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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 56: Due diligence For Land flipping
🎙️ Welcome to The Ground Game Podcast! 🎙️
Join hosts Clay Hepler and Justin Piche in this exciting episode of The Ground Game Podcast, your ultimate guide to mastering the art of land investing, team building, and land development. If you're interested in a raw, transparent look into what it takes to build a seven-figure land investment business, this podcast is for you! In this episode, Clay and Justin dive deep into:
The Overlooked Profitability of Due Diligence:
Clay and Justin explore one of the most critical yet often overlooked aspects of land investing: due diligence. They discuss how thorough property evaluation can significantly impact your bottom line and protect your investments.
Essential Due Diligence Checklist:
The hosts break down the essential due diligence checklist for both flips and developments. They cover key elements such as slope reports, soil tests, zoning regulations, and hidden CC&Rs, ensuring you know exactly what to look for before making a purchase.
Spotting Red Flags:
Clay and Justin share their insights on how to identify red flags that could derail a deal. They emphasize the importance of thorough inspections and understanding local regulations to avoid costly mistakes that can eat into your margins.
Common Mistakes New Investors Make:
The hosts discuss the most frequent pitfalls that new land investors encounter during the due diligence process. They provide actionable advice on how to avoid these mistakes, helping you navigate the complexities of land investing with confidence.
Real-World Examples of Deals Gone Sideways:
Clay and Justin recount real-world stories of deals that went sideways due to inadequate due diligence. They share what went wrong, how they managed to salvage the situation, and the valuable lessons learned from these experiences.
Persistence in Closing Deals:
Clay shares a dramatic story of a deal that almost fell through due to a seller's erratic behavior, illustrating the importance of not giving up when there’s a significant opportunity on the line. Justin adds his perspective on the emotional rollercoaster of navigating complex deals and the lessons learned along the way.
Building a Sustainable Business:
The episode wraps up with a discussion on the importance of creating a business that supports your lifestyle, not the othe
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Clay Hepler (00:00)
Hello and welcome to another episode of the Ground Game Podcast. This is your co-host, Clay Hepler.
Justin Piche (00:07)
This is your other co-host, Justin Piche, and we're here to show you how to win the ground game.
Yesterday, my wife pointed out my face is ginormous on this. So if you're watching this video, I have a close up camera. I tried moving it back this morning, but what's interesting is Wi-Fi, the mesh Wi-Fi systems, older electronics have trouble connecting to the newest Wi-Fi. Like they're fine for whatever the the.
I don't even know what all the numbers mean in front of it, but they were fine for X, you five Wi-Fi, but Wi-Fi six or Wi-Fi seven or whatever they can't connect to. So I now have this really nice camera that I can't connect to my Wi-Fi anymore.
Clay Hepler (01:04)
man, I'm so sorry.
Justin Piche (01:04)
change.
Clay Hepler (01:08)
That's how they get you man. Everyone's copying Apple's playbook.
Justin Piche (01:09)
Which yeah, which leads I know.
I know which leads me into our topic of doing your due diligence on the things that you buy. Is that a good segue?
Clay Hepler (01:20)
It's perfect man. First of all, let's do a little check in what's going on with you. What's new?
Justin Piche (01:23)
I know.
⁓ man, let's see.
It's still it's a little it's a little slow time, but we've seen I mean last week was pretty promising in terms of sales contracts. We got some cash cash closes going, which is really nice obviously. Got some notes selling money is coming back in the door, so it's good. It's good. You know sometimes you get into like a period of time in your business where. You don't have clear line of sight of when revenues coming in like statistically and experientially, you know that you have a ton of quality inventory and that you.
of great properties that are going to sell. Like, you know those things. But when the sales contracts, you know, we have this huge list of sales contracts generally when they start getting smaller, when that list gets smaller and smaller and smaller and there's no new one signed for a period, you're like, but things can come around, you know, I gotta remember that things come around. So that's good.
I'm negotiating a really interesting deal right now. I don't know if anybody's done this. If you have done this, I'd love to talk to you about how you ended up structuring it. essentially it's owner financing. The seller is like quite adamant that he wants to receive payments over eight years. I obviously want to sell the property. It's a kind of a rural subdivide. I think there's enough potential to make it worth doing.
He wants an eight year term, eight year note, and he does not want to paid off early. So I'm putting in substitution of collateral clause into the note. Um, so basically I would buy it owner financing from him for like 300 something thousand dollars, 10 % down or 20%. I don't even care what we put down. You know, he's trying to limit the amount of income he makes each year. So 10 % maybe what he wants. And then.
do a substitution of collateral so that when I sell a child parcel, I have to find a bring a note like a mortgage that I own or another piece of real property that I own that with a BPO or something that shows that it's of higher value, maybe an O and E or something like that so that I can get, you we can make sure there's no liens on it. I don't know something to protect him, but then substitute that property as collateral so that I just keep making the same payments basically over time.
and he doesn't have to make too much money on that property in each year. Which is good for him, right? It accomplishes his goal, because otherwise he has zero cost basis in this land. It was a gift to him. And so if he sells it in this year, he's going to have to pay taxes on 300 and something thousand dollars. the thing that's worse for him is it's gonna show so much income right as he comes into Medicare that his premiums.
for Medicare are gonna be so high for like a long period in the future. And that's really what he's trying to avoid. So this is kind of just a creative way to try to protect him, but also get like something good for me, right? Because it's essentially like a line of credit that you have to pay down over time that you can just swap pieces of collateral with. And if you're an honest person, like I am, ⁓ you're gonna swap it with good collateral so that he's always protected.
I mean, there's tons of assets we own that have no loans against them whatsoever, right? We just buy them cash and that's what they are. And so it's gonna be annoying, I think, you if you swap collateral for one thing and then you sell that piece of collateral.
Clay Hepler (04:57)
For eight years, dude, for
eight. What's the exit on this thing?
Justin Piche (05:03)
I think it's a buy at 320 sell at like $6.50 to $7. Like a good deal. Yeah, I'll offer interest. Yeah, if try to be fair.
Clay Hepler (05:08)
Are you paying interest on it?
What's fair? 5 %?
Justin Piche (05:16)
⁓ Prime's at 7.25.
So six and a half. I don't know. I'm refining trying to refinance my house right now. So I'm getting looking at rates. I'm like rates right now for mortgage or brokers. Some of them are pay a point eight five point eight. I'm fine. I found one bank that's five point six ish no points, but we'll see if they do it.
So those are mortgage rates. I mean, how much would you pay for a line of credit that you can move around on different assets and interests? Let's say a private lender or a bank was offering it to you.
Clay Hepler (05:54)
as little as possible.
Justin Piche (05:56)
Yeah, I agree. I agree. But... What do you think you would get?
Clay Hepler (05:58)
So, you know,
I it depends on the person who's selling it, but like, I mean, it would be low. It would be low.
Justin Piche (06:08)
Yeah, I mean to me at this point, six and a half sounds pretty dang low.
Clay Hepler (06:13)
Yeah,
that does sound love.
Justin Piche (06:16)
⁓ That's what I'm gonna offer and I also offered a 15 year option I mean it would be kind of annoying my goals are honestly to like find a piece of an asset that I Don't plan on selling anytime soon like a really quality note that I'm just gonna hold in my portfolio and let it mature or something like that and And then as I sell child parcels essentially assign That collateral to it that way don't have to keep swapping collateral over and over again You don't getting him to sign a million documents, but I want the flexibility of doing that right because I don't
I said I'm gonna just tie it to that.
Clay Hepler (06:50)
Right. Well, it's still a good deal, ⁓ obviously it makes more from a return on your money would be better to have the least amount down possible.
Justin Piche (07:03)
Yeah, I'm putting only putting 10 % down. Or at least that's my offer to him. He may want more, which I'm okay with. mean, would, yeah, this deal is still good. mean, my underwriter, I put 35 % down and the underwriter and 8 % interest and it's still 100 % return on cash. It's kind of heavy. Well, that's just 100 % return on cash on the property. That doesn't.
Clay Hepler (07:17)
Okay.
Even over eight years.
Justin Piche (07:29)
I think there's honestly a net benefit to the business to having this eight-year loan with the ability to swap collateral because instead of when I sell, let's say it's 113 acres, right? It's a pretty low dollar area.
but subdivides around solid like Caliche type, county road going through it, power, pasture, water, trees. Like it's a nice property kind of in Northeast Texas. And when I sell a child parcel, let's say I sell a child parcel for $60,000, buy it for, or no, that's probably too low. Let's say I sell it for $80,000. So I bought it for $32,000 if you will. I sell it for $80,000.
I don't have to pay any of that to him to release the parcel. My business gets to take that $80,000. I have to replace that collateral in the loan with something else that I own in inventory, but I always have tons of inventory. So I just pick another property that maybe I think is slow to sell, get a broker price opinion on it.
you know, come down to 80 % or 90 % or whatever of the value of that broker price opinion, assign that collateral to the loan so that he's still whole and just make my regular payments. And then I have that $80,000 and now to do whatever I, you know, to work in the business, take his profit, reinvest, whatever. And then I get to take that $80,000 and roll it into another deal that then could produce, you know, a 70, 80, 100 % return. And I do that until, you know, I'm slowly paying down this note. So it's really just like a
kind of relatively low interest rate line of credit that instead of that you do have to pay principal down on. That's kind of what it's like. I don't know. It's interesting. It's I've been thinking about it. It seems complex, but it could work. We'll see how it goes. So you asked me how I was. I'm thinking about that deal. I just planted grass in the lot next door. So my kids were running around like crazy yesterday on this new sod that I have for the lot next door. So that's been exciting. Otherwise, that's it. What's going on with you?
Clay Hepler (09:40)
Well, I've been doing, know, Hess has grown up, man. It's just every week, it's just amazing, right? Like, it's just so much fun. It's just so much fun to be a dad. And he's about 18 months. And so he's starting to say, dad, dad, and run up to me and give me a big hug. It's just, you know, it just gives you so much joy. It's just, you know how it is, right? And so that is, that's been pretty incredible.
Justin Piche (09:56)
dude.
It's the best.
Clay Hepler (10:08)
As relates to our business, yeah, man, we're closing about 40 deals in the next four weeks on the sales side, which is just a crazy amount of volume of deals. My team, on the buy side, on the buy side. But on the sales side, it might be, I don't know, 10. Dude, ⁓ obviously good because it lines up a lot of opportunity, right?
Justin Piche (10:18)
That is literally insane on the sales side.
⁓ the buy side of the buy side.
Clay Hepler (10:38)
But it's really, I feel bad kind of for my team, right? Because that's a crazy amount of deals to close in four to six weeks. And there can be a lot of balls dropped, which I think is a perfect segue into our topic today, right? Which is about due diligence, right? Making sure whether you have one deal in inventory or you're buying one deal, right? Or you're buying 40 in the next month, that you check all the right boxes.
Justin Piche (10:51)
Hmm.
Clay Hepler (11:08)
I've heard from people that they don't perk test lots. That blows my mind.
Justin Piche (11:14)
Yeah, I mean, well, let's be clear. There's a couple of places that there's places geographically that in the in sort of
But there are places in the States where like, perk test passing isn't ⁓ like a confusing thing. But a lot of places I work, you definitely need a perk. And I have been burned by not perking lots. I know. First hand, and I'm sure you do too, like first hand.
Clay Hepler (11:40)
Yeah, so I agree. so I'm even like, some guy submitted a funding deal to me and ⁓ he, it was like a kind of a subdivide type.
Justin Piche (11:53)
We is
this the one in that we both got you brought to me as well that we both got pictures is a different one. Okay, because we had this happen to we had this happen on a deal in Tennessee. But yeah, water for remember waterfront sub to waterfront a couple waterfront lots pasture. There's a couple of perk sites that that have passed in the past passed in the past had had had tested.
Clay Hepler (11:59)
Different one, different one.
Well, you perked it and then it died.
Yeah.
Justin Piche (12:21)
good soil in the past and perked like the new suspected lot layout or the proposed lot layout and none of them perked, nothing.
Clay Hepler (12:33)
Yeah. So yeah, I think that there's two core stages of due diligence. There's before you like your preliminary stage one due diligence and then there's stage two due diligence. So I think we can go into the nuances like stage one is primarily for your flips. I give you a couple of examples of deals just this week that we went through stage one due diligence and we killed, right? ⁓ And then stage two due diligence is more extensive development.
type due diligence, I would say, right? Like deeper, deeper, deeper.
Justin Piche (13:07)
What's the goal of proper due diligence? Let's just like start like, what are we trying to accomplish with proper due diligence? I think it's obvious, but maybe not to some people. Like, what do you, how do you think about it? Cause yeah.
Clay Hepler (13:17)
Yeah, to make sure that this investment that we have in this land is going to yield a positive return and uncover anything that could prevent that from happening.
Justin Piche (13:28)
Yeah, yeah, I think when I think about it, think how do I, my goal is to kill this deal as quickly and as cheaply as possible. That's how I think about how I conduct due diligence.
Clay Hepler (13:42)
I like that. I like that. ⁓
Justin Piche (13:44)
It's almost
like my goal is to kill like I almost approach it as like from the perspective of like my goal is to kill this deal with how thorough the searches of the things I'm working to uncover. Not to like, you know, be too conservative and like under represent numbers so drastically that it obviously kills the deal. Like I'm not trying to do that type of stuff, but killed the deal based on features and land. What can I do with it? Etc.
Clay Hepler (14:10)
Exactly. Great, great, great thought there. So, I mean, I think on a very base level, the preliminary due diligence for me is like, you know, the deal comes in, I'd love to hear your process too, but it comes in, we get it under contract, preliminarily, we're checking for utilities, wetlands, feeble floodplain, slope, like, is this, does this parcel seem like it is a buildable parcel? Now, sometimes it does not, like from a map, it's
that it seems like it's a billable parcel, right? And the seller might even disclose things that indicate that it is a billable parcel. ⁓ And I'll give you an example about that in about a second. But we get this thing under contract and then our transaction coordinator goes to work, right? They call the county to figure out if there's any restrictions on title, restrictions to build, right? ⁓ If you're buying a parcel of land,
and your exit strategy is to a mobile home, someone that's putting a mobile home on there and you can't put a mobile home on there, your value is going to be affected. In addition, we purchased a this week that is a commercial lot in an area that's like all residential, it's quite rural. It's a one acre lot and it would be a killer rural one acre lot buy for 10, sell for 60, right?
It's a really, really solid deal. But we have to rezone it, right? And so we figured that out. You could put a nightclub there, you could put a tavern, you could put... Exactly. So down zoning is a lot easier than up zoning. So we figure out what can we actually do here? What's the zoning? What are the restrictions that we do? Any sort of environmental due diligence required? Most of the time we're getting a per test.
Justin Piche (15:43)
Yeah, but nobody wants to put that. Yeah, it's so crazy.
Clay Hepler (16:03)
Sometimes we're verifying are there utilities here, ⁓ whether it's water, sewer, electric, ⁓ gas, we'll do, it's not as important as these others I found. ⁓ And we're gonna go through that very basic filter, like water restrictions, and that's gonna get us to where we need to be. I'll give you an example. So a seller that we're purchasing a property, we're purchasing, we have to kill it.
but we're purchasing this property in Minnesota. And actually thanks to the land portal, this was actually really great. They have a slope report feature, it's amazing. so they have this slope report feature and we called the county to say, this person got a conditional use permit and it has a mound system on this lot. This is our acquisition manager telling me this.
Justin Piche (16:41)
Mm-hmm.
Clay Hepler (16:59)
Right? And acquisition managers have a tendency to say, hey, you know, this is the best parcel in the world because they want to get their check, which I completely respect. Right? That's what they should be. They should be pushing the deal. But ⁓ we found out that even though they had a conditional use permit, right? Literally the proof of a conditional use permit, literally a proof they said that seller said there was a mound system on here. He did not disclose the fact of the slope.
Now we looked at the land ID and it didn't look very sloped. It looked like kind of sloped. You're like, but I can put a house on there. And I looked at actually the street view and it wasn't crazy. It was sloped, but it wasn't crazy. And then I did the land portal slope report and we found that 75 % or greater of the parcel was 23 % grade. That's basically non-buildable. Now there was an area that was under the buildability
Justin Piche (17:50)
Mmm.
Yeah.
Clay Hepler (17:58)
of the the buildability threshold for the amount of slope. It was like 16 % or 15 % which is pretty, it's very much, yeah exactly. Yeah right.
Justin Piche (18:07)
It's still pretty steep. It's buildable, but for those
of us down here in Texas, that's not, that's not, we're like, whoa, that's a mountain, man. It's a mountain.
Clay Hepler (18:13)
Right, exactly, exactly. Exactly.
Justin Piche (18:17)
Hey guys, this is Justin interrupting your podcast. Just say thank you for listening. We appreciate you guys. Clay and I are talking about due diligence, doing a little reminder, some phase one, some phase two. ⁓ It's vital. It's important. I think you'll get some value from it. If you are, please leave a comment, rate, review, subscribe, set up automatic downloads. That's one of the key ways we know that you guys are enjoying this. So back to your regularly scheduled.
programming.
Clay Hepler (18:43)
So, long story short, my CEO called the county and man, we found out like very quickly that this was a non-buildable parcel, even though there was a conditional use permit, even though the guy installed a mound system. It was unbuildable and sellers will oftentimes not disclose that we're in a league. We're going to be in a legal battle with a guy that didn't disclose that this parcel was non-buildable.
It's in a zoning district that is, that was, ⁓ like had the right zoning for a single family home, but there was a nuance in the subdivision regulations of the specific subdivision that made it a recreational parcel.
Justin Piche (19:23)
Man, yeah, I mean, I find, yeah, there's a lot of things that sellers don't disclose. This is why you have to be so good at due diligence. Like there's so many things and like it could be a number of reasons. Okay, like I tend to be somebody who assumes positive intent in most cases, although that's probably not true for a lot of people trying to like sell you their garbage piece of land, but I try to assume positive intent. So it's possible that they just don't know. Like they didn't really figure.
they bought this or they inherited it or somebody gifted it to them or whatever and they're just trying to you know they don't know much about the property but a lot of times that's not true a lot of times they know exactly why they haven't been able to sell it and you're the next sucker who you know put in an offer and thinks they could do something with it
Clay Hepler (20:08)
and they're holding their breath the entire time. So in your team, Justin, who is getting the due diligence together? Who's calling, who does the restrictions? Is there anything that I missed that you think is helpful?
Justin Piche (20:10)
yeah.
No, those are really good. do. We do. I mean, a lot of that due diligence stuff, you know, is like almost pre pre purchase or pre offer or pre under contract for us. Not all of it because I don't like wasting time before getting an actual solid offer. But a lot of that is kind of our clean initial due diligence. And then some of the stuff that you're talking about, though, is we dig deeper. We try to figure out ⁓ the full utility picture, like actually call the utility companies and determine
You know what size line can we get a tap? How much does it cost to extend power? You know 500 feet into a property like things like that with will figure out. ⁓ Land use of course, yeah, we're looking into that. We typically order a due diligence report right off the bat from parcel review. And it's like I've done this since I started the business and they've gotten more expensive overtime, but usually buy a package of like 20 or 25 whatever due diligence reports.
It's kind of nice, you know, they it's a lot of work to like put a spreadsheet together of all the good information about this, you know, said parcel. They call the utility companies and verify they'll pull the deed record for you. If it's in a state where you can pull the deed, they'll take some screenshots on like land ID, whatever. And it's I mean, it's not the best thing ever, but it's nice because we use a lot of that information in our sales listings like GPS coordinates of it, like the corners of the property.
utility companies, what utilities are available, any CC and Rs that they can find the zoning code that they can find things like that we use in our listings. And so I pay 25 bucks or 20 bucks for somebody else to do all this rather than my team do it. And then we still do further due diligence. Not like that's the end all be all like I don't fully trust that. I mean, it's good information to have in one space spot, but I wouldn't like outsource my due diligence to buy $100,000 parcel. You know, we want to do that ourselves.
Yeah, I think everything you said is what we are. You know, we are looking at my big my it's not common. You run into that type of issue where there's a parcel that was platted in a subdivision zoned recreational, but we actually ran into that once something really similar not exactly that but something really really similar. I bought this property in Alabama, Shelby County, Alabama. It was 12.8 acres and then three lots about a half acre that were
that were sold in a foreclosure sale a decade ago or whatever some some woman bought them and then we bought them from this woman and the 12.8 acres was solid. I thought I could do a subdivide turns out I couldn't because of the road. need to build a full cul-de-sac and all that. So well, that's another thing about due diligence that we can get into that's actually a great due diligence story, but I'll just keep going on the issue. That was really somebody years to the tracks were home sites that were good. I sold those the 12.8 was fine. I sold that.
And there's another half acre that was designated on the plat common area. It's like a normal lot. It looks like a normal lot. It has frontage like a normal lot, but it's a common area and the subdivision regulations just don't let you build on it. And so I own the common area of this subdivision and nobody else in the subdivision wants it and I still own it. And I'm just like, I don't know what to do with this thing. Like I try to sell for
Clay Hepler (23:34)
Yep, that's exactly
Justin Piche (23:44)
four grand, it's like a half acre. tried to sell it to the people around that boarded it. wanted it. So I don't know what I'm gonna do with it. Maybe can donate it or something.
Clay Hepler (23:53)
That's exactly what this is, but I paid 23 grand for it.
Justin Piche (23:56)
you already bought it. you bought it. ⁓ yeah
Clay Hepler (23:58)
about it. The seller did not disclose
enough. Frankly, we could have done better due diligence, right? But the seller did not disclose this fact and we checked the zoning regulations and the neighbors, like I talked to a neighbor and he is a nasty son of a gun. He's like, I'm like, would you sign a petition so that some family could get a home here? He's like, absolutely not. I don't want anyone in my backyard.
Justin Piche (24:03)
Yeah.
yeah, that's pretty. Not in my backyard. That's so common of like an attitude, unfortunately.
We're not here to disparage boomers. say, yeah, let's just be clear. But, but you know, there are certain people that that don't want.
Clay Hepler (24:44)
That's very true. That's very true, right? ⁓ But it's a lesson, right? It's a core lesson. mean, slope has gotten me multiple times. I still own some lots and bad agents, man, I think is one thing that we missed. Like bad agents is I'm considering finally changing my agent for a track that I've had on the market for like 550 days. It's a big track, but like he's so unresponsive.
I just, yeah. Lawrence County, South Carolina.
Justin Piche (25:15)
Where is it at? Maybe I have somebody.
I don't think I have anybody to get there.
Clay Hepler (25:23)
If anyone does, DM me on Instagram.
Justin Piche (25:25)
Yeah, DM, let him know. ⁓
So level one due diligence, think is probably a pretty like widely adopted standard. I think there's levels that you can go a little bit deeper even with that, like for flip due diligence. I doubt everybody goes to like the county land use and or zoning regulations or whatever for properties. One thing I think you have to do though, you have to do this. People who are listening, if there's a subdivision or a platted subdivision, you have to.
read through the covenants and restrictions. And sometimes it's really hard to Sometimes there's a plat recorded. So if your legal description, the way I look at this is if ⁓ first of all, we asked the seller, you know, and then some of the software we use will tell us whether or not it's in an HOA or something like that. But even if it's not in HOA, there could be CC and ours, covenants and restrictions that you need to look at. If the deed.
Legal description references a plat book and page number you have to look at that plot Okay, cuz on that plat it will have a bunch of other things and it might reference a specific CC and ours that were recorded differently and sometimes the only way to find that is to Look in the county deed records or call the county and ask for the name of the company That created the plot or created that recorded the CC and ours and then find those
It's like multiple levels of digging to be able to find it. So I had, this has bit me a couple times and frankly, it's kind of hard to find this stuff. So like if it's bitten you too, no shame. Like I'm not like ashamed that this bit me by any stretch, but it is a lesson learned. You learn over time. I bought these two lots in a platted subdivision. ⁓ I looked at the plat. The plat had no mention of CCNRs on it.
Clay Hepler (27:11)
Right.
Justin Piche (27:26)
It just it did say somewhere it said like subject to any future recorded restrictions or whatever. But there was no reference to a book or d-page. There was no reference on my my legal description to any other restrictions or covenants. There was no reference on the plot to any restrictions or covenants. So like I actually did my due diligence. I dove in I found the plot. I'm like looking everywhere. I'm like there's gotta be some right? No nothing. I couldn't find anything. So I buy these lots. I hire a surveyor.
They're both, they have great road frontage. They're two four and a half ish acre tracks. I look at the subdivision, there's some two acres, there's some two and a half acres, there's some three acres, there's some four acres. are both, one's four, one's five, and they've got great frontage. I was like, oh man, I'm gonna split these in two each, and I have four lots in the subdivision. Fantastic. So I hired my surveyor, sent him out. He goes on surveys, paying like four grand or whatever it is to do all this work. And then I list them for sale.
And then I started getting calls from neighbor, like one of the neighbors or like the president of the HLA or something like that. And she's like, hey, like you can't do what you're trying to do. You're trying to subdivide these lots. You can't subdivide lots. And like, are you sure? Like I, you know, I read through the, I saw the plat. I read through my deed. I don't see any restrictions preventing me from subdividing. And she's like, yeah, there's covenants and restrictions recorded in the county.
here's the thing you have to, know, here's what you have to look for. Actually, you know, it was a neighbor called me. It was the neighbor who talked to my surveyor and my surveyor called me and was explaining that this is what the neighbor said. So then I started diving in. It took me like 30 minutes to try to like type a thousand search terms to actually find these true covenants for this neighborhood. And sure enough, I read through it and it says that no further subdivision of these lots can occur. And so.
I mean, didn't end up losing money. I wasted money. Like I threw away money because I didn't need to pay the surveyor for anything. There was already a plat like we had clear legal descriptions. There was no purpose and really surveying anything. I ended up selling both lots. I made a little bit of money, maybe like a 50 % return versus what I thought was gonna be like 120 % return. But that stuff adds up, you you spend four grand extra on this deal. You spend five grand extra on that. You spend 10 on this. You lose, you know, this thousand in earnest money, blah, blah, blah, blah. And like,
You know, a year later, you've got $100,000 in losses that could have been prevented from property diligence.
Clay Hepler (29:48)
Yeah, mean due diligence is it is actually like key. mean it's crazy how important it is and the more I've been in the big business the longer we take because there are so many things that can go wrong and few things go right. so your yeah, yeah, your role as a business owner, right? Whether or not you're leveraging a fundee, funder, whether you're doing it yourself, whether you're
Justin Piche (30:07)
It does feel that way, doesn't it?
Clay Hepler (30:18)
getting into the business and your parents are gonna fund your first deal, right? Or your friends, like they deserve the utmost amount of due diligence. And sometimes it's on the front end, it's like paranoia, right? Like, am I actually doing this right? That's actually good, right? Because like if you're raising money from another person, you wanna be a steward of their cash. And so, yeah.
Justin Piche (30:40)
100%. You owe it
to them. I mean you you owe it to be a fiduciary.
Clay Hepler (30:46)
Yep, yep. yeah man, I think that's the phase one of due diligence. It seems simple here, and it is kind of simple, right? But when you're in the hustle and bustle of ⁓ your day to day, sometimes you just skip it. You're like, all right, let's just buy it, right?
Justin Piche (31:04)
When you
when you're like Clay Hepler and you have 40 properties that you're going to close here in the next four to six weeks or you have under contract to close the next four to six weeks. Yeah. I mean, I can see why something would be missed.
Clay Hepler (31:17)
Yeah. Well, I'm also, yeah. So, so that's it, man. That's it. Phase one of due diligence. ⁓ a lot of times our transaction coordinator does that, right? and then phase two, I think is like even more a deep dive, like going into development base.
Justin Piche (31:35)
Yeah, phase two costs
you money. Phase two costs you a lot of money sometimes. And there's no way around it, frankly. So if phase one is generally the stuff you can do without, know, maybe a per test is kind of the extent of phase two in terms of what's going to cost you money or survey per test or survey. Those things will cost you money and those can be part of phase one due diligence. Phase two is a lot more involved because you are probably processing some kind of rezoning or
subdivision or something on this land. And so you have to figure out, can you do your plan? Can you is your plan viable? Will it get approved by the county? Can you create buildable lots for the end buyer or whatever it is that you're creating? And some here's maybe I'm gonna if you will, can I list some of the things that I'm looking at for phase two, and then you can kind of talk and there's gonna be more that I'm missing, I'm sure. But when I think through it, wetland study delineation, right?
A lot of times you have these flood maps and these wetland maps that are on these on the programs we use, you know, land ID, land portal, land insights, whatever you can see those things. But that doesn't necessarily get you enough information. And a true wetland study will map out and delineate all the wetlands on a property. So that's one thing. ⁓ Water availability study. This is a huge one. This is the thing that I found that has killed the most major subdivisions for me.
is water availability study. ⁓ Yeah, specifically in Texas. So quick example, working on a deal right now with some partners and we submitted for the water availability study. there's a couple of things with the water availability study, right? There's obviously, the provider have the capacity to serve the number of houses or structures that you plan on putting here? That's one thing.
Clay Hepler (33:04)
Specifically in Texas.
Justin Piche (33:31)
The second is, is there enough fire flow for the fire marshal and for the fire department? Those are like the two kind of big things. The fire one generally is like the more restrictive one. The more wildfires there have been, more counties, municipalities that have adopted stricter fire codes, the higher the fire flow standards might have to be. ⁓ And so...
You generally for these some of these bigger developments like we had to pay $6,500 just to do this water study just for the water company to tell us if they could serve the development that we want to build there. So obviously before we get that we have to get our unit count right because if we if we submit this package for call it 70 units and then we are engineers able to find another 10.
home sites and then we have 80. Well, that's more. And so we have to we would have to resubmit. They would have to redo the engineering calcs again. So you have to put the money into the site plan to figuring out the road layout and design before you even submit to the water company. So that's like 1520 case. So we're already like 20 whatever K into this deal. And then we and before we go submit to the water, right, we want to make sure if the construction costs are feasible. So we've got to get some at least engineering layout designed to tension estimate.
Waterline suit, you know power whatever estimate that we can bring to our GC to quote us before we spend another like $7,000. So it's like it's like this logical progression of all the things you have to do and spend money on to kill the deal as cheaply as possible. So we submit for the water availability report no communication for 60 days from when we pay they just won't talk to us. They're like we said we'd have in 60 days. You can talk to us in 60 days. So they go through the whole process. He gave us back the report.
And the assumptions on the report are different than what we requested. Like we requested a certain amount of fire flow. They made it four times. I asked technically eight times what we needed it to be. And their conclusions were that we can't build our development. We can't build our development. We have to.
wait for all these capital improvement plans that they have and listed like 10 different capital improvement plans like capacity improvement, pipeline improvement, whatever well quality, you know, improvement and that they are going to build that they're building. They have a plan for but there's no determined timeline for when those things are going to be built. And then they said we had to install a half a mile of 18 inch pipe off the road in order to service our subdivision. I was like, what the
What is going on here? This is crazy. And look at the fire flow requirements and they're requiring us to provide or the assumption they made was fire flow a thousand gallons per minute for two hours of fire flow, which is which is kind of I think part of this this new fire flow standard. But we'd already had a conversation with the fire marshal and the fire marshal had given us a much lower number for fire flow. He said, hey, 500 gallons per minute for one hour or even 250 we can work with.
Instead, we're running the engineering calcs on 1,000 gallons per minute for two hours. So now we have to go back and get them to rerun the report, which I have a feeling they're going to ask for another $6,500 just to run the report with the right assumptions. We're going to say, no, no, you ran these wrong. Here's the record of us requesting a specific fire flow. anyway, but that kills so many deals because obviously our project purchase price.
2.7 million infrastructure. Like we have about a two and a half to three million dollar like available budget to do all the capital improvements before we can't do this deal anymore before it becomes not an attractive deal. But but a half a mile 18 inch offsite pipeline. Holy smokes dude cannot kill kill the deal. So that's what kills deals like it's like the water company says hey we can provide it to you if.
Clay Hepler (37:21)
That is absolutely insane. That's huge. That's huge.
Justin Piche (37:32)
You spend $10 million on all these offsite improvements. Like, well, I can't do that. So I guess, I guess the deal is dead. Here's my money. Thank you, sir. You know, anyway.
Clay Hepler (37:37)
Yeah, right. Yeah.
Anyway, yeah, so
mean those are, so we went through wetland delineation, but really what you're talking about is utilities.
Justin Piche (37:48)
Yeah. Yeah, I specifically
specifically water because power is not generally as big of a deal, although it can be a big deal. It can be a big deal. Like if you only have one phase going through and like you're building a big enough development where you have to build a lift station or you have a ton of houses, you may have to install three days and you may have to bring it back a ways to get three phase or do some sort of like offsite upgrade. So, yeah, mean, utilities can be can be a thing, I think, too.
Clay Hepler (38:15)
But yeah, mean, we're actually doing deal in Texas right now in Roby, Texas, which is in Fisher County. You know Fisher County, Texas? It's close to Midland Odessa. It's about...
Justin Piche (38:22)
I don't know. don't official. Okay. Okay. I actually
have never worked on the west side of the state. I've only done like basically like central to east Texas stuff.
Clay Hepler (38:31)
Okay. So it's about
45 acres and we were doing due diligence on it because obviously water is critical out there. Right. And basically ⁓ we found a guy that will lay two inch line for water and we talked with the city and the city is totally okay with it for us extending and they'll actually put the sub meters in or the true meters in because sometimes, you know, in these weird counties,
they'll have you put the meter in for a main meter and then you have to put in sub-meters and then you have to be in charge of the sub-meters.
Justin Piche (39:06)
Yeah.
Clay Hepler (39:07)
So in this county, and so then you have to build it people individually, like you would if you owned an apartment building. An apartment building, right. So yeah, long story short, it's pretty interesting, but we're closing on actually today, and it's a buy for like 115, sell for like 250. So it's really good, solid deal, solid deal, but.
Justin Piche (39:14)
Like you set up your own little mini utility company, essentially.
Yeah, that's a great.
Clay Hepler (39:35)
⁓ Yeah, I think that that's the high level for utilities for me. Anything else, Justin? By the way, dude, let's wrap this up here relatively shortly so we can get to the next one as well. ⁓
Justin Piche (39:50)
Yeah, yeah.
Yeah, I mean, we haven't even kind of scratched the surface on the county requirements and county zoning type stuff, county subdivision regulations, county meetings, etc. ⁓ So maybe it be good to do like a specific development focused due diligence process podcast in the future. Yeah, there's a whole lot of other things for phase two due diligence. But I think the ones that most commonly kill your deal for sure.
are going to be kind of wetland soils, ⁓ just land use subdivision regulations, make sure you can build a conforming thing. Like you gotta be able to review those and meet with the county and then utilities. Those are the kind of the biggest ones. There's other ones too to look out for as well. And I'll just give like a little teaser. Roads, highway department, road department, access. I mean, you might look like you have a lot of road frontage on something, but can you actually build driveways there? What's the requirement? And I could.
Clay Hepler (40:25)
Yep.
Justin Piche (40:46)
talk ad nauseum about this, I've run into so many issues, but in the interest of landing the plane and giving people a nice, perfect length podcast, we're gonna end here, Clay.
Clay Hepler (40:57)
Yeah,
absolutely. ⁓ Super valuable and roads are definitely a big consideration. We've had plenty of deals blow up because of like NDOT and different types of road regulations that didn't allow us to the type of commercial development that we were looking for in the outer banks of all places. ⁓ And yeah, so mean, guys, you know this at the end of podcast, like if you like this due diligence podcast, like sometimes going back to the fundamentals is critical. And a reminder,
Justin Piche (41:08)
Yeah. yeah.
Clay Hepler (41:25)
is more important than new information. And so if you really got benefit from this podcast, let us know. Hit the rate, review, subscribe button down below. Let us know what you like. Give us some feedback. It allows us to grow. And Justin and I keep coming here, dedicating our time every single week. It's 7 a.m. right now. Justin and I are doing 6.55 in Texas, baby. We started here at six in Texas. And we're here to really add value to you guys. We enjoy this time, but
Justin Piche (41:44)
655. My time, ⁓
Clay Hepler (41:55)
giving that feedback to us really helps show us that hey, you guys are doing a really good job, keep it up. So please share, rate, review, and subscribe, and until next week, Justin, anything else?
Justin Piche (42:06)
We'll see you guys next week.
Clay Hepler (42:07)
Perfect.