Site Plan Approval is basically when a buyer makes sure land they are purchasing complies with local regulations and that they will be able to use it for their intended purchase, such as a subdivision or a commercial building.
Eric works with several land sales in Chatham, Wake, Durham and Orange County.
Interviewer: What is site plan approval?
Eric Andrews: That’s real interesting. A lot of sellers of land tracts in highly desirable areas need to know that, if they’re wanting to sell their land, it is more than likely going to be based upon site plan approval. Let me just use the roundest of numbers so I can do the math real easy. We have a hundred acres and that land is worth 30,000 per acre. We want $3 million for that land and the sellers are happy. They can sell their hundred acres for three million and the developer looks at this land and says, what can I develop these lots for? How much will it cost me to develop these lots? What’s the end retail?
One of the other things they’re going to look at is when we look at that end retail number for the lot, and let’s just say for the sake of argument, again, to do the math real easy. Let’s say the end retail of a marketable lot, there is a hundred thousand, then we need to be in the $500,000 range for a home. Can we build a 2,400 sq ft home, a 2,700 sq ft home, in this neighborhood, on our lot, that’s going to be a $100,000 and keep it roughly in that $500,000 range? We work backwards and everything. The developer says, okay, all that preliminary pro forma fits into our marketing plan, so we’re willing to pay you, but we have to ink out at least X amount of lots out of this property. What they’re going to do is they’re going to meet up with an engineer and see whether or not… how much it’s going to cost to bring water and sewer there or they’re going to have a soil scientist, and they’re going to say, how many perk sites can we get? How many septic systems can we put on this property?
They’re going to have stream, wetland, buffers, topo, the road, DOT, everybody’s going to say, okay and they’re going to give advice as to… of course, the most important would be either the municipality planning department, either, the local town or the county planning department. This is how many lots you can go and now they have to get this whole project engineered, and now they have to get it approved. Right now in today’s market, that could take 12 to 14 months. It’s not crazy for it to take, if it’s a bigger project, it could take 18 to 24 months. Real, real important that sellers know you’re going to get an offer and it’s going to say, based on site plan approval. Now you need, this is really, really important. You need a listing broker that is familiar with the process and can give a pay-for-play contract. As things move along, there is money released to the seller.
If you have what is known as an open-ended contract, if you get so excited and you’re like, I want $3 million for the land, and the buyer comes along, says, I’ll give you 3 million based upon approval. You say, okay, no problem. But you don’t know how long that takes. If there’s no actual date, the buyers incentivized to take their time because property values are going up. They haven’t paid for the property yet.
Interviewer: That’s very common, right?
Eric Andrews: It’s very common. It’s very common.
Interviewer: Did you come up with the pay-for-play?
Eric Andrews: No, no, no. Unfortunately, it’s when a seller does it on their own, or they hire a friend that’s a residential real estate agent that doesn’t know how things are done in the commercial or the land world. They love their… their kids go to school together. It’s the best agent ever. She sells 50 homes a year. She’s a great agent. But she’s not familiar with large tracts of land or she got lucky and she sold one big piece of land. So she has, oh, that experience, whatever. But it’s constantly changing. I do at least a dozen big tracts of land per year. Half of those are probably site plan approval or whatever. That’s super important that that contract is probably going to be X amount of days free look, but then there’s going to be money released to the seller. It’s very important that there are definitive dates.
It’s also a give and take game. We will normally do some built-in extensions. Sellers hate extensions because that means we’re not closing until later. But there are ways to construct the extensions that they’re really going to be committed at that point. I’ve done extensions where they set the property aside for $25, $50,000 or whatever and then they needed a 30-day extension. That 30 day extension was $100,000. They need the extension, but you can construct the contract. I’m not an attorney, but one of the things I love is, attorneys don’t do this every day either, I consult with the attorneys and the attorneys consult back with me. It’s real important that even though that’s how you did it last year, you need to know how it’s done this year.
The weirdest thing that happened this year in 2021 was we had two months of land sales where the buyers were so desperate to get land that the sellers were saying, no, you either buy it or don’t. We’re not going to allow you to have a site plan approval contract. But that was a very short, quick. That was during the time of irrational exuberance and things cooled down. It was kind of like lumber prices got super, super crazy this year and they’re starting to cool down just a little bit or whatever. Things got so crazy. That’s how it was with land for a little bit. But right now it’s still a great, great, great time to sell land. But you need an experienced agent that knows how to give you a contract.