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Part 7: A Landowner's Perspective
In 1971 Bruce Buie got together with a few fellow physicians and other investors. One of them acted as their "scout". He was interested in real estate and kept a lookout for possible land acquisitions. For his effort, he was given a 5% stake in the property. There were 5 other investors. Two of them held a 10% stake, while the remaining three, including Bruce, held 25% each.
Together they purchased about 120 acres of farm land near 119th Street and Woodland Road. They would eventually sell this to Keith so he could develop Mill Creek Grande. Originally, however, they intended to hold on to the land for just a few years, then sell it. At the time of their purchase, farm land had been increasing steadily in value.
Bruce was involved in other such land deals over the years. In fact, another piece of land in which he invested he also sold for residential development. As it turns out, when Keith built his first house for sale in Johnson County, long before he decided to become a developer, he built the house in that subdivision.
All the quotes in this article are based on an interview with Bruce in March, 1998. Some of the material also is based on conversations with Keith.
Drilling For Oil
Shortly after Bruce and his partner bought the land at 119th Street, farm prices began dropping. The short term investment turned into a long term investment. They were able to lease the land to a farmer, which covered their expenses, so they just held on.
At one point they even got involved in oil drilling:
"After we had held it for, oh, 10 or 15 years, a guy to our north wanted to buy - this was 120 acres to start with - he wanted to buy back the North 20, which was the least desirable. It was down in a ditch, down behind us. It was not really farmable or capable, really, for what I think of constructing homes on it, so we thought that was a good riddance."
"In a few months he started drilling oil wells on it. He put those stripper wells on." [Bruce laughs].
After seeing their neighbor to the north put in wells, Bruce and his partners also tried it.
"We drilled 5 or 6. Two of them were dry holes. Initially, you're lucky to get four or five barrels a day. After they'd been going for a while a couple of them dropped out."
"That was back when oil was going for 30 bucks a barrel."
"We probably about broke even. I don't think we made a big a killing because shortly after we started drilling - two or three years - the production went down and oil dropped to 15 dollars a barrel. So when oil prices dropped we had to close those fields down. [The last one closed] 8 or 10 years ago"
"We did come out tax-wise. Because you could write off all those billing expenses. 80% of them. There were three doctors, four doctors in this group and they were all looking for tax write offs. This turned out to be a good one."
The oil drilling would have an effect on the sale to Keith, since oil wells meant an additional environmental inspection near the collection tanks had to be done. As it turned out, there was no contamination from the drilling.
Finding A Buyer
Farm prices eventually did rise again, but the partners decided that it would be wiser to sell the land for development rather than farming:
"No one would make us an offer to meet our buying price for years. After we had held it for eight or ten years and prices started going back up, we decided, 'Nah, let's just wait.' Usually selling it for a residential development your prices go up considerably from just raw farm land."
They even considered developing it themselves:
"At one time we thought we would go ahead and do the development within the group. But no one in our group really had any expertise in doing residential development. We went so far as to get some estimates of costs and so forth, but we were all getting older and less inclined to put in a lot of time."
When development had moved far enough south, they put the land on the market again by posting a sign on it. Many people called about buying a few acres, 5 to 10, but the partnership decided to try to sell it as a whole. So they hired Stevens and Company as their realtor. Lyn Overholt was their agent. It was through him that they found Keith.
The original 120 acres was now down to 88. About twenty had been sold to the oil driller and about 11 others to a church. The partners agreed to sell the 88 acres for $9,500/acre - $836,000. They signed the contract. The sale was dependent on financing being arranged and all zoning requirements being worked out.
Zoning
Keith approached the Johnson County Planning Department about zoning and laid out his plans. Keith said they were pleased with his approach on zoning issues. They worked with him for several weeks. Keith was certain that they had all reached agreement and he was preparing for the town zoning board meeting to get approval. The day before the meeting, the Planning Department told Keith that the lots were sized too large. That they were going to recommend much smaller lots to the zoning board.
Keith felt betrayed. At the meeting the Planning Department did recommend the smaller lots. Keith expressed his anger and frustration, particularly that after weeks of work he was given one day's notice that his 2 - 3 acre lots were too large. The zoning board sympathized.
Bruce remembers that:
"The township zoners put it on hold for a month. That caused the delay because we wanted to end a split decision. They were talking one acre sizing."
"They were trying to go from the big houses there like on 114th Terrace into a medium size and then there's supposed to be a smaller size house. They hated to put in any nice, big, good houses in between for some reason. They backed off of that."
Other issues that came up were dry sewers and traffic. In the end, Keith got his large lots, but also agreed to put in the dry sewers. So although the homes would have septic systems, when sewers came far enough south, they could be connected to the development with minimal expense and disruption.
Financing
Keith had considerable trouble arranging the financing necessary to close the deal. [See Creation Of A Neighborhood, Part 6: How To Get $1,000,000 For Your Dream.]
Here is Bruce's perspective:
"Well, you see, when you enter a real estate contract you're tied down. You can't offer it to anybody else, because it's a legal thing. Each time that he went into default, we could have said 'That's it' and closed the deal. Well, each of us, by that time had had some interaction with Keith. Thought he had a good plan. Seemed like just a great guy."
"We decided, well, no let's don't pull it now. Let's give him one more chance. Then that got by and then all of a sudden it happened again. Actually, there could have been a third default, if we had, you know, been hard nosed about it."
"It was this last few weeks. It was January 15. Then we got by that and he was in default again, but we didn't penalize him. It was the banker's fault, we knew that. He was in a real pickle. He'd already had to shell out a couple of times. We felt kind of bad about it."
"One of the partners thought that we should just...They didn't think he'd ever get it done and wanted to start over anew. I think it was after the second default. He decided he'd had enough. We should start looking for somebody else."
"But then you would have had to really start over from scratch and there's no telling that the next guy wouldn't have the same set of problems. So I said, 'Oops, we're into it up to our neck now, let's just get it done. Because after holding since 1971, what's another month or two.'" [Bruce laughs]
The agent also wanted to stick with Keith:
"I think he had also had some interaction with Keith by that time. He thought that he was pretty good. He knew his financing was thin. See initially we were going to try to sell the whole thing at one time for cash and get out of it. We all wondered whether that was really the most prudent way of doing it, because a lot of times they'll buy part of it and then get an option to buy the second half of it. Basically that's how this has gone on. We've got over an 18 month period to close on the last phase of it."
Return On Investment
There are so many factors involved that it would be very hard to get an exact value for return on investment in this land deal. In addition, the investors lent Keith the purchase price of about one half of the land, corresponding to the second phase. Keith must pay off that mortgage in 1999.
"You know, if we had taken that same amount of money and put it in Procter & Gamble or Microsoft or something that has done well we would have probably done better. I have not sat down to figure out what our return on our original investment is because of all these other partial...we bought out ***, I think several years ago. That time I think we paid another $4,000 for his per centage where we got the original for $1,100.
"So it's hard to figure your basis. Since it's been 20 acres at the back sold, 11 at the front for different figures. So, you'd need a CPA to go back and really...plus all this oil and stuff that went on."
Over the time they held it, the partners were also leasing it to a farmer to cover expenses.
Nevertheless, to get a ballpark starting point, one can compute the annual increase in value of the 88 acres of land sold to Keith based on a purchase price of $1100 per acre by the partners in 1971 and a final sale price in 1998 of $9,500 per acre. This represents an increase over 27 years of about 8.3% compounded annually.
Inflation, as measured by the Consumer Price Index, was approximately 5.3% compounded annually over that same time period.
[See:
Warning/Disclaimer: I did both of these computations myself using some basic formulas and the data provided by the tables, so, if they're right or wrong, I get credit or blame. I think they are right, given my assumptions. Editor.]