The choice between paper lots vs finished lots is the single decision that defines a land development deal’s risk and return. Sell paper lots and you entitle raw land, then double-close with a builder the same day you close on the dirt — never taking title, and often returning 200-300% on a small entitlement outlay. Sell finished lots and you close on the land, build roads, sewer, water and electric, then deliver lots on a takedown schedule for something closer to 25% on a much larger investment.
Ross Wade, partner and VP of development at Elite Companies, runs both exits and prefers the second one. His reasoning, the actual costs of getting a subdivision approved, and the structure that lets a builder fund part of your down payment are all below.
This guide covers where a subdivision deal really starts, the three entitlement steps and what they cost per lot, why construction design is what makes the deal underwritable, how the two exits compare on real numbers, and where the money is genuinely at risk.
Key takeaways
- Entitlement, not construction, creates the first jump in value — Wade put land under contract at $340,000, paid a civil engineer $50,000 to entitle 45 lots, and the property appraised at $1.1 million before any dirt was moved.
- Budget roughly $30,000-$40,000 in city and filing fees to entitle a project with no construction design, or about $2,000 per lot all-in once horizontal construction design is included.
- Rezoning is required on roughly 90% of residential development deals and is the biggest hurdle — don’t start construction design until zoning clears.
- A signed builder contract before land closing can release escrow at closing as working earnest: on one Wade deal, roughly $800,000 came back to the developer the day the land closed.
- The entitlement cash is the real capital at risk, not the land. Only about one in ten pieces of land on the market works for residential development, so site selection is the skill that matters.
From the Real Estate Pros Show
This article draws on an interview with Ross Wade of Elite Companies on the Real Estate Pros Show, hosted by Cody Crabb.
Where a Subdivision Deal Actually Starts
A land developer sits above the builder in the food chain: buy raw land, get it entitled, sell the lots to national and regional builders. Wade’s firm does exactly that, and his own entry into it was an accident.
He put land under contract at $340,000 intending to build spec homes on 45 lots. He paid a civil engineer $50,000 to entitle it. When he went for a land-plus-development loan, the appraisal came back at $1.1 million — before anyone touched the dirt. He built the first three houses on Buffalo Trace in Washington, Indiana, then sold the remaining 42 lots to an investor and stopped swinging a hammer.
The reason that works is builder economics. Lennar, DR Horton, Pulte and Rausch Coleman all develop some of their own land, but Wade’s point is that most of them would rather buy finished lots from someone else because the cash-on-cash return is better than tying up capital in horizontal work.
The supply picture backs it up. Roughly a million new homes get built and sold in the U.S. each year against a housing shortage Wade pegs at about 7 million — and if annual production stays flat, that deficit doesn’t move. Four Star, the nation’s leading lot developer, delivered 14,000 lots last year. One company, 14,000 lots, against a million homes.
That gap is the whole opportunity. There is not a shortage of builders wanting lots; there is a shortage of people willing to do the entitlement and infrastructure work that produces them.
One long timeline makes it possible: Wade’s contracts give him up to 12 months before closing, and he’ll often pay above current market value to get that runway.
The Three-Step Entitlement Process and What It Costs
Entitlement is three sequential approvals, and the first one is the wall most deals hit.
- Rezoning. It is rare to find land already zoned correctly for a residential community. Roughly 90% of Wade’s deals require a rezone, and this is the biggest hurdle in the process.
- Primary plat. This is where the subdivision takes shape — lot count, lot size, the shape of the streets, and setbacks (how close a house can sit to the property line).
- Secondary plat. The final plat. Once you have secondary plat approval, you have full approval to build the subdivision.
Wade won’t start horizontal construction design until zoning is done, because zoning is the step most likely to kill the deal. Spending engineering money on a site you can’t rezone is spending it twice.
On cost, there are two numbers worth carrying in your head. Getting a project entitled with no horizontal construction design runs roughly $30,000 to $40,000 in city fees and filing fees, and that figure moves market to market. Total entitlement cost including the civil engineering averages about $2,000 per lot.
The difference between those two numbers is the construction design — the sewer, stormwater, electric, roads, and retention and detention ponds. That is where most of the spend goes, and it is the part that turns approvals into a sellable asset.
The whole cycle runs 10 to 16 months in Wade’s deals, which is why the long closing window on the purchase contract matters so much. You are buying time to complete approvals before you ever have to fund the land.
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 on the tail end, knowing that you’re not throwing money at this deal without an exit.
— Ross Wade, Elite Companies
Why the Construction Design Is Non-Negotiable
Zoning and platting alone leave you with an approved subdivision you cannot underwrite. That is Wade’s core argument, and it is the reason he runs entitlement and horizontal construction design concurrently rather than sequentially.
By the time you reach secondary plat approval with the design complete, you have a construction drawing you can hand to a site contractor. The contractor bids it and tells you what the full development will cost. Now you have a real per-lot development number.
Without that, you have nothing to compare against what the lots are worth on the tail end. You know what the land cost and you know builders want lots, but you cannot say whether the deal makes money.
The math runs backward from the builder’s price. If a builder will pay $100,000 per finished lot, taking ten at a time, and your site contractor bids the approved design at $50,000 per lot, the remaining $50,000 per lot has to cover land cost and profit. Whatever is left after land is your margin.
That same number is what lets you price a paper lot exit. Once you know the finished lot price and the site cost, you can reverse-engineer what a paper lot is worth and discount your own profit to make an immediate sale attractive to the builder.
If they’re willing to buy a lot for $100,000, ten of them at a time, and your site contractor bids an approved design at $50,000 a lot, you know you’ve got land and profit built into that extra $50,000 per lot.
Three metrics drive the forward sale agreement: the finished lot price, the site contractor’s bid, and the land cost. Everything else is negotiation.
Paper Lots vs Finished Lots: The Two Exits Compared
Paper lots. You put the land under contract, pay to get it rezoned, platted and designed, and then bring the builder to the closing table. The builder closes on the land simultaneously with you. You never take title.
Wade’s illustration: land under contract at $1 million with $20,000 in earnest money. Pay a civil engineer $100,000 to get 80 lots approved. On closing day the builder buys the paper lots for $2.1 million. You pay off the $1 million land, reimburse your $100,000, and roughly $1 million is left. He has seen a $6 million paper lot exit outside his own organization, and knows of investors in the space who have done eight figures on deals where they never owned the dirt.
Finished lots. You close on the land, build the infrastructure, and deliver lots to the builder on a takedown schedule. On a current Wade deal the builder is contracted to take nine lots every 90 days — at the most recent closing they took 13.
Wade prefers the finished lot exit for two reasons. First, scale: he would rather make 25% on a $10 million investment than 200% on $100,000 to $200,000. Second, salability. The finished lot exit is a much easier offer to get from builders because demand for delivered lots is so strong. Paper lot deals are harder to place.
The two are not mutually exclusive. If you have a finished lot contract in hand, you can usually convert to a paper lot sale by discounting your profit to entice the builder to take everything at once.
How the Capital Stack and Builder Escrow Actually Work
On a $10 million development of roughly 200 lots, you are not building all of it at once. Wade frames it this way: if land is $1 million and the first phase of horizontal work is $5 million, you have a $6 million capital stack, and you should expect to bring somewhere around $1 million to $1.5 million in cash.
The builder often closes part of that gap through the forward sale agreement. Here is the structure on a deal Wade closed:
- Land cost: $1.38 million
- Civil engineering to entitle 199 lots: $250,000
- Builder contract signed before the land closing
- Bank loan covering the land plus the first 120 of the 199 lots
- Roughly $800,000 of builder money held in escrow, released to the developer as working earnest the day the land closed
That $800,000 covers part of the down payment the bank requires to fund the first phase. All the lots were already sold before the land was purchased.
Wade phased 120 lots, which is aggressive. He notes most developers would build the first 50 or 60 instead, which cuts the loan size and the cash required at closing. If you are doing your first deal, phase small.
You still need real financial capacity and cash in the deal — the builder escrow reduces your exposure, it does not eliminate it. But the sequence matters: get the builder contract signed during entitlement, and the escrow arrives exactly when the bank asks for your equity.
Where the Risk Really Sits and How to Contain It
The at-risk capital is the entitlement money, not the land. On the deal above, that is the $250,000 paid to the civil engineer — spent before closing, on a property you don’t own, with no guarantee of a certificate at the end.
Wade names three failure modes:
- You finish horizontal construction design and something doesn’t work with the utilities.
- You can’t get sign-off on a road expansion or similar off-site improvement.
- The infrastructure works, but the site contractor’s bid comes back materially higher than forecast and the lots no longer pencil against the builder’s price.
Any of those leaves you with land that is zoned, platted, wanted by the town, and unbuildable at a profit. Wade says it hasn’t happened to his group yet, and that on deals where costs did rise, builders kept outbidding each other on lot price. That is a market condition, not a guarantee.
His containment method is sequencing. Push to get a builder offer during entitlement rather than waiting until approvals are complete. Sometimes the offer doesn’t land until the very end — but every development his firm has done had a full builder contract on the lots before closing on the land. Frequently they get offers from multiple builders on the same site.
The deeper protection is site selection. Land flipping is forgiving; almost any parcel can be flipped at the right price. Residential land development is not. By Wade’s estimate, about one in ten pieces of land on the market actually works for it. Picking the right site is what keeps the other risks from ever showing up.
Frequently asked questions
What is the difference between a paper lot and a finished lot?
A paper lot is an entitled lot that exists only on approved plans — rezoned, platted, with horizontal construction design complete, but with no roads, sewer, water or electric built. A finished lot is one where that infrastructure has been constructed and the lot is ready for a builder to pour a foundation.
The practical difference is who builds the infrastructure. Sell paper lots and the builder takes on the horizontal work. Sell finished lots and you do, which is why finished lots command a much higher per-lot price.
How much does it cost to entitle a subdivision?
Roughly $30,000 to $40,000 in city and filing fees to get a project entitled with no horizontal construction design, according to Ross Wade — though that figure varies by market. Including the civil engineering for construction design, his deals average about $2,000 per lot in total entitlement cost.
On a 199-lot project his firm paid a civil engineer $250,000 to complete entitlement. On an 80-lot deal he uses as an illustration, the number was about $100,000.
Do you have to buy the land to make money on entitlement?
No. In a paper lot deal you tie up the land with a purchase agreement and earnest money, complete entitlement during a long closing window, and then close simultaneously with the builder on the same day — you never take title.
Wade’s example: $20,000 earnest on $1 million of land, $100,000 to entitle 80 lots, builder buys the paper lots for $2.1 million at closing. The land purchase and the lot sale happen in the same transaction.
How do builders help fund a land developer’s down payment?
Through a forward sale agreement with escrowed deposits. The builder contracts for the lots before the land closes and puts money into escrow, which is released to the developer as working earnest on the day of the land closing.
On one Wade deal, roughly $800,000 of builder escrow was released at closing and applied toward the equity the bank required to fund the first phase of horizontal construction.
What can go wrong after a subdivision is already zoned and platted?
Three things, per Wade: the utilities don’t work out once horizontal construction design is finished, you can’t get someone to sign off on a needed road expansion, or the site contractor’s bid comes back well above forecast so the lots no longer pencil against what a builder will pay.
In each case the entitlement cash is already spent on a property that is approved but not profitably developable. That is why the entitlement outlay — not the land — is the real capital at risk.
The bottom line
Before you spend a dollar with a civil engineer, get honest about the site. Nine out of ten parcels on the market won’t support residential development, and no amount of entitlement work fixes a bad one — so run the finished lot price and likely site cost on paper first, then decide whether you’re buying the paper lot exit or the finished lot exit.
