Split my Residential Lot or Not?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
catchinup
Posts: 252
Joined: Sun Dec 31, 2017 6:35 pm

Split my Residential Lot or Not?

Post by catchinup »

Hello,

I own a sf home in Los Angeles, on a 6,000 sq/ft lot - no mortgage. Under the new SB9 zoning laws, I could carve off a minimum of 40% of my lot to build a separate dwelling and sell it.

This company offers to complete the process, including construction and selling of the split portion. They say they would keep 20% of the profit from the sale and I would keep 80%:

https://www.homestead.is/

If you were considering going into a contract with the company above, what sort of questions would you ask? A big concern I would have is knowing how much is the actual profit from the sale of the split off unit.

If I were planning to sell my entire property anyway within 5 years, do you see any potential benefit to splitting up the property and selling off part of it now? Maybe my lot will be worth more later left intact?

Thanks for your thoughts/input
User avatar
Sandtrap
Posts: 14726
Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii No Ka Oi , N. Arizona

Re: Split my Residential Lot or Not?

Post by Sandtrap »

Not a good idea in general.
Your property might be well left intact and greater value vs two very tiny tiny tiny lots.
Talk to an architect
Talk to reputable licensed general contractors
Avoid the sales speil that sounds so so good.

Seek legal counsel if you pursue this.
j🌺
Last edited by Sandtrap on Thu Nov 25, 2021 8:43 am, edited 1 time in total.
Wiki Bogleheads Wiki: Everything You Need to Know
Bob Loblaw
Posts: 15
Joined: Thu Oct 18, 2012 5:48 pm

Re: Split my Residential Lot or Not?

Post by Bob Loblaw »

Be careful! If you do this, you'll have to pay 2x on "per parcel" taxes/special assessment until the new parcel is sold.
Dottie57
Posts: 10510
Joined: Thu May 19, 2016 5:43 pm
Location: Earth Northern Hemisphere

Re: Split my Residential Lot or Not?

Post by Dottie57 »

I would think that the larger lot size is more valuable than 2 small ones. Hard pass.
123
Posts: 7968
Joined: Fri Oct 12, 2012 3:55 pm

Re: Split my Residential Lot or Not?

Post by 123 »

The biggest risks are with the integrity of your development partner. They are in the drivers seat as they calculate costs, they can drive those sky high (various "overhead" numbers, etc) and drive the profit (if any) way down. To what extent would you be on the "hook" for payments to subcontractors, etc. What if the partner goes bankrupt when the project is 50% done? What is their history with prior development efforts, check out their references. How much does would the new home decrease the value of your home due to proximity etc?
The closest helping hand is at the end of your own arm.
quantAndHold
Posts: 6600
Joined: Thu Sep 17, 2015 10:39 pm

Re: Split my Residential Lot or Not?

Post by quantAndHold »

Another option would be to build an ADU and collect several years of rent, before you sell a lot with two houses on it. I would pencil it both options before making a decision.
Yes, I’m really that pedantic.
User avatar
Watty
Posts: 23823
Joined: Wed Oct 10, 2007 3:55 pm

Re: Split my Residential Lot or Not?

Post by Watty »

catchinup wrote: Wed Nov 24, 2021 6:41 pm This company offers to complete the process, including construction and selling of the split portion. They say they would keep 20% of the profit from the sale and I would keep 80%:
If their construction costs are high enough then there might not be any profit. :mrgreen:

The details of the calculation are very important. Right now the land itself might be worth a couple of hundred thousand dollars depending on your local market. For example sometimes a million dollar property is really an $800K lot with a $200K building on it. If they subdivide the land and build a $100K house on it then sell it for $400K then how do they calculate the profit.
Galt guy
Posts: 28
Joined: Mon Oct 05, 2020 8:48 pm

Re: Split my Residential Lot or Not?

Post by Galt guy »

You'd be better off talking to your city's planning department first to find out what types of improvements will be needed to the property. New water and sewer hookups could be expensive, even for a single small house. I have a buddy building a 500-square foot addition to his house in Santa Barbara, and it's costing nearly a half-million bucks. That's without new utility hookups! SB 9 also requires you to continue living in the other dwelling for at least three years. If you aren't discouraged yet, I'd shop contractors who are familiar with your community's planning/permitting staff and go from there. A lot of city staff may not yet be familiar with SB 9 yet, either, and there is an effort to put a recall of SB 9 on the November 2022 ballot.
suemarkp
Posts: 668
Joined: Sun Nov 12, 2017 8:18 pm
Location: Somewhere in WA State

Re: Split my Residential Lot or Not?

Post by suemarkp »

Are there other issues such as:
  • How would someone access the other lot (do you lose some street frontage, or is there a road along the back)?
  • Are the setbacks for your existing house going to still be conforming (especially if you lose some side yard, but also minimum distance for two back yards to their respective dwelling)?
  • Utility easements?
  • Do you want another house looking right in your back windows? How about if they build a max height building?
Mark | Somewhere in WA State
mchampse
Posts: 289
Joined: Mon Feb 26, 2007 1:45 am

Re: Split my Residential Lot or Not?

Post by mchampse »

You probably don’t want to be the first person taking advantage of this new law. Let others figure out the pitfalls and the city figuring stuff out. Perhaps look to split the lot in a couple of years.
WhyNotUs
Posts: 2082
Joined: Sun Apr 14, 2013 11:38 am

Re: Split my Residential Lot or Not?

Post by WhyNotUs »

Some things to consider:
• Layout- if another house were built next door, if/how would my livability be impacted?
• Market- what is the market value of a 3,000 sf lot in my neighborhood? That identifies the minimum level of profit that I would expect before getting involved.
• Construction- how do I value the impact of living next to new construction
• Timing- have rules been finalized for my area? Making sure you understand the process before getting into it
• Loan- if you have a loan on the property, will your lender allow you to participate?

Once I had a sense around these issues, I could meet with the builder to see if this made sense for me. My questions for them would be about risk/reward, guaranteed performance, and my input on siting and design
catchinup wrote: Wed Nov 24, 2021 6:41 pm Hello,

I own a sf home in Los Angeles, on a 6,000 sq/ft lot - no mortgage. Under the new SB9 zoning laws, I could carve off a minimum of 40% of my lot to build a separate dwelling and sell it.

This company offers to complete the process, including construction and selling of the split portion. They say they would keep 20% of the profit from the sale and I would keep 80%:

https://www.homestead.is/

If you were considering going into a contract with the company above, what sort of questions would you ask? A big concern I would have is knowing how much is the actual profit from the sale of the split off unit.

If I were planning to sell my entire property anyway within 5 years, do you see any potential benefit to splitting up the property and selling off part of it now? Maybe my lot will be worth more later left intact?

Thanks for your thoughts/input
I own the next hot stock- VTSAX
User avatar
deanbrew
Posts: 1357
Joined: Wed Jul 21, 2010 12:05 pm
Location: The Keystone State

Re: Split my Residential Lot or Not?

Post by deanbrew »

If there is value in splitting your property, the value arises from land value. Muddying the waters with planning and construction costs makes for a very complicated analysis, and I can't think of a worse time to build a house for profit.

I would look at it as a relative simple test:

A. Value of your property as it exists on a 6,000 sf lot.

Vs.

B. Value of your house on a 3,000 +/- sf lot plus value of a vacant 3,000 sf lot minus the cost of subdivision (survey, planning, legal fees, utility hookups), minus extra taxes on vacant lot for a holding/marketing period.

The value of your house will go down with a smaller lot, but you will have to figure that out by doing the research or hiring an appraiser. And you will lose the pleasure and privacy of the now-vacant land while you live there.
"The course of history shows that as the government grows, liberty decreases." Thomas Jefferson
User avatar
Metsfan91
Posts: 376
Joined: Sat Jan 11, 2020 12:33 pm

Re: Split my Residential Lot or Not?

Post by Metsfan91 »

Dottie57 wrote: Wed Nov 24, 2021 6:54 pm I would think that the larger lot size is more valuable than 2 small ones. Hard pass.
+1
"Know what you own, and know why you own it." — Peter Lynch
Goal33
Posts: 1797
Joined: Sun Apr 12, 2015 12:30 pm

Re: Split my Residential Lot or Not?

Post by Goal33 »

No.

I’d rather make my money from something other than giving up half my lot.
Cruise
Posts: 1638
Joined: Mon Nov 21, 2016 7:17 pm

Re: Split my Residential Lot or Not?

Post by Cruise »

How would you feel if your subdivided lot was sold to a total jerk whose behavior interfered with your quality of life? ThOse two homes are going to be really close together .
humblecoder
Posts: 875
Joined: Thu Aug 06, 2020 8:46 am

Re: Split my Residential Lot or Not?

Post by humblecoder »

I think there are two separate questions embedded in the OP's post:

1. Should I subdivide my lot?

2. If I decide to subdivide my lot, should I use this company's process?

You say that the lot is 6000 sq ft. That is something like 60ft x 100ft. Honestly, that is a pretty small lot as it is, so subdividing it seems absolute bonkers to me. If you subdivide it, your new neighbor will be right on top of you. Not to mention all of the noise and other inconvenience of having construction going on in such close proximity to you.

We used to live in a house on a similarly sized lot and I felt claustrophobic. I can't imagine living on a lot half that size!

If you do decide to move forward, I wouldn't use the method that you describe. I would just sell the land to a developer and let the developer take the risk. That way, you pocket the money and if there is a loss on the eventual sale of the new house, it isn't your problem.
Topic Author
catchinup
Posts: 252
Joined: Sun Dec 31, 2017 6:35 pm

Re: Split my Residential Lot or Not?

Post by catchinup »

Bob Loblaw wrote: Wed Nov 24, 2021 6:52 pm Be careful! If you do this, you'll have to pay 2x on "per parcel" taxes/special assessment until the new parcel is sold.
good point!
Topic Author
catchinup
Posts: 252
Joined: Sun Dec 31, 2017 6:35 pm

Re: Split my Residential Lot or Not?

Post by catchinup »

Bob Loblaw wrote: Wed Nov 24, 2021 6:52 pm Be careful! If you do this, you'll have to pay 2x on "per parcel" taxes/special assessment until the new parcel is sold.
good point!
Topic Author
catchinup
Posts: 252
Joined: Sun Dec 31, 2017 6:35 pm

Re: Split my Residential Lot or Not?

Post by catchinup »

quantAndHold wrote: Wed Nov 24, 2021 7:11 pm Another option would be to build an ADU and collect several years of rent, before you sell a lot with two houses on it. I would pencil it both options before making a decision.
that's true. I thought about an ADU before. I didn't work out the numbers, but given the cost of construction plus added property taxes, I suspect it would take a long time to recoup my investment. Not sure.
Topic Author
catchinup
Posts: 252
Joined: Sun Dec 31, 2017 6:35 pm

Re: Split my Residential Lot or Not?

Post by catchinup »

humblecoder wrote: Fri Nov 26, 2021 8:34 am I think there are two separate questions embedded in the OP's post:

1. Should I subdivide my lot?

2. If I decide to subdivide my lot, should I use this company's process?

You say that the lot is 6000 sq ft. That is something like 60ft x 100ft. Honestly, that is a pretty small lot as it is, so subdividing it seems absolute bonkers to me. If you subdivide it, your new neighbor will be right on top of you. Not to mention all of the noise and other inconvenience of having construction going on in such close proximity to you.

We used to live in a house on a similarly sized lot and I felt claustrophobic. I can't imagine living on a lot half that size!

If you do decide to move forward, I wouldn't use the method that you describe. I would just sell the land to a developer and let the developer take the risk. That way, you pocket the money and if there is a loss on the eventual sale of the new house, it isn't your problem.
I would want to rent the part I'm living in.
Topic Author
catchinup
Posts: 252
Joined: Sun Dec 31, 2017 6:35 pm

Re: Split my Residential Lot or Not?

Post by catchinup »

Thanks to everyone for being a sounding board. I agree with the comments. It sounds like a bad idea.
stan1
Posts: 10851
Joined: Mon Oct 08, 2007 4:35 pm

Re: Split my Residential Lot or Not?

Post by stan1 »

catchinup wrote: Fri Nov 26, 2021 1:53 pm Thanks to everyone for being a sounding board. I agree with the comments. It sounds like a bad idea.
How long do you plan to live in the house? Being able to split the lot (and add two ADUs) will add value to the property. You can also see how the neighborhood evolves over time rather than being the first to do this. If a lot of owners in the neighborhood split their lot and also add ADUs it will be a different place than you are used to. That's not necessarily saying it will be bad because the people who move in may be quite happy living there compared to where they live now. It will be different for you and your current neighbors because its a big change. Some of the beach cities have allowed duplex condos and what's now called an ADU for over a century so you can see how the neighborhood is impacted. Often it was a front unit and a back unit (with a 1/2 address).

What you can do with the lot is going to be very dependent on how it is laid out. My family owned a 3,000 square foot lot in a beach city for 80 years before it was sold to a developer who built a duplex condo. In that case the lot had a back and a side alley in addition to a front street so it was very easy to build a duplex condo.
exodusNH
Posts: 1360
Joined: Wed Jan 06, 2021 8:21 pm

Re: Split my Residential Lot or Not?

Post by exodusNH »

catchinup wrote: Wed Nov 24, 2021 6:41 pm Hello,

I own a sf home in Los Angeles, on a 6,000 sq/ft lot - no mortgage. Under the new SB9 zoning laws, I could carve off a minimum of 40% of my lot to build a separate dwelling and sell it.

This company offers to complete the process, including construction and selling of the split portion. They say they would keep 20% of the profit from the sale and I would keep 80%:

https://www.homestead.is/

If you were considering going into a contract with the company above, what sort of questions would you ask? A big concern I would have is knowing how much is the actual profit from the sale of the split off unit.

If I were planning to sell my entire property anyway within 5 years, do you see any potential benefit to splitting up the property and selling off part of it now? Maybe my lot will be worth more later left intact?

Thanks for your thoughts/input
I'd be wary of how they calculate profit. There are a lot of accounting shenanigans they can use to show very little profit. I wouldn't trust them. ("Hollywood accounting")

An intact lot will probably be worth more 5 years from now than whatever you'd gain from this plan. Given current labor and supply constraints, you're probably looking at 12 months before the building is complete.

If you were going to live there longer, keeping the lot intact and building an ADU would likely be better. While you lived there, you'd control who lived next to you. And in a sale, it could appeal as an in-law apartment or as a rental unit.
SouthernInvestor
Posts: 31
Joined: Thu Jul 15, 2021 6:13 am

Re: Split my Residential Lot or Not?

Post by SouthernInvestor »

Bingo! How the heck do the calculate profit? Sounds way too good to be true. Side on sidelines.
AnnetteLouisan
Posts: 1210
Joined: Sat Sep 18, 2021 10:16 pm
Location: New York, NY

Re: Split my Residential Lot or Not?

Post by AnnetteLouisan »

We looked into stuff like this but passed because the risk of disputes is too great and after all we own it outright so why bother.

Friends and relatives overseas partnered with developers and there were cost overruns and delays but overall it worked out. centrally located plots with an old house or two became massive, modern mixed use complexes with lots of apartments for family members and lots of commercial and residential rental and sale income. They could never have done these projects on their own.
Even after the 30 percent developer cut it made sense.

So as always with RE, every deal is different.
User avatar
celia
Posts: 13554
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Split my Residential Lot or Not?

Post by celia »

I wouldn't want a rented ADU on our property since it is hard to get rid of the renter, should it not work out for any reason. A new owner might want to buy the property to use one house for elderly parents (another problem that is emerging in California), but will pass on your property if the renter is still there. (But potential landlords might be interested in buying two rentals.)

Another reason we would not do this is environmental. Look at all the "greenery" that would be replaced by hardscape and extra generated trash. This doesn't even address added use of utilities, laundry, and parking (yours and theirs).
quantAndHold
Posts: 6600
Joined: Thu Sep 17, 2015 10:39 pm

Re: Split my Residential Lot or Not?

Post by quantAndHold »

celia wrote: Fri Nov 26, 2021 3:32 pm I wouldn't want a rented ADU on our property since it is hard to get rid of the renter, should it not work out for any reason. A new owner might want to buy the property to use one house for elderly parents (another problem that is emerging in California), but will pass on your property if the renter is still there. (But potential landlords might be interested in buying two rentals.)

Another reason we would not do this is environmental. Look at all the "greenery" that would be replaced by hardscape and extra generated trash. This doesn't even address added use of utilities, laundry, and parking (yours and theirs).
OP is talking about *selling* half his lot to a developer who will build a house on it. Getting rid of a bad tenant is child's play compared to getting rid of an objectionable *owner* living in my backyard.

We've lived in a dense urban environment full of mulitplexes and ADUs for decades, and we've had similar numbers of problems with both owners and renters. The advantage to dealing with problem renters is that you can eventually get their landlord to deal with the problem. Dealing with owners, though, is like herding cats. You have to get them to want to do what you want them to do.
Yes, I’m really that pedantic.
quantAndHold
Posts: 6600
Joined: Thu Sep 17, 2015 10:39 pm

Re: Split my Residential Lot or Not?

Post by quantAndHold »

SouthernInvestor wrote: Fri Nov 26, 2021 2:48 pm Bingo! How the heck do the calculate profit? Sounds way too good to be true. Side on sidelines.
I think this is the biggest issue. In some locations, and it sounds like OP might be in one of them, it might actually be a good deal to split the property and sell half of it. But the devil is in the details. I could see this turning out really good for the developer, and less good for the seller. At the very least, I would want an attorney who's super knowledgeable about this stuff on my side.
Yes, I’m really that pedantic.
nalor511
Posts: 2206
Joined: Mon Jul 27, 2015 1:00 am

Re: Split my Residential Lot or Not?

Post by nalor511 »

Bob Loblaw wrote: Wed Nov 24, 2021 6:52 pm Be careful! If you do this, you'll have to pay 2x on "per parcel" taxes/special assessment until the new parcel is sold.
And they will probably reset the basis on the old lot you're keeping, removing any grandfathered lower property taxes, would be my guess
skis4hire
Posts: 63
Joined: Thu Oct 11, 2018 12:54 am

Re: Split my Residential Lot or Not?

Post by skis4hire »

OP, consider that many of the people posting here are used to larger suburban lots where acreage is cheap relatively speaking. People in CA are desperate for housing so the base minimum cost of a house is very high even on a tiny 3k lot, and I would guess that works out in your favor.

It should be possible to look in for comps in your area with your current lot size and 60% lot size and check what the difference in value is. I would be surprised if the difference is not much less than the value of a new house on the 40% split.
calwatch
Posts: 686
Joined: Wed Oct 02, 2013 1:48 am

Re: Split my Residential Lot or Not?

Post by calwatch »

It's a good idea for the right lot. I think this would work great for corner lots, especially those which have detached garages that have an entry off the side street (or could take one off the side street). I could easily see tearing down the detached garage and putting a two or even three story carriage house there (garage on the bottom, homes on the top). When you do it for a regular lot, either you create a flag lot where the other property owner has a narrow strip of land to the home on the back lot, or you have to tear down the existing house or otherwise reconfigure it to a row house, as most homes tend to be centered on the lot they're built on.

SB 9 only commits you to a letter of intent for living there. You could easily move, although you may have trouble selling your putative home. For example, you could convert a single family lot into a four plex (two duplexes side by side, sharing half the lot) through a lot split but you would have to keep one of the units for a few years. That could be used as a pied a terre while residing somewhere else.

Although there is an initiative which may nullify SB 9 by allowing cities to ban its use, a case could be made that anything in the pipeline is grandfathered in. So there is a window of at least nine months to think about getting this done. And as far as the issues of owners, that's the same case if your next door neighbor was a jerk. I might make sure my sound insulation was up to snuff prior to selling though, since next door will be a lot closer than currently.

Honestly though, I am skeptical of these fly by night outfits that claim they know the secrets of SB 9. The ADU market is somewhat more established and there are several companies which have reputations, good or bad, because they've done a lot of work. I would look to existing ADU firms as they have permitting experience, especially one who already does business in your jurisdiction.
bradinsky
Posts: 576
Joined: Sat Jul 21, 2018 6:32 am
Location: Ohio

Re: Split my Residential Lot or Not?

Post by bradinsky »

People/companies don’t pitch these ideas to you to help you. This is all for their benefit. Remember, “if it sounds to good to be true, it probably is”.
MrCheapo
Posts: 543
Joined: Tue Dec 22, 2020 3:43 pm

Re: Split my Residential Lot or Not?

Post by MrCheapo »

Note "They say they would keep 20% of the profit from the sale and I would keep 80%:" that may sound enticing but depending on how profits are calculated that may only be $100K so you netted $80K. Also be sure they are not going to do it just for 20%. They are paying for construction costs, risk, loans etc. They are going to make their money other ways such as inflated building costs, add ons etc. Also what profit are we talking about, do they sell the property as well? Again they could sell it for a lower price and get their profits that way.

This has a lot of conflict of issues.
catchinup wrote: Wed Nov 24, 2021 6:41 pm Hello,

I own a sf home in Los Angeles, on a 6,000 sq/ft lot - no mortgage. Under the new SB9 zoning laws, I could carve off a minimum of 40% of my lot to build a separate dwelling and sell it.

This company offers to complete the process, including construction and selling of the split portion. They say they would keep 20% of the profit from the sale and I would keep 80%:

https://www.homestead.is/

If you were considering going into a contract with the company above, what sort of questions would you ask? A big concern I would have is knowing how much is the actual profit from the sale of the split off unit.

If I were planning to sell my entire property anyway within 5 years, do you see any potential benefit to splitting up the property and selling off part of it now? Maybe my lot will be worth more later left intact?

Thanks for your thoughts/input
iljets10
Posts: 31
Joined: Sat Oct 05, 2019 9:56 pm

Re: Split my Residential Lot or Not?

Post by iljets10 »

humblecoder wrote: Fri Nov 26, 2021 8:34 am I think there are two separate questions embedded in the OP's post:

1. Should I subdivide my lot?

2. If I decide to subdivide my lot, should I use this company's process?

You say that the lot is 6000 sq ft. That is something like 60ft x 100ft. Honestly, that is a pretty small lot as it is, so subdividing it seems absolute bonkers to me. If you subdivide it, your new neighbor will be right on top of you. Not to mention all of the noise and other inconvenience of having construction going on in such close proximity to you.

We used to live in a house on a similarly sized lot and I felt claustrophobic. I can't imagine living on a lot half that size!

If you do decide to move forward, I wouldn't use the method that you describe. I would just sell the land to a developer and let the developer take the risk. That way, you pocket the money and if there is a loss on the eventual sale of the new house, it isn't your problem.
Have you ever been to Newport Beach? This actually sounds like a large lot size for a lot of neighborhoods in LA. I would give it 2-3 years and then hire a contractor who has credibly worked on numerous SB 9 projects with credentials and actual profit numbers.
Post Reply