This episode establishes the 2x conservative gross margin requirement for subdivide funding, explaining why higher-priced properties ($50K+ purchases, especially $100K+) demand even stricter margins due to smaller buyer pools, extended market exposure, and amplified downside risk when deals stall or require price cuts.
Key Takeaways:
- 2x conservative gross margin is mandatory regardless of deal size. This buffer accounts for market shifts, misinterpreted comps, buyer pool constraints, and multiple closing costs per child parcel in subdivides.
- Higher-priced properties compress margins at higher risk. A $200K buy for $300K sale sounds attractive until closing costs, realtor commissions (6-10%), allocated overhead ($2K-$5K), and opportunity costs erode the apparent profit.
- Include all subdivide costs upfront in margin calculations. Survey fees, approval costs, value-add expenses, septic tests, and per-parcel closing costs must be baked into the 2x target before funders will approve deals.
Listen to the full episode for the complete framework on protecting downside while targeting larger subdivide opportunities.
(Podcast transcript below)
Hi, Chris Duff over at Serious Land Capital, vacant land funding partner. So I wanted to start a little series regarding how we approach subdivides, particularly from a funding perspective here. This was kind of spurred by a comment made by Jeff Perkins, a few
weeks ago on Spotify, that’s my fault that slipped through, but I had saved it to tackle all of those bullet points that he was asking for, and I think it’ll be very informative for the audience as well here, and some of these will be more general in relation to tactics compared to just subdivides, but…
I know it’s a very popular topic. We’ve obviously talked about them often on this podcast in the midst of two pretty large deals that are minor subdivides anyway. So definitely top of mind. So the first thing Jeff was asking about is just kind of base requirements for…
funding subdivides here. So to break that down really just from a numbers perspective and again, this will also be applicable to other deals that aren’t subdivides here is that we’re looking for roughly a 2x conservative gross margin on any deal that we invest into.
regardless of absolute dollar size. And I believe I’ve commented about this in the past here. But we’ve definitely learned our lessons from experience. then also hearing some other stories within the land industry is that it may be kind of enticing to see, I can buy this deal for
200K and flip it for 300. The issue is, yeah, and I remark on this all the time is, know, land is inherently a risky business. Like when you have assets that can generate enough or more significant alpha than you’re able to find in more efficient markets.
the risk just tends to be higher on average. know, whether that’s just from an inherent market risk, or there’s pieces of that operator risk, you know, operating in a new area, you know, having…
certain legal or title related or regulatory issues come into play that you might have missed. There’s a whole bunch of things that can quickly derail a deal. But probably the most significant is just the market either shifting or misinterpreting the data points before the purchase. what might look like a
buy for 200, sell for 300, can occasionally become far more risky if whatever the potential buyer pool just suddenly dries up or maybe some of those comps that might have been used to generate that anticipated 300k sales price, they were unique.
possibly one-off buyers, maybe they were neighbors of the properties that they bought in the first place. There were certain characteristics that were far more appealing compared to the subject property. So again, there’s kind of infinite variables that might change the anticipated or the actual true exit price versus the anticipated one.
Plus, just in general, for higher price properties, and that’s where usually people are looking to compress or potentially compress their margin because the absolute dollars are ostensibly higher, is that the buyer pool is just naturally smaller, less people have or are sitting on $100,000 plus, just ready to invest in land.
even if they use a third party lender, you know, it’s just naturally going to be more difficult to get approval for that anyway. And even if you do get, or you feel very strongly about, know, hey, there’s a market for 300K here, you have to take into account the closing costs, maybe any value add that you’ve done. You know, if you’re working with realtors, you know, generally that’s going to be at least six to 10%.
off the gross purchase price of the deal. Maybe consider between 2,000 on the low end, upwards of like 5,000 for in and out closing costs for the property. So all of those items will potentially impact the sales price.
more significantly than when you initially underwrite. Plus, like I’ve remarked in a different podcast, what’s your allocated overhead? You have to subtract that out too to find what your true net margin might be on any deal. You can search that podcast for my more in-depth thoughts there, plus just potential time on market, opportunity costs for those higher cost and capital outlay deals in relation to…
how many more times you might be able to turn over dollars into a particular or into various other land deals versus going into a higher cost one that might be held up for longer. So that all has to be weighed appropriately as well there. So with all of that in mind, I know like each of those items could
probably deserve their own podcast there is that based on our experience and having got burned in the past, we’ve been doing this for a while here. We’ve seen kind of the good, the bad, the ugly in various land deals and higher priced ones. Our average purchase price is definitely well over $50,000. So that definitely gets into a different type of buyer pool.
when you’re buying price to your properties like that. that’s why, you know, regardless of absolute value of the deal, I like to see that 2X conservative gross margin on deals. So then I just have plenty of potential protection to protect for, you know, downside.
When things go smoothly, you find a buyer right away. There’s no issue. No one’s going to be complaining, but things can get stressful and anxiety ridden pretty quickly if things aren’t moving and you’re going through price cuts and so forth. that’s why we’d like to see that. And generally for higher price properties and subdivides, oftentimes will be higher priced on average.
I’ll want to hew even closer to that 2x margin than I might even on a lower cost property because I know again my buyer pool is going to be smaller on average and more opportunity risk in general there. So just keep that in mind. You know if you’re bringing somebody like
Yeah, possible minor subdivide here and make sure you include all the various costs. know, they don’t necessarily need to be hard quotes, but at least get a reasonable expectation on what’s going to be needed. Okay. You know, at baseline, you’re going to have to do a survey. What’s the cost of that for the surveyor to divvy up into child parcels? Is there an extra associated cost? Are you going to have to go through various approvals?
At the county or city level is there a cost associated with that or will the surveyor bake that into their fee? Am I going to need to do any other possible value add? Based on the comps that I was seeing in the area You know driveway installations water meters, etc various clearings All of those should be accounted for
still in relation to that anticipated 2X conservative gross margin too. And that’s the thing too, it subdivides is you’re going to have more often than not, you know, each of the child parcels selling by themselves. So you’re eating extra closing costs for each of those sales. So that’s going to depress total margin on the full acreage as well there. you know, that’s just another avenue.
for why you’d want to decrease that. Plus, you you’re also probably going to want to undercut the market even further, especially if you’re adding more than, you know, three to possibly four child parcels in a market. You want to make sure, unless you have a really superior property in terms of characteristics, to be undercutting the market pretty considerably to make sure that you can move the properties in a reasonable
timeframe, which we will get into in any other podcast. So hopefully this one helps in terms of, you know, at least what we’ll look for brass tax when it comes initially to reviewing subdivides. If you’ve got one or you got another land deal for us to look at, serious land capital or land daily diligence, Facebook group for
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