What I’m thinking about: The atrocious underwriting behind most subdivide deals across the land industry has been driving me nuts.
Offended? Fine, but for the operators who want to get better, keep reading.
Having reviewed thousands of “potential” subdivides (and successfully bought and sold them), I think fewer than 5% (probably less than 1%) of the land industry has a good handle on land subdivision analysis. The focus here is on minor subdivides, or majors that are not being sold as paper lots to a developer or builder.
This article aims to be as bare bones as possible, since I want to routinely reference these guidelines, including to my team.
A few quick definitions:
- Minor subdivisions typically involve splitting land into a smaller number of lots (perhaps ~3-5 lots), with limited or no infrastructure being required, and allows for a quick approval process.
- Major subdivisions involve splitting land into more total lots (varies widely, but potentially into the hundreds), often times with heavier infrastructure regulatory requirements.
- Parent parcels are the original subject property, prior to a subdivision.
- Child parcels are the new lots created from the parent parcel, after a subdivision.
Caveat: This is a STARTING point. These are table stakes that apply ~99% of the time, anywhere in the country. But…every piece of land will have its own unique features, in its own market and set of regulations. Adjust accordingly. Subdivides are complex.
And if you only take one thing away from this…never forget that the market does not care about your VISION, it only rewards the TRUTH.
=====
- Scan For Existing Child Parcel Precedent
On the aerial map, are there already existing parcels with similar acreages (within ~1-2 acres) as your proposed child parcel plan within a ~5-10 mile radius, with similar characteristics (e.g., contour and street frontage)?
If yes: Good sign. The market has proven it accepts that product.
If no: You are a first mover. That is a massive red flag unless you have patient capital and appetite for extended hold times…potentially for years.
Understanding whether comparable subdivisions exist in your target area is the foundation of effective parcel split feasibility research. Without existing market precedent, you are essentially experimenting with buyer appetite using your own capital.
- Volume Analysis: Does The Market Support Your Inventory?
This is where most deals die.
Check the sold, pending, and active listings within a ~5-10 mile radius, the closer the better. Some areas will justify extended search radii.
If you are creating 2 child parcels of similar acreage, have at least 2x the number of child parcels (compared to parent parcel acreage) sold or pending in the past 3-6 months (max 12 months) in that area. Bonus points if the sold or pending comparables are from another subdivide project.
Creating 3 child parcels? You need 3x the sold or pending comparable volume compared to parent parcel acreage.
(If child parcels are distributed across multiple different acreages, such as three 5-acre parcels and two 20-acre parcels, then adjust the multiples of sold or pending comparables according to each acreage band.)
The active market is effectively the inverse. If you see a bunch of active child parcels (particularly if they are grouped together as part of another subdivide project and have similar characteristics), be more cautious about introducing additional inventory, unless you can significantly undercut the market.
The longer the collective days on market (DOM) of the active listings, the more cautious you need to be.
Also, account for where child parcels are moving. Are they all closer to an interstate or city limits? If your project is much more rural, your project may blow up in your face.
While uncommon, are child parcels moving significantly faster (e.g., 2x as fast) than parent parcel acreage? That can offset lower sold or pending volume, but be extra conservative if making a decision from this standpoint.
- Price Per Acre (PPA) Appreciation Must Be Real
In the subdivision analysis process, as a rule of thumb for child parcels above ~2-3 acres, PPA should show at least 1.5x appreciation over parent parcel pricing. For child parcels below that acreage threshold, then raw price should be at least a 1.5x premium, since PPA falls apart.
To be crystal clear: If my parent parcel acreage of 50 acres trades at $10K PPA, then my single split pair of 25-acre child parcels should trade at $15K PPA minimum.
Anything less and you do not have enough of a risk premium accounting for subdivision timeline and cost, potential adverse selection, and DOM.
The more child parcels you are bringing to market, particularly if they are about the same acreage, the higher the PPA appreciation should be.
The mechanics of the deal can make a key difference here. If you are buying a parent parcel outright, you will want a higher PPA appreciation. If you are partnering with the seller and your capital outlay is less, a smaller margin may be acceptable. This is an entirely another discussion, but worth mentioning here.
- Account For Adverse Selection
Are all your child parcels relatively uniform in physical characteristics? Or will one or more parcels be significantly more or less desirable than the others?
If you are creating 3 parcels and one needs significant grading to account for a nasty contour and is also impacted by wetlands, while the others are flat and clear, you cannot average the pricing. The inferior parcels will drag down your blended return and potentially lengthen your total DOM dramatically.
Model each child parcel separately with conservative assumptions on the weakest offerings.
And remember, if you are introducing a parcel that is in the bottom 25% from a characteristic perspective across everything that has sold and is on market, then you should think twice (three times, four times…) before you buy it.
- Know Your True All-In Costs (And Timeline)
Assuming you have passed the above 4 hurdles, what is the actual cost to subdivide? Not just filing fees…the total number including surveys, engineering, legal, and carrying costs during approval.
What is the approval process? Are there hearings? Planning commission reviews? Environmental assessments?
Most operators underestimate both cost AND timeline, or have done zero research into either. If doing horizontal development work (e.g., clearing and driveways), add a minimum 25% cost buffer to soft quotes to be safe…and triple the quoted timeline.
Thorough subdivision cost analysis requires accounting for every soft and hard expense, plus the opportunity cost of capital during extended approval periods. The difference between projected and actual expenses often determines whether your deal generates profit or loss.
=====
The Bottom Line
More often that not, after rigorously applying the above steps, the market will indicate if you are better off attempting to sell the parent parcel versus attempting a subdivide.
TIP: Even if the data indicates a subdivide is a good play, the market may surprise you (as it so often does), where the only serious buyers want the total acreage. So having optionality is ideal, where you can at least break even selling the parent parcel acreage, net of all value-add and closing costs.
Almost nobody who sends us subdivide deals has worked through even ONE of the above steps.
(I realize that the above steps are not quite as simple as I intended. Ultimately, there is so much nuance in land, it is hard to boil things down to hard and fast rules. So you have to get the reps in, in order to start to see things as clearly as my team and I do.)
Subdividing works…when you follow the guidelines. Otherwise, the market will beat you into the ground. Tough.
Whether you are considering partnering with us or evaluating a subdivide on your own, run through this checklist first.
If you cannot answer each section confidently with data, the subdivide probably will not work.
=====
Need funding for a properly-structured subdivide (or any land deal)? Work with the most data-driven land funding team, with industry-leading 41% operating margins. $50K minimum purchase price, ~2x conservative gross margin. We close 100% of deals we commit to.
