This episode establishes a critical framework for evaluating subdivision opportunities by focusing on the often-overlooked relationship between parent parcel and child parcel pricing. The analysis reveals that many seemingly attractive subdivide projects fail to deliver meaningful profit improvements after accounting for adverse selection, extended hold times, and multiple closing costs, making the 1.5X price-per-acre multiplier threshold essential for justifying the additional complexity and risk.
Key Takeaways:
- Child parcel adverse selection erodes theoretical margins Subdivide carve-outs rarely feature equal terrain, road frontage, and buildability, forcing discounts on inferior child parcels that reduce blended exit prices closer to parent parcel levels than initial projections suggest.
- Use 1.5X price per acre as minimum subdivide threshold A meaningful price differential requires child parcels to command at least 1.5 times the parent parcel’s price per acre to justify the extra time on market, multiple closing costs, and increased execution risk.
- Parent parcel market activity often exceeds child parcel demand Many markets show more consistent buyer activity for larger acreage than smaller carved lots, making the safer play to sell the parent parcel quickly rather than gambling on assumed demand for subdivided pieces.
Listen to the full episode for detailed examples of when blended child parcel exits fail to exceed parent parcel values and why protecting downside always trumps attempting to maximize profits.
(Podcast transcript below)
Hi, Chris Duff over at Serious Land Capital Vacant Land Funding Partner. Today’s sticking on the minor subdivision topic. Another issue that we see come up routinely and there’s worth mentioning repeatedly here is just to consider the true
exit price per acre for child parcels of a minor subdivide. So to break that down a little bit further, you know, when you’re looking at a possible subdivision, which you would, you know, you would call the primary parcel, you might be looking to subdivide a parent parcel and, you know, however many splits you might be considering, you know, two parcels, three parcels or more.
All of those splits would then be considered child parcels. So the key to taking, taking on any potential sub by project, first off is to understand the underlying market for the child parcels as well as the parent parcel too. So.
That this is a issue again that we see come up routinely is that Okay, people get excited. They have a larger Parcel they think is right for a subdivide. Okay, let’s just cut it up Maybe get a couple quick pumps and say okay we can sell for this exit price per acre, which I’ll call PPA to be
to utilize that acronym within the industry here without really understanding some of the inherent risks or possibly the difference between the exit PPA for parent parcels versus child parcels as well as just the anticipated and current or recent past market demand for
each of those types of parcels, the parent parcel or various child parcels that you might be looking to bring to the market here. So as usual, what we always start out with is our characteristics review before we even consider pricing out the property. And this is where I know I mentioned, you
many, many times is that when you’re considering a subdivide, you have to consider the possible adverse selection of the various child parcels that you bring to the market. You know, some of your carve outs could have worse terrain than other pieces. Some might be less clear or worse road frontage, et cetera. So if you’re going to bring an inferior
to the market, you generally are going to have to discount your possible exit on it or have a longer wait time to actually sell the property or potentially both. So it’s very rare to have a subdivide where all things are effectively equal, same road frontage, same terrain, et cetera. It’s possible that those happen, it’s just not.
that commons. You really want to assess what your cuts are going to look like and then have to compare those possible child parcels in relation to what the comps are on the market or that had gotten sold on the market that were of a similar size and what their characteristics were. So that’s always a key factor there.
And then when I’m going to be assessing possible subdivision here, always want to know, you know, especially on something that might be a little bit smaller, you know, if it’s like a hundred plus acres, probably will be a better candidate for subdivide, you know, even 50 plus, but not always. That’s why you always, you know, especially if you’re in a market that you’re not as familiar with, and we operate nationally, so we just don’t make blanket assumptions about how
each local market operates. And even if we have operated in market before, it’s always good to double check your existing data and assumptions to see if the market has changed since the last time you’ve been participating there.
So what we generally always do is assess, what is that existing market for the parent parcel acreage in relation to child parcel acreage? And more often than not, you’re not going to have that much of a distinction, probably just from kind of a selection bias of what properties are sent to us. Again, people oftentimes think there’s a subdivision opportunity when it’s
It’s not that cut and dry or can add more risk than not. know, you have a 10 acre piece and trying to just carve up into a couple five acres or maybe a 20, 25 acre slice into two or three child parcels. Those are probably the most common scenarios. And it is rare that the child parcel PPA will actually exceed the parent parcel PPA, exit PPA, again, price per acre.
in a meaningful fashion. So to give you an example is that, you know, maybe you’re looking at a 25 acre piece and the exit PPA, you could say is closer to maybe 8,000 per acre. And I’m just throwing out example numbers. And then you can see that the
Child parcel exits that I, you know, let’s say you carved it into three, so you got maybe roughly eight acre child parcel pieces are exiting perhaps closer to 10,000 or so price per acre. To me, that is not a meaningful enough difference in the possible exit here, especially accounting for, again, the adverse selection and the
possible risk of extra time on market to dispo all or three times as many properties as if you were just doing one parent parcel. Also notwithstanding the extra associated closing costs that you’re going to have with each separate exit, depending on the absolute value of properties, those will be more substantial in a relative fashion than
properties that are of higher absolute value. So that’s just another key thing to keep in mind here.
So in situations like that, generally our suggestion will just be, you know, we’re always focused more on the downside scenario. So even if we leave potentially a little bit of money on the table, which is not always the case, right? can’t, you’ve been in land for even longer than a few months, you know, can’t count your chickens before they hatch. Tons of things can change in the market. Market can just punch you in the face at any given time.
no matter how good your diligence is. So, you know, generally our rule of thumb is always protect downside first and foremost and be okay with a potential lower exit compared to, you know, trying to juice profits a little bit more, but taking extra time on market risk or just have a PPA exit.
of equal or potentially even lower value than if we had just sent or tried to sell the parent parcel. And I say blended PPA meaning, if you had those three child parcels as an example, whatever their total exit is, you know, maybe one sold for 11,000 per acre, another sold for 10, another sold for nine. So then.
you know, assuming they were all roughly the same acreage, it would be a blended of roughly 10,000 price per acre. So that’s how we just have to account for that. Whereas again, maybe the parent parcel gets the eight. It just not that that meaningful of a difference for many parcels there. So it’s tough to say exactly, okay, where is it going to be more advantageous to
try to juice your profits in one direction or not. Also influencing our decision is just how active is the market for parent parcel acreage versus child parcel acreage. You know, if it favors parent parcels, you know, there’s more 20, 25 acre pieces moving on the market, then yeah, favor that versus trying to carve up and assume that there’s more of a market there than…
might not be in some realtors might say, well, hey, it’s just, you know, not many people bring acreage like this to the market routinely, but it does get scooped up right away when it’s there. That is a gamble. Sometimes you can’t always count on that. I prefer to use hard data whenever it’s available. especially in a risky business like, like land here. So, that’s just something that you’re going to have to figure out in each individual.
situation, but that piece may play even a larger role compared to what those differences are on exit price per acre. But if I think I can get a meaningful difference, maybe one and a half X multiplier on child parcel PPA.
And it seems to have a decent market in relation to parent parcel exit PPA. That might be my threshold, roughly, to consider a subdivide in that area. But again, you have to consider all those individual differences, like I mentioned earlier, to really see what the best possible scenario is. So it’s probably a topic that’s going to come up.
again and again, just because there’s so much variation, but wanted to share some additional thoughts, hopefully prevent some mistakes happening in your own business based on what we’ve seen and also pursued ourselves here. So, seriousland.capital for any of your deals, looking for funding, Land Daily Diligence Facebook group.
for zero cost review of your land deals, whether you’re looking for funding or not, landpricer.ai for the most simple and accurate way to price land parcels. Take care, everybody.
