Topic 1.3: Development and Construction

Learning Objectives

After successfully completing this topic, you will be able to
• explain the three phases of development and construction, and
• distinguish among the three categories of residential construction.

Developers buy large tracts of land, subdivide the land, make improvements such as roads, utilities, and drainage, record the subdivision plat map, and dedicate the roads to the local government. Builders or investors purchase the finished sites.

The development and construction process has three main parts: land acquisition, subdividing and development, and construction.

Land Acquisition

Before buying the tract of land, the developer will analyze the current market to determine the demand for building sites, and review applicable land use plans to ensure there are no problems with the intended use. At that point, the developer may wish to put up a small option deposit to “tie up” the property.

The developer’s engineers will prepare the development plans and estimate the costs of the site improvements. The developer will total the improvement costs, land costs, surveys, attorneys’ fees, financing costs, and sales costs. The developer will not begin the project if the costs plus a required profit are greater than the projected sales prices of the finished sites.

If the costs are in line and the developer expects to make a fair profit, the next step is to get financing. When the financing is set, the developer is ready to obtain the required permits to start work.

Subdividing and Development

Subdivision plat map. Before building begins, the developer must submit a subdivision plat map for review by the local planning board or commission. The map will include the roads, lots, and other improvements. The clerk of the court will record the map after it is approved.

Restrictive covenants. The developer will also record restrictive covenants when the plat map is recorded. Restrictive covenants run with the land and establish standards for the minimum square footage, architectural styles, setback lines, fence style and location. The covenants help assure that the use or design of one property will not diminish the value of other properties in the area. The covenants apply to all owners in the subdivision and stay with land through all subsequent sales.

Dedication. The developer will also give the roads, rights of way and improvements to the county or city government in a process called dedication.

Development. The developer must build the improvements to comply with county specifications. The government agrees to maintain the roads and drainage in the future. Because of the maintenance agreement, buyers and lenders know that the access to the property will remain in good condition, making houses easier to sell.

Residential Construction

Construction of houses. When the subdivision improvements are complete, the developer will sell building sites to licensed contractors or to investors. The contractor uses one of three categories of construction: Spec building, tract building, or custom building.

Speculative (SPEC) building means the builder will build one or more houses based on his or her best guess of what the buyers will want. Because the builder doesn’t yet have a ready buyer, this method, while usually more efficient, can be risky. The builder may not find a buyer, and may have to pay extra interest on the construction loan while trying to sell the house.

Tract building is somewhat like spec building, often built by the developer who markets using model homes. A buyer will select one of the models for purchase, and sometimes request certain modifications to the interior finish.

Custom building reduces the risk to the builder. The home buyer brings building plans to the builder. The builder builds the house, often on the buyer’s site. There is more discussion and negotiation in this category, but the builder has the assurance that the house is sold when it’s completed.