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Craig and Burnell Scott own a 7-acre Texas property and wanted new income sources in retirement.
Their solution? They built a duplex next door. Thanks to the $2,700 monthly rent roll, the duplex pays for itself. In a few years, the income will also pay for their primary residence as well, said the couple, ages 55 and 65, respectively.
An appreciating housing market is offering some homeowners an opportunity to develop their own properties and maximize their values, ultimately offsetting living expenses, letting them age in place, or to increase savings.
Among the techniques most often used are subdividing and selling off a piece of land, building a rental property on a parcel next door, or turning a large, urban single-family home into condominiums, which is the most onerous.
"It can be a financial bonanza for the owner if a property can be subdivided from single-family residential to a higher density of development, " said Brad Hunter, chief economist for HomeAdvisor.com,
Now may be as good a time as any to become a DIY developer.
Demand is up and inventory is down. In a balanced market of supply and demand, there's generally about six months' worth of home inventory. In May, it was 4.7 months, according to the National Association of Realtors.
Existing home sales are projected to increase 3 percent nationwide this year, according to the NAR's most recent forecast, with housing starts rising 14 percent, according to the National Association of Home Builders.
Some metro areas have done even better: Craig Scott estimates home values in his south Austin neighborhood have doubled over the last three years, which has prompted him to plan construction of three more duplexes on his property, pending city approval. Once completed, he could pull in more than $10,000 a month, while living free in his primary residence.
"I prefer the open space more than looking at duplexes, but I will need the income stream to stay in my homestead due to ever increasing taxes, insurance and cost of living in general," he said.
While it sounds tempting, this strategy is not for everyone. Homeowners must often pay cash upfront for legal fees, title review, architectural plans, surveys and permits until construction begins, when they can apply for a loan. Those start-up costs can run thousands of dollars, said Marianne Cusato, professor at Notre Dame's School of Architecture and HomeAdvisor.com housing expert.
It can take a lot of time to navigate local permitting and zoning requirements, which can differ radically, even block by block in some jurisdictions. Your lot may not be subdividable if it does not meet local size requirements.
For example, there often are rules for floor-area ratio or lot coverage, which limit the size of the structure you can place on the property, Cusato said. Homeowners who want to build a rental house on their property or turn their home into multiple units may be prohibited by community ordinances, she said.
Cusato recommends homeowners perform some due diligence before shelling out money for architects or contractors. Call the local building or permitting department.
Ask them: What is the process for getting a property-use change or subdivision? How long will it take to obtain a building permit? What are the costs? Many departments have free research tools available online, she said.
Scott, for example, hired a consultant, a former employee of his local permitting department, to walk him through the process of building his first duplex.
There's some evidence that more people have future development in mind when shopping for a home these days. Nationwide, single family homes with subdividable potential are appreciating faster, up 14 percent based on price per square foot in 2015. That's three times faster than other homes, which appreciated 4 percent, according to Realtor.com, which tracked over 1,000 sales listings in areas where subdividable listings could be identified and were marketed as such.
Marc Aschoff, a financial services professional, and Michael Carbonara, an electrical engineer, recently purchased an investment property in New Jersey, partly because of its unusually large lot size. The business partners, who invest part-time in real estate to create passive income streams later, considered subdividing before deciding against it.
"The problem is we would need to apply for a [zoning] variance," Aschoff said. "This is a big cost of time and money because you cannot guarantee the decision [the zoning board] would make. On top of all that, the permitting process would create so many headaches. When we were buying it, it was with the intentions of renovating it. So it can be very difficult to plan renovation work if we don't know the future of the lot."
Financing options available to buyers may also determine how you proceed with a subdivision or conversion. Lot-only loans are hard for consumers to finance, and lenders have their own set of rules on condo conversions.
Fannie Mae and Freddie Mac require approximately 70 percent of units in a converted condo to be sold before authorizing lender mortgages, and at least 50 percent of the units will need to be sold before the Federal Housing Administration will insure those mortgages, said Than Merrill, president and CEO of FortuneBuilders, which invests in real estate.
"In some cases, subdividing a plot into two or more segments has a detrimental impact on the property as a whole because the separation devalues all parts of the home, " Merrill said.
"For example, if you subdivide the pool or garden off of the entire home in the process of creating a duplex, it may devalue the home to the point where you don't make a profit. "