or a grout crush gravel road And then it became okay now if we're gonna have to do this road We have to increase the density to make sure the return on the project is is better and then once we aligned on getting this Chip and seal road here we were gonna do a transition from chip and seal to either kind of a rolled asphalt millings road or Or just continue the chip and seal and then when we decided we're gonna continue the chip and seal that's when we cut the density
on this back parcel even smaller too. It's like if we're already going to get this whole thing approved and subdivided into these smaller lots, why not go fuller, like more dense across the whole board.
Clayton Hepler (16:18)
So, so let me just pause here. depending on the county, depending on the area, okay, there is going to be a difference between five and 10 acres or there could be no difference in price breaker. So when you were looking at this and you said the 10 to seven,
Justin Piche (16:21)
Yeah.
Yep, that's right.
Clayton Hepler (16:35)
Okay, 10 to seven and half on that bottom parcel Southeast. And then you're like, you know what? I'm going to pay the additional money. There's a calculation guys. There's a return that we have to say, are we going to go 10 acres or are we going to have to do the upgraded infrastructure in order to go to five acres, seven acres, whatever. So what was that discrepancy dude between the 10 and the seven or 10 and the five that caused you to say, you know what, man, like
Justin Piche (16:53)
Right.
Clayton Hepler (17:03)
I'm going to, I'm going to, I'm going to do this full major subdivision here.
Justin Piche (17:07)
Yeah, well, we got some initial like really good road bids that they gave us a lot of confidence is the first thing. Those ended up coming in a lot higher as they as they usually do once people get out to the site and you get engineering and all that kind of stuff done. But the price difference is pretty significant. A 10 acre tract in this in this area is going from twenty seven to thirty three kind of thousand an acre. That's the price per acre for a 10 acre tract. And there's a few of them.
It's also quite a high price point, right? $300,000 $330,000 a lot is a pretty decent price point, which prices out a lot of folks that want to live here because they don't have that amount of money to spend on just a lot they're going to eventually build on. Once you get down to three to five acres, the price is up around 45 to 50 plus an acre. So it jumps pretty substantially when you go from the 10 down to the three to five. And there's not a lot of inventory of that in the area because most developers
take the exception rule because it's a lot easier to get an exception approved. There's a whole lot less work you have to do. You don't have to deal with a ton of engineering on road design and you don't have to do an aquifer test, which is something we can get into that we had to do on this, which costs a lot of money. And if you, if it comes back bad, it's all gone. You know, when you're doing developments like this, your due diligence money that you're spending on proving out that you can actually supply water and, and, the initial engineering before you actually get approval. That's if it doesn't.
or you can't get the deal together, you lose all of that money. So it's a risk, right, to take when you're doing something like this. So we put an offer in on this property down at about 900, ended up settling it at 1,035,000 for this 40 acres. And so this one's at 1.6. So we have this whole property under contract at 2.635. That's the purchase price of the property. So when we decided to go,
kind of simpler, I mean smaller, smaller lots. We started working with an engineer to give us a lot layout. And you can work with a whole lot of people to get site layouts. Sometimes I work with the engineering company that's recommended by the county. Sometimes I work with overseas engineers that understand how to do lot layouts to get something done for pretty cheap. actually have a guy that does lot layouts now in Columbia for me. they're usually, even I had him do a 94 lot.
development that I'm working on elsewhere in Texas that It was like 150 bucks for the lot layout, which is a really good price so You can find these people on Upwork or Fiverr. This was a one my project manager on my team knew this guy She's an engineer as well and and she knew this guy and so she made a referral and we ended up working with him and yet produces a great great product But when you're getting the full engineering design done you want somebody you have to have a professional engineer licensed You know here so you can't use that guy for the overseas person for the whole project
Clayton Hepler (19:57)
Right. Right. Right.
Justin Piche (20:03)
but we got the lot layout, ran our density or ran our underwriter calculations with these smaller lots and gathered a whole bunch of estimates and bids for the work that we'd have to do. Now the first big question on development like this is water. These are all wells. This whole area is wells. It's run off of the Trinity Aquifer and we had to basically prove to the county, to the groundwater board that
the number of wells that we're putting on this development and whatever life cycle they have and however many gallons per day or whatever they're going to pull from the aquifer and all of the other wells that are in this area combined with the new wells that we're putting on don't adversely impact the water table and make it so that water can't be provided for all the current commitments that the aquifer has. So that whole process was really interesting.
We hired a groundwater testing company, guy named Brian and then another guy named Mike. was a company called Apex Drilling to drill the wells and we had to drill two wells here on this property. And we went out there for a site visit to set the well location. So we made sure we were setting them in an ideal location on our proposed lot split. know, because these are are wells that will be used for somebody's water source. You don't have to waste them. They will go to a lot.
Clayton Hepler (21:22)
Right?
Justin Piche (21:28)
And so we want to make sure they were in good locations. Then we had to also set two wells back here. So I think we put them like, one of them was like right here and here, and then the other two were like here and here or something like that.
Clayton Hepler (21:39)
So, so if
you're, in this process, you got the engineered designs, you, you're kind of figuring out where your lots are. Okay. ⁓ you're, you're at this point, you don't have a survey line. So how are you actually locating the actual lot? Like the areas that you should be.
Justin Piche (21:55)
We had this lot.
So we had the boundaries. We had the boundaries surveyed and then we had this lot layout. Yeah, already had the boundary surveyed, not the individual lots yet, but we had the boundaries surveyed and then we had the KML site plan from the engineer. So this is actually, if you're looking at our YouTube video, this purple line, this is actually importing a KML file to land ID and overlaying it on the parcels. That's what this is, this purple kind of line here.
Clayton Hepler (22:00)
Okay, you already had the boundary surface.
Justin Piche (22:24)
So we just use GPS on the phone and set the location.
Clayton Hepler (22:24)
Okay, so at that point, at that point, yep,
yep, latitude longitude, you put it in there and you're good.
Justin Piche (22:33)
But the
aquifer testing, still in the, so we've, we drilled the wells starting back in February and then we got all the well testing, like the pumping tests finished a few weeks ago. And then we got all of our test results, our data back that our water testing engineer ran through the model and everything looks good from his perspective. And so now we're in the phase of we're getting approved by the groundwater board. So they're going to review all of the data, the full tests, and then they're going to give us a density that we're allowed.
to All indications right now are we are golden on this and we could probably have higher density and we may try to introduce a couple more lots if it makes sense, if we can still create really good home sites on every lot. But this is probably what we're going to what we're going to end up with. But that whole thing costs my partner Ben is the one who fronted all the money for that. I have different money fronted for different projects, but he paid for all of that out of pocket. So he's out of pocket one hundred and fifty K or something like that just for the aquifer testing and well digging and stuff. And we haven't even closed.
I mean, we haven't closed on the property yet. So that's kind of one aspect.
Clayton Hepler (23:35)
So one
aspect, and this is a big thing, right? So when you're approaching these opportunities, a lot of people throw them out because they're instantly, oh, this is above the or below the exemption. Too much headache. Oh, this is, know, there's too much difficulty here. Too much, you know, too much headache. I don't want to go through or I don't have the cash to do it. Right. So.
That is that's crucial. So flexibility in mind really is what's going to help you get through these types of opportunities, but also the right partners, the right person that can come in and finance this. Whether that's family money, you raise it from a fund or you raise it from an LP. But that's a crucial part of this whole process because if you want to scale, if you want to play this game, which is a bigger game, right? You're to have to front money. You're going to have to
send the money to the surveyor and not know if it's gonna pass. You're gonna have to go out there and do the wastewater plants or the wastewater tests or the groundwater tests or the PERC tests and you're in 80, 100, 100K and you're not closing a deal, right? Like that happens, unfortunately it does happen, but if you're swinging enough, if you're going and doing enough deals, mean, just we're gonna talk about the numbers here in a second, which we're gonna transition right now.
Justin Piche (24:42)
you
Yeah.
Clayton Hepler (25:00)
But you're swinging enough of these deals,
you'll see by these numbers, returns get pretty attractive, right? Returns get pretty attractive. So let's look at the underwriter here. So we see that we're gonna move from one screen, I'm gonna just kind of talk us through here so that everyone can kind of understand what you got going on. So purchase price 2.635.
Justin Piche (25:04)
and
Hey guys, this is Justin interrupting your podcast in the middle as I usually do to say thank you for listening. This is a little bit of a different episode. I'm doing a deep dive into a more complex development that I'm working on. And you know, if this resonates with you or you have a deal that you think might fit this type of criteria that requires this level of work in capital raising, et cetera, and you want to get a second set of eyes on it, click the link below. Clay and I would be happy to review it and give you some feedback as.
Usual you're the best and now back to your regularly scheduled programming
Yep. Which averages out to about 17, 500 an acre. So real quick description on this underwriter. This is a product Ben and I, Ben put in probably must've worked, but Ben and I really had to build out a much better underwriter for these type of deals. Because I use a general, and I've given this template out to people and if you want it, let me know and I'm sure I can get you a copy of a really simplified
Clayton Hepler (25:58)
Okay.
Justin Piche (26:21)
Underwriter this one's a little more proprietary I'm not really giving this one out if you want to partner with with with clay and I you know happy to happy to talk talk about it or What not but this is this is a this took a lot of work to develop And the reason why we needed something more complex is because when you get into a deal this size and you don't have The capital to take this deal down like I don't I don't personally have the total raise here is 1.53 ish million
I don't have 1.53 million liquid that I could deploy into this deal and take it down myself. And why would I want to if I did if that was the capital I have, why would I want to just put all that capital in myself and take all the personal risk on this deal? You you want to bring people in, you want to establish relationships with investors. And in order to raise money from people, you have to show them what the financial performance is in order to show them what the financial performance is. You have to model it. You have to show the cash flows. You have to show the returns.
You have to understand the nuances of your lot sales prices and timing, whether you're offering owner financing or not, when those cash flows are going to be released, how you're going to pay your bank debt. All that stuff has to be realized and visualized. And so it just took a lot to kind of build this out. So that's what we're looking at now is this underwriter. But essentially, 2.65, 2.635 purchase price. We're pursuing a construction loan, a 25 % down, 75 % loan to cost on the property and
on the improvements. So 2.8 ish million dollar loan is what we're looking for. And not about a million dollars down payment. A couple of things that I have in here. One, I'm raising a year's worth of interest upfront on the full bank debt. And that interest reserve is to make interest payments on the loan before lots sell. So we're forecasting lots are going to start selling about six months after we take title to the property. But
We have a year's worth of interest reserve already set aside so that we're not having to do capital calls in the future. That's just a bit of conservatism built in. That's something you definitely want to do on any large scale project where you have bank debt or some sort of debt that you need to pay pay interest on. The rest of these are kind of, you know, estimations, one percent origination fee. Obviously got appraisal fee. I think they came in quite a bit higher than this, like three or four grand. So whatever, you know, it's not a huge change in the in the one point five million dollars we're raising for it.
Clayton Hepler (28:40)
Yeah.
Justin Piche (28:47)
This line entity formation fees. So we are forming we formed a special purpose vehicle a fund for this Investment where where Ben and I are the GPs and we have a management company that will earn the acquisitions fee and a development fee for all of the work that we're putting in and then we have the fund itself and then that fund owns a Property company or an LLC that owns the deal itself
So the deals bought by this prop co the prop co is owned by the fund. All the investors are LPs in the fund. We are the GP. The GP has a co invest. And then there's this management company off to the side that earns fees on the deal. That's kind of how the how it's how it's set up and that I mean that can range in cost. We're working with my friend Kyle Bryant the firm that he's he's a part of which we Clay and I were just on a meeting with them and they're called the investment lawyers. I think it's TIL.
Yeah, the investment lawyers. That's this is all they do. They set up funds. They're really good at it They offer really great customer service. I've been very happy so far using them I'm sure you can find other attorneys or places to set up to set these up. But if you are looking for one, that's my that's my referral Kyle if you ever listen to this referral bonus man referral And then we you know insurance obviously want to have insurance so we're underwriting for that and then entity tax prep
there's going to have to be some sort of tax prep fee for issuing K1s to our investors. So we just throw in 5K a year. It may end up being a little bit less than that. We'll see. And then down here, we have all the make ready stuff. And your make ready section is really like, what does it take to get your development over the line? So a lot of these, when I first underwrite deals, these numbers are all just estimates. They're just estimates based on my experience, based on past projects I've worked on, based on
Clayton Hepler (30:31)
Mm-hmm. Mm-hmm.
Justin Piche (30:38)
AI, like helping me determine what is a reasonable cost for something, asking other developers, looking at, you know, whatever public data is available. They're all estimates. And over time we refine these. So these have all been refined. These are actually like the real costs. The only one that's still not defined is this power line, the power line build, because in this specific area, Pedernales electric co-op or what I think that's what it's called Pedernales electric co-op.
They will until we have final plat. They will not give us any cost estimates whatsoever, which is really hard and frustrating as a developer because you want to if you're raising a bunch of money, you want to know with a high level of certainty what your total costs are right. You don't want to under raise and be 50 percent of what your final utility costs is going to be. And conversely, you don't want to throw away a deal if the return doesn't meet your target because you overestimated a cost. So it's kind of like a double edged sword. So we're.
Clayton Hepler (31:14)
my gosh.
Justin Piche (31:36)
We're having to, we've got, we got a little more data over time to refine this. ⁓ but there's also a contingency, a 10 % overage contingency that we raise on all the, that's down here. This one 52 on top of all of the construction costs. And you know, we feel very confident that we are going to be well within our contingency based on all these numbers, but you know, that's why that's in there. Cause you don't want to do a capital call. That's like the, not to say the capital call is the end of the world. It's not okay.
Clayton Hepler (31:49)
Yep.
Justin Piche (32:04)
If you're setting an expectation on a raise, you just want to raise it all up front, have all the capital you need to run the entire project and run the project and not come back to your investors and say something like, Hey investor, I underestimated and made a mistake. I need an extra hundred thousand dollars or whatever. You don't want to do that. Yeah. It kind of hurts your reputation a little bit, but you should do it if it's otherwise the deal will fail. like, you know, take your lumps, swallow your pride and do it. If you ever get in that situation, I mean, if we end up having to do a capital call, of course we're going to have to eat it and talk to our investors and show them why.
Clayton Hepler (32:24)
That's right. That's right. That's right.
Justin Piche (32:34)
and work to make it right. But that's all part of the subscription documents for the fun, too, of how that process is defined. Anyway. Yeah, there's a whole bunch of other things in here that we have.
Clayton Hepler (32:46)
So we're just going over and at the bottom
here, one thing that's important is like, you know, the acquisition fee development fee is a part of. So if you're going in these big, yeah, if you go into these bigger deals, you know, you still like because in just we'll talk about the structure in a second. But if I made, you know, because we're not paid until the end right until the project is successful. There's a little bit of an acquisition fee for time. You're going out to the property.
Justin Piche (32:57)
Yeah, these, that's what these, yeah.
Clayton Hepler (33:16)
you're putting all this time and energy effort into it. The management company should be paid acquisition fee, there should be development fee, which is basically GC fee managing it. And yeah, yeah.
Justin Piche (33:25)
Basically, yeah.
Yep, so we've tied these fees. These are pretty standard numbers. This is I think we have a 7 % development fee and we have a 2 % acquisitions fee. 2 % is pretty standard for an acquisitions fee and 5 to 10 or something is pretty standard for a development fee. The acquisitions fee is tied directly to the purchase price and the development fee is tied for us. It's tied directly to all these loans.
Any any construction soft hard costs that are that are lendable by our bank That's what we're calling development and that's what we're the development fee to So the total there is what? 1.2 little over 1.2 million and like costs for the development So that's what the development fee is tied to and then obviously we got our you know, our closing cost estimates in here You know on one of the I normally have 6 %
underwritten as a sales commission for brokers. But when you start getting up into these higher dollar, higher value properties, you you can negotiate with your broker to bring those numbers down a little bit. So that's one thing. For anybody who's like stuck in the 6%, I tell this to coaching clients all the time for even for regular land deals is it's always a negotiation. If a broker tells you, I need 10 % commission, you can always tell them, I'll do this with you for 6%, I'll do this with you for 5%, I'll do this with you for 7 % and just.
Negotiate with them. You don't have to just accept that And now they may decide it's not worth my time and not not work with you for that lower commission But they may say okay, I'll do that So it's the same thing with these bigger developments You can usually negotiate a little bit lower commission because it's still a lot It's a lot of money right to go with one broker for the whole thing And we got our overage This loan interest is like the additional loan interest that's not raised up front that we're gonna incur and there's a whole cash flow tab here which I can
Clayton Hepler (35:06)
Right, right, right, right.
Justin Piche (35:19)
I mean, this is where the modeling takes place. This spreadsheet is all the modeling and all the assumptions we're making and where the costs are incurred and what's going into the make ready loan, totaling our net cash flow, bringing down to the developer fees. And we're having the developer fees come out in a couple tranches. The first one is assessed at close because we've done a ton of work up to now to get everything launched. The second one.
The requirements for that development fee are plat approval and first lot sale. So we have those have to have those two things the plat has to be approved and then we have to sell our first lot and then we want to occur the second part of the development fee and then the last development fee over here is tied to the loan payback Yep, and then after all the fees you have your cash flow distributions after developer fees and those are the cash flow distributions that you're giving back to you as the GP and to your LPs
And so for generally the way these funds work is the GP, whatever money you co-invest essentially earns what the deal earns. So in this case, we're looking at a 95 % estimated cash on cash return for the, for the project, which is not exceptional. It's not bad. It certainly works for this deal. And that's what our money, our GP capital will, will earn. So Ben and I are contributing this. Yeah. Yeah, go ahead.
Clayton Hepler (36:39)
Yeah, let me just
jump in here. This is important, right? So a cash on cash return is time bound, right? So, for example, if you have a 10 year...
Justin Piche (36:52)
independent
of independent of time. Cash on cash return is independent of time. So like, yeah.
Clayton Hepler (36:57)
Right, right. So,
can we go back to your little catch? So, you have an equity multiple of 1.9495. You have a cash on cash of 95 and an entry or entity IRR. Can you break these down so that we can kind of understand? There's a profit of 1.451. So, let's talk about how this actually works.
Justin Piche (37:04)
Yeah.
Nine five, yep.
Yeah, so I mean the cash on cash return is not like, is not really, is time independent. So it's literally like when you, if you bought it today and sold it tomorrow, excuse me, tomorrow and you calculated what your return on the cash you invested was, that's what it is. Or if you bought it today and sold it in 10 years, you calculate that return, that's the cash on cash return. The entity IRR, that is, the IRR is your kind of like your,
Clayton Hepler (37:42)
Mm-hmm.
Justin Piche (37:50)
That is bound by time. That's like your cashflow distributions that you get over a period of time. there's obviously a calculation for it and we can just pull it up. So I'm not talking out the wrong side of my mouth. IRR calculation.
So calculation is it's basically it adds a discount rate to the cash flows. So saying, okay, if you're here's an example of what would create a higher IRR versus a lower IRR. A higher IRR would be distributing cash more quickly. You're getting your cash back to reinvest in other projects because you're you're it's basically giving you cash back and then you can redeploy that cash into other investments and earn a return. Now, if you delayed all your cash flows to the very end,
that would result in a really low IRR because you don't have the ability to make more money on that cash. It's basically assuming that you're reinvesting the cash that you get distributed.
Hopefully that that answers that question.
Clayton Hepler (38:47)
Yes. Yeah. It's the, it's the few,
it's a future value. I divided by the present value basically.
Justin Piche (38:55)
So we had, and there's, I mean, you can skin this cat so many different ways. We played around a lot with how we were going to do distributions and trying to figure out what's the optimum way. And there's, ways to run deals where your IRR is higher than your cash on cash return. If you, if you have like really quickly distributed cash flows, you may have a lower, but you can front load those distributions. You may have a higher RR than, than the deals total cash on cash return. Like that's totally possible.
But the way companies or people use IRR is to determine what's the best investment for me right now. If you're comparing two, it's a way of basically comparing multiple investments. An investor in this deal may say, okay, well, this is a, what are we offering? me look and see what we're settled on for investors IRR. 36 % IRR is what we're settling on for investors, which is great. It's a great return. They'll look at that and they'll say, okay, well,
Clayton Hepler (39:48)
Amazing. Amazing.
Justin Piche (39:51)
I'm gonna get a 36 % IRR. Now I have this other deal that's offering me a higher return on my cash, but it's only a 20 % IRR. because the deals are different life cycles, different time, different time of cash distributions, the IRR, the goal of the IRR is to normalize that between two separate cash flowing investments.
Clayton Hepler (40:11)
Right. So here's an important, so if you get above a 30%, 36%, your money's doubling in under two years. It's an insane return, right? So that's just shorthand for IRR. That's just the rule of 72. You just look up the rule of 72. That's how quickly your money doubles, right? So I wanna just kind of...
Justin Piche (40:13)
so they can make a decision based on that.
But that and real
quick, that's assuming you're reinvesting your money at the same rate that you're earning in this deal. like fundamentally, you're not going if you invest in the steel, you're not doubling your money. But if you redeploy the capital as soon as you get it back into a deal that's exactly the same, then you would double that would be because yeah, I think I think that's clear. And if we're talking over your head, I'm sorry, you we
Clayton Hepler (40:48)
Right.
Yes. And so
one thing, so the question becomes like, so I had two deals submitted to me, Justin and I, over the past week. One deal is a, both subdivide deals, both are in Tennessee, and one of the deals was, basically they both said, hey, how do you guys know,
if you should invest in a deal, right? Whether it's as a, you know, I'm pitching an investor to invest a deal. want Justin and Clay to come in and be a partner in this deal. There's a lot of different factors. There's a return on hassle factor, right? So if it's a very clear, easy road frontage, easy subdivide, there's an acceptance of a lower IRR, but usually as a general rule,
Justin Piche (41:31)
you
Thank
Clayton Hepler (41:50)
we're going to look between what would you say Justin over a period of two to three years
Justin Piche (41:56)
in terms of like a total return or IRR. I like to see for over three years, I want to see it like a hundred percent plus cash on cash return. And then the other, know, I, and I've struck this so many different ways, obviously like as I've learned what, people want and what I want, things have changed. What I used to do, what I still do on some smaller subdivides when I have a bank loan or leverage on the property is I'll pay off the loan.
Clayton Hepler (41:58)
Turn or return.
Justin Piche (42:22)
in its entirety from all first cash flows before distributing capital back and then distributing profit. But that results in a much lower IRR. It does result in a slightly higher return on cash because you have a lower interest expense over the life of the project, but it results in a lower IRR. And what I've moved to is much more quick kind of cash flow distributions to get that capital back and redeploy it into other deals. And that's what we're doing obviously on this one is what I've said. I've kind of set a 50 %
number of every all the cash flow we have come in, we're going to use 50 % to pay off the debt, which kind of spreads it out over the life of the project. And we may go a little more, you know, a little less. We'll see how, but each, each partial release obviously has to be negotiated with the bank. Generally you have a rule at the front when you, when you originate the loan where they'll say you need to hit 1.1 or 1.2 of your cost basis on each acre that you sell in order for us to partially release it. And so you kind of negotiate that on the front end and then you can either
Clayton Hepler (43:16)
Mm-hmm, mm-hmm, mm-hmm.
Justin Piche (43:22)
distribute more or less. And in this case, we want the IRRs to be high and really attractive for our investors. And so we're going to distribute cash flows quickly.
Clayton Hepler (43:30)
Exactly. so the flexibility kind of like how you structure that with your banking relationships, most of the time for deal like this, you're going to want to bring a bank on. Right. And so there's a lot of things. There's a net worth component to that. This is no longer a standard funding deal. You're no longer, obviously you showed that at 25 % down loan payment loan. You your bank's going to actually help with the construction loan format, but you can no longer pencil unless you have an incredibly low internal rate of return.
Justin Piche (43:40)
yeah. Yeah.
Clayton Hepler (43:58)
which no investors are gonna wanna be involved in, this deal if it's an all cash purchase. So really you're have to use a combination of bank loans and equity funders, whether you raise it yourself.
Justin Piche (44:08)
Yeah, I mean, we can we can look at
it right now. You know, you can just do 100 % down payment. And what does that do to the return on the deal? That kicks it kicks it to a 46 % return on cash or 28 % IRR and at the splits. And it's still not like a horrible, horrible deal, but it's not nearly as attractive. But the absolute return goes up.
Clayton Hepler (44:29)
Yeah.
Justin Piche (44:34)
I mean, if you look at the total profits here of 1.9, I mean, we're saving a ton of money on interest expense, 1.9 million total profits versus the 25 % number, which has 1.45 million in profits. But it really hurts your cash on cash return significantly.
Clayton Hepler (44:47)
Right.
So, Justin, think we're kind of wrapping up here. the end, you guys are finishing up this project, closing on this project. Last thing here is, how long is this project going to take?
Justin Piche (45:08)
Yeah, I'm estimating three years from purchase to last lot sale. And I actually, think it's going to take less than that. I don't think it's going to take that long. I think we're going to be able to come in with some, some builders buying a few lots and, move the, move the development faster than that. But, ⁓ you know, I don't want to, it's another thing. Like I did a sensitivity, a sensitivity analysis on this deal where
I dropped the estimated sales prices by 10%, raised them by 10 % and saw like what happens to the IRR or to the cash and cash return. And then I did another one where what happens if the deal takes an extra six months or what happens if it's six months shorter and did a sensitivity analysis to show the investors kind of what would happen in those scenarios and make sure they were comfortable with that risk on their investment. But yeah, three years is my estimate. You when I first started doing
larger subdivides, I was way too optimistic on sales timing. And I guess one of the lessons I've learned is just don't be so optimistic on sales timing. And who knows? Like we could take longer than this. It could take four years. I don't think it will. I really don't. It's not a ton of inventory in this area. It's really, you can look at sell through rates and kind of understand how much inventory you're introducing versus what's the sell through rate in that area. You can always do things to speed up the process, know, and diving a little.
Clayton Hepler (46:28)
I've never done a large scale development deal like this. I've primarily smaller rural miner sub-device, bread and butter. But what I always do is you're looking at your price per acre, for example.
And you're assuming, you know, the best case scenario, you might be selling at 95 % of market value. Um, when you're, this is how I underwrite 95 % of market value price breaker on my first lot. if I have a 10 lot subdivision, I'm going to assume, you know, basically 30%, 30 to 35 % are going to be at 95%. Then I'm going to assume another 30 % are going to be maybe 92 to 90. Um, and then I'm going to assume my last 30 % are going to be an 80.
That's what ends up happening because your best deals sell, your best parcels sell the fastest and then you end up wanting to sell out, your money faster and you'll be willing to take a total return to get your money back.
Justin Piche (47:12)
Yeah.
Yeah, yeah, exactly. Yeah, I think that's a great way to underwrite a little more conservatively. I went a little conservative on the purchase price from the get go. Like these are not going to be our list type prices. We're going to list higher than what we have here as the estimated sales price. And the other thing that I did to add some conservatism in is 20 % owner financed and then estimated the lot, the note sales into the underwriter as well with the, with that cashflow timing too, assuming we.
Clayton Hepler (47:59)
At what
discounted yield rate? Are you selling them? Good.
Justin Piche (48:02)
I underwrote at about a two. Yeah, I
wrote them at like a 20 % sales yield. Which ends up being right about an 80 % of the principal value note sale. So we get the down payment and then we sell at 80 % of face value to somebody else basically is what I underwrote in here.
Clayton Hepler (48:09)
Okay.
That's a great stress test.
Justin Piche (48:23)
Because the numbers would look a lot better if
I did all cash sales, right? They would. They would look much better. And then that might put us into offering a lower promote or lower percentage of profits to the LPs. There's all kinds of ways you can play with this. I'm trying to be as true to what I think is really, truly going to happen with a little bit of conservatism in there as I possibly can to get the numbers right. And we won't know until this deal performs what really will happen. We just, we can do everything we can on the front end.
Clayton Hepler (48:49)
Right, right, right, right, right. all
numbers in the spreadsheet and you've done your due diligence. kind of wrapping up here, in sum, what ended up being a preliminary...
potential no turned into a package deal. As we can see on the screen right now, it becomes an entire development. It becomes an entire subdivision. And so one of the things that I really learned from this call, this podcast is that when you have an opportunity, if you know your areas, you know your market, because I understand that your partner in this deal really knew the market, really understood the market. And so you can kind of look past the outside
And say, I really know, I think I can make a deal work here. Right. And, and then you packaged it, you, you got more creative, added the front lot, it becomes an entire subdivision. So then what happens is the more loss that you bring to market, you know, you can offer at the beginning specifically, you can sell them quicker because you have lots of different sizes and different, appearances. And so you can move them quicker in that way. So dude, I love the way that you package this together. This is really great. Thanks for sharing that.
Justin Piche (49:48)
Thank
Clayton Hepler (50:04)
I know the listens are going to really benefit from that and yeah, I think that All in all I can't to hear how that thing performs
Justin Piche (50:05)
Yeah.
Yeah, I'm sure I'll provide some updates as we go on. got a few more that are kind of similar in scope and size that are in various stages of works. This one is the furthest along in terms of like, we're about to close, we're like, we've raised all the money, we've set up the entities, we're calling capital this week and we're closing as soon as the water results are finalized.
Clayton Hepler (50:34)
So for the listeners, these are opportunities. I got a deal submitted today, buy for 500 cell port for 1.1 to Justin and I. And we're going to put some links down below if you're interested in getting support or having us look at your opportunities to help you kind of take that to the next level. can see that this, what Justin said here is it's not just a standard flip, right? There's a lot of complexity here.
There's a lot of months, there's a lot of cash outlay that if you want to take your business to next level, really we can help you kind of bridge that gap in whatever way you want us to help you, right? Whether it's just coming in with the cash, whether it's serving as a consultant and that's something that we're open to explore.
Justin Piche (51:14)
you
Yeah, absolutely. And you know, one of the things that I really I think I've tried to make it clear on this podcast and anybody who's worked with me will tell you is like I'm I just try to be as equitable and fair as possible with with whatever whatever whatever deal is presented. And I I really truly do want everybody to win. And maybe it's my wife's people pleaser kind of like very like
emotional intelligence kind of rubbing off on me a little bit. But I think it's just if everybody wins, like it's much better. I really am just not a big fan of doing deals where one party is really benefiting highly over another and it's not an equitable split of work and profits and whatnot. And yeah, anyway, just a little little piece there.
Clayton Hepler (52:09)
I love that man, that's great point. What I love about the land community coming from the household selling world and in multifamily world, it's just so much closer, it's just so much more intimate and there's a few really great operators, a few really great people in the space and people that are coming in and kind of learning that it's a very collaborative space and that's what I really love about the land business. yeah man, well.
Justin Piche (52:33)
Yeah, yeah. One last one
last shout out on this deal for because I know Ben's going to listen to this and our partner, Ben, but he he's he's such a smart dude and he's very like props to him for finding this deal and really pulling a ton of legwork to pulling it all together. And, you know, similar to like the way that you and I clay interact is I feel like having partners that kind of sharpen you or challenge you or, you know, and just being in open discussions about these developments of thinking creatively about what is possible.
just that iteration of talking to somebody else about a deal, they may see something that you don't see and it turns something that isn't into something that is.
Clayton Hepler (53:14)
amazing. Well guys, you know at this point what happens in the podcast. You subscribe, you rate, review and you say Clayton's contribution to this podcast was just amazing. No, no, seriously, I think Justin earned it this week, guys. If you get any benefit from the podcast for those long time listeners, you know, we see 5 % of the people that really rate, review and subscribe. And Justin and are going to keep bringing these awesome deep dives into our business, into what's working, what's not working to help you guys continue to scale your business and
win the ground game. Justin, anything else before we sign off here, brother?
Justin Piche (53:47)
That's it. Thanks, Clay, and we'll see you next week.