Paper Lot Strategy Explained: How Developers Sell Subdivisions Before They Even Own the Land

Ross Wade (00:00)

And so during that time, I paid a civil engineer fifty thousand dollars to entitle forty-five lots. And I went to get a loan, and the loan was going to be a land-plus-development loan, like we always do. And this had been my first real land development play, and

the land got appraised for the loan and it tripled in value. So I put the land under contract for $340,000, and we—I paid—this was before I was a part of the partnership—I paid $50,000 to entitle it, and it appraised for $1.1 million before we even touched the dirt.

Cody Crabb (02:05)

Welcome back to the Real Estate Pros Podcast by Investor Fuel. I’m your host, Cody Crabb, and today I’ve got Ross Wade with me. Ross is a partner and VP at Elite Companies, where he leads their land development and subdivision strategy, turning raw land into finished lots for regional and national home builders. Ross, thank you so much for being here.

Ross Wade (02:24)

Thanks for having me.

Cody Crabb (02:24)

So for somebody who’s never thought about the land under a new subdivision, like a lot of people think of that as the beginning, right? And so give me—give me some context as to where a deal like this actually starts.

Ross Wade (02:37)

Well, they can begin anywhere, but it began for me on accident. So I actually bought land to entitle forty-five individual lots to build spec homes on. I was a home builder, and we paid about fifty thousand dollars to entitle forty-five lots, and I had to get a loan to build the road at the same time as closing on the land.

And what we do is we have long timelines before we close on the land. Often we will offer more than the land is currently worth because the seller’s willing to hold for a closing for up to 12 months.

And so during that time, I paid a civil engineer fifty thousand dollars to entitle forty-five lots. And I went to get a loan, and the loan was going to be a land-plus-development loan, like we always do. And this had been my first real land development play, and

the land got appraised for the loan and it tripled in value. So I put the land under contract for $340,000, and we—I paid—this was before I was a part of the partnership—I paid $50,000 to entitle it, and it appraised for $1.1 million before we even touched the dirt.

I was still too dumb to figure out what just happened. So I built the first three houses.

And if you—if you look up Buffalo Trace in Washington, Indiana, you’ll see this. So those first three houses are bigger, more custom. We were gonna sell each house, and then had an investor take the remaining 42 lots. And I took proceeds and went and never looked back, put my hammer down, and that’s how it began for me—seeing that you could just sell the lots after creating the value by entitling it and building the road and the sewer and the water and the electric.

And so since then, we’ve done multi-millions of dollars of deals with larger builders and much bigger towns. So that’s how it began for me.

Cody Crabb (04:31)

Interesting. Yeah, this is one of those things where I think a lot of people don’t think of the part before the creation of the subdivision as the beginning, but like it seems like this whole part beforehand… So give me an idea of what I’d like to do as a little example, going just to kind of get our heads around this process. So like what is actually happening during

this entitlement that takes a piece of dirt from, like you said, three hundred and forty thousand to 1.1 million without you actually improving anything first?

Ross Wade (05:01)

Yeah. So most—in most cases, you’re gonna need to do a three-step process of entitlement. You’re gonna need to rezone the property. It’s very rare to find a residential community that’s already zoned correctly, so 90% of our deals we have to rezone. And then the second step is called the primary plat, and that’s where you’re defining lot size, how many lots are gonna go on the property, the shape of the street.

It’s mostly just, “Okay, what’s the shape of the subdivision? How many lots? What are the setbacks?” or how close can the house sit to the property line—all those details. And then the secondary plat is—that’s the final plat. So once you have secondary plat approval, you’ve got full approvals to build the subdivision. But the real key information, if you want to exit a profitable subdivision,

you need to have the horizontal construction design done by a civil engineer during that 10, 12, 16 months, because it may cost you $30,000 in city fees and filing fees, $40,000 maybe to get a project entitled with no horizontal construction design. And that number changes from different markets, but

we’re averaging about $2,000 per lot in total entitlement costs. And where that extra cost comes from is the horizontal construction design from the civil engineer, which means that by the time you get to that third step of secondary plat approval, you will have a full design of the sewer, the stormwater, the electric, the roads, the retention ponds, detention ponds.

And then you have a plat, or you have a construction drawing that you can take to a site contractor, and the site contractor can bid that and tell you how much it’s gonna cost to do the full development. And without that information, you have nothing to compare to what the lots are worth on the tail end. And so it’s entitlement running congruently with construction design.

And so we often won’t start the horizontal construction design until at least we get the first step done, which is zoning, because that’s the biggest hurdle, honestly. And so to answer your question, yeah, and to give you an example, like we—I just had a closing yesterday for 13 lots. It was supposed to be nine lots, but the builder’s buying more than they—than they agreed to, which is a good thing for us.

But that deal was 1.38 million land cost. We paid a civil engineer $250,000 to entitle about 199 lots. We had a contract already signed with the builder before we even closed on the land. So once we got zoning and platting done with the construction design, we closed on the land with a loan

that also covered the first 120 of the 199 lots. And the builder put down about—I think it was near $800,000 in escrow, and the day we closed on the land, that money got released to us as working earnest. So that covers part of your down payment you need to go to the bank to go build the first—for us, it was 120 lots. Most developers would probably build the first 50 or 60.

And that would reduce your capital stack and the amount of capital you need to go to the bank. But that—that’s what a deal looks like. All those lots are already sold.

Cody Crabb (09:17)

Is that always the case? Like are they always already sold, or is this—that’s just kind of something that happens sometimes?

Ross Wade (09:22)

In our case, yes. It’s a lot easier to sell the finished lot. So there’s two different ways to make money doing what we do. There’s two different ways I make money: You can sell paper lots, or you can sell finished lots. Paper lots would be as if you put the land under contract, you paid to get it zoned, platted, and got all the horizontal construction design done,

but then when it was time, after the 12, 14, 16 months, to close on the land, you bring the builder with you and they go ahead and close on the land simultaneously. And so they would buy all 199 paper lots at $20,000 a lot or $30,000 a lot, whatever that number is. Whereas that’s a harder deal to do than for you to prove it and actually go close on the land and develop the lots. And the builder there is supposed to close on nine lots every ninety days.

And so the finished lot exit is a much easier offer to get from builders because the demand is so strong. So to answer your question: Every development we have done, we have had—we have had a full contract from a builder on the lots before we close on the land.

Cody Crabb (10:29)

Gotcha. I like hearing this kind of perspective, because it’s good to kind of see how the process works on the—on the back end. So what do the economics of this look like if somebody hears this and goes, like, “This sounds way too good to be true. Like who’s actually taking the risk here? Why does this actually work in terms of the—the risk and stuff?”

Ross Wade (10:47)

Well, so going back to what I was saying, you can sell paper lots or finished lots. Oftentimes you’ll see two different returns on—return on investments: You’ll see a 200 or 300% return on your investment for the amount of cash to entitle the project. For example, the $250,000 we put into the deal before we close on the land is actually the real risk for us. But you minimize that risk by pushing to get an offer,

by pushing to get the lots sold on the tail end, knowing that you’re not throwing money at this deal without an exit, right? Now, sometimes it doesn’t happen until the very end of entitlement, but that’s the name of the game. But oftentimes we’re getting offers from multiple builders on our sites, which proves that the secret sauce is finding the right site. Because it’s not just like land flipping, where you can pretty much flip any piece of land, but one out of 10 deals

that are out there work for residential land development. But to go back to what you’re saying, for example, there’s people selling paper lots that are just entitling land. Say they put $200,000 to entitle a subdivision of 120 lots, and then they have it sold to a builder the day they close on the land and do a double closing. So they never took title, they never actually bought the land. So example:

I’ve seen deals better than this. We prefer to sell finished lots, we do, because I would rather make a 25% return on a $10 million investment than to make a 200% return on $100,000 or $200,000. But if you have the finished lots sold on the tail end, you can most of the time go ahead and sell the paper lots by enticing the builder with a discount, right? But the risk is really the cash going into the entitlement,

because just because you get it zoned, get it primary platted, doesn’t mean that—there are cases, and it’s not happened to us yet, where you get to the end of the design of the horizontal construction design and something doesn’t work out with the utilities. You can’t get somebody to sign off on a road expansion or whatever it is. And so you get into this deal with all this cash, and you got it zoned, you got it platted, the town wants it, but the infrastructure doesn’t work.

Or maybe the infrastructure does work, but it comes back at a much higher cost than you forecasted, and you can’t make money selling those lots on the end. Even though that’s pretty rare, too, because every deal we’ve run into an issue where the costs are going up, the builders just keep outbidding each other. But again, that boils back down to picking the right site. So the name of the game is minimizing risk by structuring your forward sale agreements with the—with the builders on

tailoring three main metrics, right? Finished lot price, because if a builder is willing to give you a finished lot price, you can reverse-engineer a paper lot price. Because you got to remember, if they’re willing to buy a lot for a hundred thousand dollars, ten of them at a time, and you get to the end of entitlement and your site contractor bids a design that’s been approved for $50,000 a lot, well then you’ve got land

and profit built into that extra fifty thousand dollars per lot. And you can entice the builder to go ahead and buy the paper lots by discounting your profit, right? So it’s not simple or easy, but if it was really simple or easy, everybody would be doing it. And the easier it is to teach, the easier it is to automate, and the more replaceable you are, honestly.

Cody Crabb (14:14)

So for somebody listening who’s already kind of flipping houses or buying rentals or something, but they’ve never really looked at development, when should they look at a piece of land and think like, “There might actually be some opportunity here”? Like what kind of people would that—you be a good fit for?

Ross Wade (14:27)

Well, I would tell them to book a call with me and I’ll show you exactly how I’m getting clients to risk about the same amount of capital they do on a house flip, but we can consistently—and this, I have to say caveats, right? This is not investment advice and all this stuff, but—

Cody Crabb (14:44)

Believe me that we’ve got that all over our podcast, yeah. Trust me.

Ross Wade (14:47)

Okay.

Well, most of the time we can double your money on entitlements alone. And here’s why: because say someone comes and pays us to show them our exact playbook, and then they compare it to house flipping and all these other things. Number one, the very first thing that I’d like to say about land development, because I have flipped houses, I have built houses, and I’m dealing with six and eight subcontractors, and it’s multi-phased, and there’s much more

scheduled time to structure and organize versus when you put a piece of land under contract, you’re really just paying one person, and that’s a civil engineer. And sometimes you need an attorney for brief moments, but we handle all that kind of in-house. But what it looks like is: You tie up a piece of land with earnest money, maybe five, ten, fifteen thousand dollars—I can get that lower in most cases—and then

you pay a civil engineer $100,000 to get a project approved. We will buy the paper lots as long as there’s a finished lot contract with the builder on the tail end, right? So for example, going back, I’ve seen deals like this: So you put a piece of land under contract, you’ve got $20,000 in earnest on the land, you pay a civil engineer $100,000 to get 80 lots approved.

On the day you close with the builder, you can sell the paper lots for a million dollars more in cost. So if the land was under contract for a million, you got a hundred—or eighty lots, you actually didn’t buy the land, but the land is tied up for a million, you’re in 100K. The builder, on the day you close, buys all the lots for $2.1 million. You take the $2.1 million, you pay off the $1 million land,

you pay yourself back a hundred thousand dollars, and there’s a million dollars left to—left to spread. You can find other deals way better than that. I’ve seen a six-million-dollar… This was not a part of our organization, but that was the highest I’ve ever seen. I know some other investors in this space have seen eight-figure exits on paper lot deals—they never owned the land. They literally simultaneously close.

So essentially what you’re doing is, it’s not flipping. You’re tying up the land and you’re improving its value by uncovering all the unknowns and getting it rezoned. You’re changing the land use. You’re basically just setting it up for a builder to say, “Look, there’s no more bureaucracy to deal with. The site contractor bid the design. Do you want to take it now and build the road yourself? Or do you want us to buy the land and we’ll build the road and you can take it off in pieces?” Right? So—

Cody Crabb (17:18)

Thank you for all this perspective. I think this has been really interesting to hear from somebody that’s kind of—been in these things. You’ve done house flipping, home building, you’re in development, you’ve said that you’ve kind of had some feelers in multifamily as well with the company. So looking across all this experience, you’ve been around a lot of investors. What’s a mistake that you see real estate investors make kind of over and over again?

Ross Wade (17:42)

So number one, our company owns the—the partners own about five hundred units we built over the last thirty months, so I do not disagree with anybody that’s in multifamily. I think you should be building multifamily. We build our own, so there’s a lot of value creation there. But I think that, for instance, out of a seven-million-home shortage, if we’re only building a million homes a year, and the nation’s leading lot developer, Forestar,

did 14,000 lots, there’s a lot of room for other developers out there, and there’s a starving crowd of builders. But what most investors I think do wrong is they’re constantly looking and falling for the education or the coaches or the mentors that are trying to say, “This is easy. You can do—this is easy. This is simple.” And the easier and simpler and cheaper it is,

the more likely more and more people are doing it, which means that you’re very replaceable. And so the value creation for flipping houses requires lots of human capital, requires almost just as much capital as land, except the payoff is just not near as big, and it’s a saturated market. So if—what most investors are doing wrong is I would say

not observing like what it really means to do value creation through financial arbitrage. There’s a lot of different ways to make money in real estate, but the number one thing is, in my opinion, is you make your money on the purchase. So if you want to make more money, yes, make more offers, but be selective on those offers and learn how to select the right property.

And don’t always think of real estate as a building. There’s a lot of land out there where you can be at the very top of the food chain. So if your name is tied onto a purchase agreement on the land, so the seller has given you a 12-month clock with some extensions, someone has to write you a check. You’re in control of the deal, whether there’s an investor involved or not. And by the way, if you tie up a piece of land

and you create an exit with a national builder that’s multi-millions of dollars and they’ve expressed to you they’re going to put a down payment down, it’s really easy to get an investor. And by signing up as a coach, if you sign up to our mentorship program, we would like to be that investor. And so, another piece is I own 10% of a land banking company, and so there’s the opportunity where if no builder buys it, but it’s got just a waiting time where

there’s just sewer down the road that has to be extended, we’d love to buy land and just hold it. So yeah, you make your money on the purchase, so don’t look for these quick and easy schemes where it seems like a quick flip and a quick buck, because it’s a race to the bottom.

Cody Crabb (20:25)

And I always say, like, yeah, look for who has a financial stake in you doing it. Like if you’re gonna buy this program that is gonna be the quick and easy fix, maybe they—maybe they might not have your best interest at heart if you’re just—they’re just trying to get you to buy something. But no, this has been a really interesting perspective. I really appreciate this. If people want to learn more about what you’re doing or connect with you or kind of learn about some more of this strategy,

where’s the best place for them to find you?

Ross Wade (21:34)

Yeah, just go to Instagram and find me @submasterstrat, also known as Subdivision Mastery Strategies. You can also—

Cody Crabb (21:42)

SubmasterStrat, because it kinda sounds like you’re a DJ at first, which is kind of—that’s kinda fun.

Ross Wade (21:48)

Yeah, I just got tired of saying the full name, so that’s just what it turned into. But that would be the best place to find me for now. We really use that business to feed Elite Companies more opportunities.

Cody Crabb (22:00)

I love that you’re just straight up about it. Like, yeah, just that’s what we do. Like that’s—that’s—you don’t hear that too often, where it’s like, “Yeah, that’s part of the strategy.”

Ross Wade (22:08)

The other thing, too, is like people pay a hundred thousand dollars to go to college for four years with no chance of making money to go learn a skill to make eighty thousand dollars a year, whereas paying—I love the alternative education space. I think it’s gonna continue to go up and up and up and up. Definitely.

I paid $175,000 in coaching fees last year, and it just blew my mind because it’s the opposite of what most people think. Like, if you think everything’s a scam, you’re never going to get anything done. If you pay a mentor to help you avoid all the mistakes they already paid the money, the more wealthy and rich you are, you would rather spend money than time. And then

the less fortunate people, it’s a—it’s a poor mindset to think that you would rather spend time than money. And then to give a true testament of why I know I’m in the right industry is not only are we successfully knocking down deals one after another, but we did a development with the number six builder in the country back in 2024.

And he was unique, because if you look at the top five builders, they’re nationally traded companies, and so the guys running those businesses, net worths are really high. But we were dealing with a guy that was 39 years old, and he ran a company that was number six in the country, and they had done like 5,000 homes in one year. Now, D.R. Horton did 100,000 last year, 80,000 was Lennar, and then it goes down to I think like 20 and 30,000, Pulte, but he was—

he was the single owner, a hundred percent owner of this company. And I became pretty close with his brother-in-law, the executive vice president. And we—I don’t know if it was my idea entirely, but I did get a thank-you note from the owner after they did this. But I said, “You guys should really stop building houses.” And it was like a crazy thing, because they were just racking up houses as a—

owning a hundred percent of a company that does five thousand homes a year, you’re probably making about a hundred million dollars a year. And he went ghost. They kind of looked at me and it’s like, “Stop building houses? What do you mean?” I’m like, “Well, you should just go build a huge runway of entitled or fit—or finished lots and then just sell the company.” And it was—it was—I’m not taking credit for it entirely, but he went ghost for like eight months, and that’s what he did.

And he sold his company for $900 million to Lennar’s sister land bank, Millrose. And what he—a guy like that sold his company, 900 million, was probably already making a hundred million a year, multi-billionaire—what he did: He started another land development company where all they do is entitle and sell finished lots to builders. Interesting. And that is like the best evidence, that’s like—that like trumps everybody’s real estate advice,

because I’m not as smart as this guy, I’m not as successful as this guy, and neither are most of the people I talk to trying to tell me, “You should flip, you should do this type of strategy.” And it’s like, no, I think this guy could have done anything he wanted, and he chose to go right back into land banking.

Cody Crabb (25:11)

He didn’t have to do anything! Like he could have just not done anything, also as a very—as a very good option. And that was just—yeah, that—that’s a—you’re good. That’s a good point. Follow the—follow what the big dogs are doing is never gonna be too bad of a strategy. Well, Ross, I can’t thank you enough. This was a great episode. Thanks for this really different perspective on where the value can actually be created in real estate. Thanks for coming on,

and thanks for your time. And thank you, listeners, for your time as well. If you liked this episode, make sure you don’t miss the next one. And Ross, we’ll catch you next time. Thanks again, and we’ll see ya.