…plus the questions I should have asked first
There aren’t many things more fulfilling than buying your first piece of real estate. Buying land is the mark of a wealth builder. More importantly, the sense of accomplishment is glorious and propels you to want to achieve further greatness. But what happens when those feelings are dashed by realizing you made the wrong choices? Let’s hope you learn from my real estate mistakes.
- Don’t skimp on the research
- Strategies and risks to consider
- Buying for the price
- How to buy a land
- I didn’t shop around
- Buying sight unseen
- I didn’t buy according to my 5 year plan
- The questions I should have asked
- Location
- Pros and cons
- Do your research…
- What you should put on your land
Don’t skimp on the research
Several years back, I became fixated with buying land. The ultimate dream in my mind’s eye was creating a completely self-sustaining black community. Complete with a mall and business center, completely epic. Starting from one parcel of raw undeveloped land shaped and molded into a medicinal herb farm, edible forest, as well as my own home, I saw generational wealth unfolding in my mind’s eye.
I purchased my first piece of land. A 20 acre parcel in southern California that cost just a few thousand dollars. It sat right outside the Salton sea. Initially, I thought I hit the real estate lottery. However, I realized that not all deals are created equal. Firstly, the land was virtually useless to me, to my purpose, and in fact, unable to be developed at all…without a quarter million dollars in investment to develop. Spend the time, make the calls. Due your due diligence.
Strategies and risks to consider when buying a land
Strategies
Buy and sell
In this very approach, basically you are flipping the land. Your believe is that you will buy the land below market value. You’re hoping, you will find another buyer who will be willing to pay at or much more than the market value. There’s a hope of a quick sale with little or no additional work on the land on your very part.
Buy and hold
This approach, you will buy a land and hold onto it for some time. You believe that the land will appreciate in value. You will continue to pay taxes on the land, together with any additional costs to be able to maintain the land during this time. This is a very common approach in areas that are re-gentrified. The investor will buy a land with the hope that they will sell it to a developer in the future as the area will become more popular.
Buy, develop, and hold
With this approach, you will buy a raw piece of land with the intention to develop the land yourself. You would equally decide to construct a strip mall, which you would rent out to retail tenants. Another option might be to establish a bed and breakfast which you will be able to run and manage.
Buy, cultivate, and hold
This approach, you will be more interested to use the actual land, than to build property on the land. You will manage the land actively and hope to earn a profit off of what the land will produce.
Buy and go through the entitlement process, and sell
In this particular scenario, you will buy a land and then carefully go through the process to have the property zoned for a particular use. If you will be able to get the land rezoned for residential use, it will make the land much more valuable to potential developers and more desirable. As it is one of the extra step that you won’t take yourself.
To buy, develop, and sell
In this case, you will buy a land with an intention to develope the land yourself and then sell it to an end user. You might be able to set up a vineyard and sell it to a buyer who will be able to manage and run it.
To buy, develop, and rent
Finally, you would develop the land and then rent out the land to someone else. If you are lucky and an owner of a multi family property close by will ask if they can rent a space from you. Reason being that they do not have enough parking for their tenants.
Risks
Zoning Classification
One major problem you may encounter when you want to buy a land is zoning issues with the way the land would be used. Every town has its own land use plan. This basically will divide the town into different areas and that include residential, commercial, agricultural, industrial, historical, or even mixed use.
Use of land
The first challenge you will need to deal with is the way in which the land might be used. If the land is zoned for the use of residence and you plan to build a residential property on the land, you will have no problem.
However, your aim is to change the way the land have been zoned, you might have a battle on your hands.
Zoning restrictions
The second factor you will need to consider when buying land is the very size of the development you will be allowed to construct. When you want to build or improve a commercial property, there will probably be a zoning requirement for the land to build ratio. And how large a structure or other building you will have. Other considerations include the following:
Setback requirements
Usually there’s a code that will require that your property to be built in a certain distance from the neighboring property lines. This will include the front, which will likely be the street, the two sides, and the back. Permanent structures, like home, garage or deck, will be built a certain distance far from the property lines. This depend on the size of the lot you look at, this would greatly affect the size of the structure that will be built.
Lot coverage
This code is there to prevent flooding problems. There need to be a certain percentage of the lot that won’t be covered, where rain will habe the ability to be able to seep into the soil.
Floor area ratio
The square footage of every floor of the property will be put together and then be divided by the size of the lot. The total floor area might just only be a certain percentage of the lot size, which every town will determine.
Height
You will need to know the height of the structure you are allowed to build. If you plan on a three family building, but the town might not allow more than two stories at a particular location. This very investment will not make monetary sense for you at all.
Environmental issues
The third risk of buying land is you do not understand what lies right beneath the soil. You will certainly encounter some high levels of radon or asbestos. The soil might be unstable and very unfit to build on. When you build on soil that is not stable, it might cause the foundation of your property to crack immediately.
The land might be located in a flood zone. Certainly this will not be the end of the world if you are able to raise the property up or probably change the grading of the soil to prevent flooding.
Access to utilities
How easy is it for you to get utilities at the location? This will include sewer, running water, gas, telephone, electricity, cable, and Internet. When your property lies in the middle of nowhere and equally has no access to a sewer line. You will have a percolation test done on the soil to be able to determine if a particular system may be installed on the property. This test will determine how quickly water is draining through the soil. To assume that the land will pass the percolation test, you will equally have to dig a well for drinking purpose.
No income, but expenses
When you are buying land, and nothing on the land, meaning is not generating any income. It will be very difficult to get a loan on an empty land, so you will likely have to pay money for the land. There is no income in any way being generated, but you will still have to be responsible for the expenses on the land. The major expense will be taxes. You might equally have to pay to maintain the land, like to mow the grass regularly.
Buying land for the price
Secondly, Don’t buy what’s cheap!
The phrase: “You get what you pay for” pertains to land in the same way it relates to everything else. Yes, it was cheap, but only because of the multitude of things that was wrong with it. Let’s just say, heavily salted land cannot be farmed. Especially land close to a body of water that gains its name from the properties in the water. And that was still only the 5th thing that made the property useless to me.
How to buy a land
While the process of buying land might be overwhelming, you can still become a landowner just by following the proper steps and thoroughly executing your due diligence. From the very moment you show your interest to buy land to the completion of a deal, these steps that will help you to navigate the buying process:
Have the right team
Real estate investors are known for wearing many hats, but that doesn’t mean you should then shy away from working with a team. A group of trusted experts will be helpful when buying land, as the process will require many steps than just buying a property. Any land search do start with the acquisition of a good team. You should network and build good connections with architects, contractors, land surveyors, and other investors who may have a background in buying land.
The team will not only be there to help analyze deals, but they will equally provide valuable insights into the ideal location. In the absence of a structure, location is another thing that equally adds value to an undeveloped land. Thus making this a very critical factor when you evaluate any land purchase. As an investor, you should, therefore, lean into your network and gather more information on the right market areas. Oftentimes, investors do find a vacant land investments that are located outside their usual market. Having a strong team is very crucial to the overall process.
Identify your goals
Buying vacant land should never be an impulse action. Before you buy any piece of land, you will need to understand what your purpose for that land is: Will you build on the land? Is the building going to be residential or commercial? Do you plan to subdivide the land and resell it? Wholesale it? The answer to these questions will help to determine the trajectory of your search.
You should assess your finances
The financial considerations that will be going into buying land are much more different than those associated with buying a home or even commercial property. You should understand that land by itself is cheaper. While on the other hand, without any structure as a collateral, many banks will require a big down payment. In some cases, they will only be willing to loan on 40 to 50% of the value of the land. That’s if they will even be willing to provide financing at all.
Find your ideal piece of land
As you are searching for the perfect piece of land, equally consider how various investment strategies will also impact your choice. There are many possibilities for raw land that will include leasing to farmers, opting to buy and hold. As well as to develop.a property, and even “flipping” by buying very low and selling very high. The right decision is dependent on the market but do remember to weigh your options very well before settling. Always refer back to your investing goals as you will decide on an end game, this will help your overall buying process.
When you are able to find a land you like, it is very important to take good stock of the area. Is there access to the land? Is the access a year round stuff? Are local utility companies already in service in the area? Is there phone service? These are some of the questions you should ask about land for sale before you settle on particular one.
Figure out Permits You’ll need
Well, when it comes investing in raw land there might even be more permits to learn about. During the search for the piece of land, you should equally research on any potential permits and their fees. Let’s look at some of the common permit requirements that you need to familiarize yourself:
Building permits
Any new construction project will require building permits, which would lead to a lot of regulations. In most cases, your contractor will be aware of these requirements but it will never hurt you if you do your own research.
Sewer service and water
Permits are basically required when you request for new utility services, as they might even require the construction of new hookups.
Zoning
Whether you need to develop commercial or residential real estate, it is crucial that your property is correctly zoned.
Environmental
In some cases, vacant land might be near some designated conservation sites or even contain protected plant and wildlife species. Take time and look into maps provided by the U.S. Fish and Wildlife Service and know if these restrictions apply before you do anything on the land.
Special regulatory issues
Similarly, the land might even be in a designated historical district in your state. Investors will need special permits to build in these districts if they will even be allowed to at all.
Always give yourself adequate time before you choose a buying date or even make an offer. The approval process for permits do vary based on type and the area. It is very imperative that you consider this information as you are analyzing the profitability of the potential deal.
Hire an inspector
Due diligence on undeveloped land will include some additional steps and expenses, and that include working with an inspector. An inspector will there to help you complete some necessary steps before you buy the property. Such as environmental and soil testing, surveying, and they will confirm the presence of the necessary utilities. The very reason this is important is that it will assist you to determine the viability of the deal before you will be locked in a contract. Bring in professionals and use the time to research more on your potential land.
Now make your offer
To bargain with the seller will significantly bring down the price you will pay and significantly reduce what is likely to be a big down payment. You will equally want to include an option on the land in your offer. To have the opportunity to complete your due diligence before completing the buy.
I didn’t shop around
Thirdly, I didn’t check out the competition for sales.
Impulse shopping is a major issue, especially when it comes to lasting and potentially disastrous purchases like buying land. It pays to be patient. I could have saved 10’s of thousands of dollars over the years if I checked out neighboring parcels of land. Made lower offers (haggle always), even buying the same piece of property from a different source or making a cash offer directly to the owner can lower the cost thousands of dollars. If the land isn’t perfect, check out something different, it’s better to wait, than to regret.
Buying sight unseen
Fourthly, don’t buy a piece of property that you have plans for, unless you have put both feet and eyes on that property. I can’t stress this enough. The 20 acres in California that I bought, could have been avoided, even not knowing everything else, if I had stepped foot on my potential farm and realized that it was filled with high craggy rock formations, cliffs, mini mountains and salt deposits. Actually, for me to build a home, or even plant a garden much less a farm with the steep slopes was impossible. Buying land you’ve never seen is a huge mistake!
I didn’t buy according to my 5 year plan
Finally, I learned decades ago the why’s and how’s of a good 5 year plan. My 5 year plan included diversified streams of income that were to take place before and during the farming process. So the land needed to be close to me (I live in Connecticut, the land was in California). Secondly, it had to be farmable(rocky terrain and no legal access). Finally, it couldn’t cost more than 5,000 for earthworks (excavation, rock removal, etc). It set my plan back. Consequently, the cost of the land, though cheap, proved to be an expensive mistake when calculated into what I needed to accomplish in the next 5 years. Buying land should fit into your plans!
THE QUESTIONS I SHOULD HAVE ASKED
Is the land zoned for what I want to use it for?
That 20 acre parcel in southern California was zoned for residential/recreational. There was a tight limit to how many residences could be built (2). Initially, I hadn’t considered giving up meat and was disappointed at the small amount of livestock I could own. Every county has it’s own zoning code. Your zoning might not allow you to have a rooster or may limit the height of the house you want to build, or might not allow you to build a tiny home, like I wanted. But for my purposes, the zoning limited the amount of land coverage by plants I could introduce. Check out this site’s description of zoning and land use for more info: https://realestate.findlaw.com/land-use-laws/land-use-and-zoning-basics.html
Is it buildable?
Is it buildable? a simple question that can be asked when you call and speak to the land assessor. Questions you should ask before you buy. Even the perfect piece of land may not be buildable for many reasons:
It could be under some form of conservation. Wetlands are often under conservation
Maybe it’s landlocked, which was the case of the 20 acres by the Salton Sea. Landlocked means exactly what it sounds like. Land bordered on every side by other land…that you do not own. In other words, you have no legal access to your own property. Therefore you cannot develop or build on it at all.
There are ways around it, It’s usually easy to get in touch with the neighboring property owners. You can ask them to deed you a right of way. Basically, they sell you a piece of land that runs through their property to a street or road that connects your land and makes it build-able. But that doesn’t mean they will do it. And in my case, the land I owned was bordered by the Bureau of land management and they won’t deed you anything. You can only pay exorbitant fees for irregular access through their lands.
Is the cost too high, even if the land is cheap?
You may find a piece of property, with or without a house on it, at an eye-catching discount. But consider the costs. Does the price of the property reflect the value of the property. Perhaps the cost is cheap, but the property is so valuable that the property taxes are outrageous. Maybe it’s seems perfect but the cost of earthworks is outrageous. Even if everything else had been perfect on that 20 acres of California rocklands, the cost of almost $40,000 to build a well on the property broke my budget. And that doesn’t include all the permits and surveys.
Location… Still Location… Location
What good is it to get the seemingly perfect plot of land, if you have to drive 50 miles to buy toilet paper, or to the post office. There are times when that type of isolation is beneficial, but for many of us, that type of distance from the nearest gas station or hospital, can be real burden.
Pros and cons of buying land
Buying land pros
You are abile to do whatever you like with the land: When you buy vacant land, you are totally free to do with it as you please, as long as it will meet with zoning laws and regulations. To build on vacant land will allow you to be able to create your vision from beginning to the end.
Outright and direct ownership: Many vacant land buying are made in cash, this means that you will own your investment immediately.
Low maintenance: Vacant land that will be part of a buy and hold investment strategy might not require a lot of maintenance.
Affordability: Taxes and fees for vacant land are basically much lower than they would be on any developed land. Thus making vacant land more cheaper to own over the long run.
Buying land cons
More difficult to finance: Without any structure in place that will serve as collateral. Banks and other financing institutions will basically loan a much lower percentage of value on undeveloped land.
Delayed returns on your investment: Without any rental income coming in. There’s no way that your vacant land will be making any money to cover up the expenses like property taxes or even improvements to the land.
You can’t claim depreciation: Understand that depreciation does not apply to undeveloped land. This means you won’t be able to claim this as a tax deduction like you would on developed land. In addition, you won’t have any mortgage, so you can’t be able to deduct mortgage interest during tax season either.
The land may not be permitted yet: I believe you know very well that permitting can be a time consuming and a tedious process. With the current zoning and permitting for a given plot of land is something you might find out during your due diligence. It means that overcoming zoning and permitting issues should be a part of your plan from the start.
Do your research, be patient, ask questions, and plan ahead…you will thank yourself later.
P.S. Don’t forget to do a Title search. The worst thing you can find out after you’ve bought your land, is that it wasn’t theirs to sell.
So what mistakes, if any, have you made?
What you should put on your land
Vacant land always present a blank slate for land use purposes. Being an investor, you will have many options on how you can be able to use it. Some of the top ideas:
- Sports field
- Concert venue
- Outdoor advertising
- Wind farm
- Solar energy
- Vineyard
- Golf course
- Horse stables
- Storage
- Junkyard
- Produce farm
- Event rentals
- Parking lot
- Dairy farm
- Livestock farm