Buying land is an often overlooked form of real estate investment that can produce good returns. Land is a fairly hands-off investment, but generating returns is more involved than with rental property. This is because to buy land, there’s more research, evaluation, and firm profit strategy needed.
Here are four stages to buying land and profiting from it successfully.
1. Locate Land to Buy
The first step is simply to locate a good piece of land to buy. Searches for property can involve real estate agents, land brokers, online sites, properties for sale by owner, auction companies, and government agencies holding surplus property.
Real Estate Agents
Real estate brokerages and their agents have access to the largest body of property for sale, and that includes raw land. In fact, according to the National Association of Realtors (National Association of Realtors (NAR), only 8% of real estate sales are for sale by owner (FSBO), meaning that more land is listed through real estate agencies than anywhere else. Every real estate office has access to one or more multiple listing services (MLS) that contain all the properties for sale by the various agencies that belong to that MLS.
The downside to searching for property with an agent is that the seller has agreed to pay a commission for the sale, which will be reflected in the price. So, the commission effectively makes the asking price of the land perhaps 3% to 5% higher than if you find an alternative without an agent. Keep in mind that land prices generally are negotiable, so you may be able to overcome the higher asking price with good negotiation.
Additionally, keep in mind that not every real estate agent or even brokerage is experienced with land sales. So, be sure you are working with an agent and office experienced with land sales.
Land Brokers
While not every neighborhood real estate office is familiar with land deals, there are specialized real estate agencies known as land brokers that are very familiar because it’s all they do. Typically, you’ll find land brokers in rural and agricultural areas, and they will be familiar with the specifics of the parcels available, their physical characteristics, survey information, and uses.
Land Brokers’ commissions tend to be a bit higher than typical residential real estate agencies, with commissions more in the 7% to 10% range. Land is harder to sell, and these agencies price their work into the commission. Again, as a buyer, the effect of the commissions may be reduced with good negotiation.
Online Sites
You have many options for searching for land online. Craigslist has land listed in virtually every state and community. Online real estate websites like Zillow and Trulia are great sources of lots and raw land. Additionally, there are online equivalents to land brokers, such as Land and Farm, which can provide a wealth of potential deals.
FSBO
A lot of land is for sale directly by its owner. If you’ve ever driven in less developed parts of town or more rural areas, you’ve probably seen any number of signs advertising a parcel of ground for sale. FSBO sites often have lots, developable parcels, and rural land listed.
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Auction Sites
A very common way land is offered for sale is via auction. Land sales are one of the most common things that auction companies handle! You can find local auction companies with a simple Google search such as “Chicago auctions” or “Chicago auctioneer.” Local auction companies may hold their auctions live or through their own online auction sites.
National online auction sites are also a good possibility for finding land to buy. In its real estate section, eBay has a great amount of land for sale at any given time. Other national auction sites like Bid4Assets are also tremendously useful in finding land and lots being auctioned.
Government-owned Land
Many government agencies have land available for sale. Their inventory usually takes two forms. The first is surplus land that local, state, or federal agencies own but no longer need. The other comes from when people fail to pay property taxes, and property is sold at tax lien and tax deed sales and auctions.
2. Evaluate the Land Purchase
Land deals can be enticing because of their pricing. Inexperienced buyers are often lured by amazing-sounding deals on lots and parcels, literally costing only a few hundred dollars, or promoted as “can’t-lose” investments by shady dealers. Be prepared to thoroughly research potential purchases before you end up buying a piece of dirt that’s good only for holding the Earth together.
Profiled below, the areas to investigate before you buy a piece of land are:
- Deed and ownership history
- Property taxes
- Zoning and potential zoning issues
- Physical characteristics of the parcel
- Usage restrictions and building requirements
- Availability of utilities
- Property survey and plat maps
Research the Deed and Ownership History
Ownership claims on vacant land can be more involved than with property on which buildings have been constructed. That’s because a built-out property has most likely already been through title searches and any liens or claims on ownership resolved.
Previous legal searches are often not the case with vacant land. You may find multiple parties who have legitimate claims to a parcel by way of inheritance, easements, or gifting. Sometimes, unrecorded claims will come out of the woodwork but, in the end, could be substantiated.
When you are considering buying land, always pay for a thorough title search and get title insurance when you buy. This can be accomplished by a title or escrow company or real estate law office. It will uncover those who have claims to the property or who have filed liens against it. Buying title insurance will protect your interest in the property should an unforeseen claim come to light.
Research the Property Taxes
When you buy land, taxes are the one ongoing expense you will face aside from a mortgage payment. So, even if you pay cash for the parcel, you’ll still have annual property taxes to pay.
Be sure you know what the tax amount will be prior to purchasing. In some areas of the country―particularly rural areas―property taxes are minimal. However, in densely populated urban or suburban areas like New York, Boston, or Los Angeles, taxes are significant and can run almost as much as a mortgage payment would be in less expensive markets.
Research the Zoning and Potential Zoning Issues
Each parcel of ground will have a certain zoning designation, often delineated by a series of letters and/numbers unique to the local area. Zoning limits the potential use of a property and what can be built on the parcel.
Zoning Types
There are several categories of zoning, each unique to the kind of use and user allowed in that area. Zoning ultimately limits the types of buildings that can be constructed, what the functions are within them, and even the density of the building.
While the designations for zoning vary across the country, the major categories are fairly similar. The most common are:
- Residential: This form of zoning usually allows for single-family homes
- Multifamily: This zoning will allow for single-family homes along with duplexes, triplexes, and other multiunit properties as well as apartments
- Commercial: Permits office buildings, retail, and sometimes hotels
- Industrial: Generally reserved for warehouses, factories, and light manufacturing
- Agricultural: For farms, orchards, ranches, and similar. Single-family homes and small multiunits like duplexes are sometimes allowed with this zoning.
Rezoning Concerns When You Buy Land
One thing to be especially watchful of when buying land is pending zoning changes. Zoning changes can make land more or less desirable. However, rezoning always affects what you can do with the land, and that can often be costly to you.
For example, if you intend to build a single-family house on a lot zoned as agricultural, but the county rezones it as industrial land, your plans may be thwarted. Similarly, if an area is zoned for light commercial and you planned to build a small retail center, but then the land is rezoned to residential, you’ll have to pursue a different project.
Research the Physical Characteristics of the Land
Even though buying a piece of land should seem easy, there are many areas to be mindful of. You can easily buy a piece of worthless or nearly worthless land if you are not careful.
Here are areas to pay attention to when evaluating the physical characteristics of a land purchase:
- Landlocked parcels: Landlocked means a parcel is fully surrounded by other properties with no access like a driveway. Because value is ultimately rooted in people being able to make use of a property, they must have access.
- No road access: Similar to the above is a parcel that has no access to a road. This is especially important for more intense uses like commercial or industrial zoning.
- Flood zones: A lot of land remains undeveloped because it is in a flood zone. If it is, you may never be able to build on it or, if you can, it still may be impossible to insure.
- Environmental issues: There is a wide range of possible environmental concerns, ranging from being a wetland protected area to a former junkyard. Check with your local authorities.
Research Usage Restrictions and Building Requirements for Vacant Land
Zoning and other restrictions will often control what you can and cannot do with a piece of land. Here are some very important considerations to investigate regarding building and use restrictions:
- Building moratoriums: Make sure you can build on the lot you’ve purchased. There are many areas of the country where building moratoriums are in place.
- Easements: Sometimes, land has been designated with some form of easement, limiting what can be done with it. Examples include wildlife and historic preservation easements that may prevent all future development.
- Inadequate size and shape of the parcel: Make sure the lot is sufficiently large to build on. Also, make sure the shape naturally allows for the building or development you are planning.
- Setbacks: Many local areas specify how far back a building must sit on a lot, yet many lots don’t conform.
Research Utility Availability and Options
One of the most basic yet complex factors related to buying raw land is the availability or lack of availability of utilities at the lot. If utilities are not available at the lot, you will either need to have them brought to the lot line, which is costly, or make use of other options, such as bottled gas for heating, if there’s no gas line.
Investigate What Utilities Are Available
Start by determining what utilities are either at the lot or very nearby. You are looking for the following:
- Water: If municipal water has not been run, then you must investigate whether digging a well is possible. A lot without water is unbuildable in most cases
- Sewer: If municipal sewer is not available, then a percolation test (perk test) must be run to see if the parcel can have a septic tank. If it won’t perk, you probably can’t get a permit to build.
- Electricity: Electricity is one of the easiest utilities to run to a lot if it’s nearby but not yet at the lot line. Check with your local electric utility to estimate the cost of running a line if it’s not there already.
- Gas (optional): Fortunately, if a lot has electricity, it doesn’t necessarily need gas. However, if gas is the custom in the area, then you will want to check with the gas provider to investigate the cost of running a line to the lot.
- Phone, communication, and internet (optional): The lack of telephone, cable TV, or Internet lines won’t prevent you from building, but lacking them will certainly be unacceptable for anyone eventually planning on living or working on the land you develop.
Research Surveys and Plat Maps
As you investigate issues like the lot size, whether a parcel may be landlocked or have environmental issues, look to property surveys and plat maps to provide you with many answers.
In virtually any county, you will find a county surveyor. That office or perhaps a county geographic Information service (GIS) office will have plat maps that show all the various parcels, their lot lines, measurements, zoning, topographic and geographic features, and what they are adjacent to. Many of these offices, maps, and surveys are searchable online.
3. Finance Your Land Purchase
When you buy land, there are two paths to fund the purchase. You can use cash, which is quite common, or you can obtain a mortgage or other financing, which will allow you to buy the property even if you don’t have the full cash amount.
Paying Cash
Because prices for raw land are often less than their developed counterparts, it’s very common for purchasers to pay cash. Additionally, financing raw land is more difficult than financing a building because banks view raw land as a riskier investment. This leads to even more cash purchases. Also, keep in mind that paying cash eliminates the mortgage expense, meaning you only have to cover property taxes until you sell or develop the property.
Conventional Loan Options
A portion of conventional lenders do offer long-term mortgages for land purchases. Generally, the loan-to-value (LTV) is rather low, so be prepared for loan options to cover as little as 50% of the purchase price.
Land Loans and Lot Loans
Many lenders specialize in land loans or lot loans. Often, these are savings and loan institutions in more rural areas. Land loans tend to be shorter terms of 10 years or less, typically higher than the market rate, and require 20% to 50% down.
Owner Financing
You’ll find that owner financing is more prevalent with raw land than with developed parcels. That’s because vacant land typically is harder to sell than developed properties, and it’s more common for them to be owned outright, which makes owner financing easier.
4. Profit When You Buy Land
Once you’ve purchased a parcel, there are several ways to profit from it. Some of the options will generate a return in a fairly short timeframe. Others take longer and require holding the property, perhaps for years.
Hold Long-term
One of the most basic land investment strategies is holding for the long term, then reselling when the price rises. If development is moving in the direction of the land you own, it will apply upward price pressure. The closer development gets, the more valuable your land is likely to get, even if you do nothing to it.
Improve the Lot
Building on the lot naturally will increase its value. Whether it’s a single residential house or a small commercial building, improving from an undeveloped lot to a developed one is a basic way to profit from the land investment. Even running utilities to a lot or adding a gravel driveway to make a parcel more accessible can add value.
Get the Property Rezoned to a Higher Use
There is a principle in real estate knows as “highest and best use” that can make land more valuable simply by changing its zoning, thus what it can be used for.
For example, if a large parcel was zoned for, say, agricultural use and you successfully got it rezoned for residential development, chances are the value of the parcel will increase tremendously.
Lease the Land
This is an often-overlooked option for land purchases. In certain cities like Baltimore, Maryland, many buildings sit on leased lots called ground rent. Mobile home parks are structured around leased lots. Rural land can be leased to farmers to cultivate or to graze livestock. Even large parcels of the most rural countryside can be leased to hunters.
Flip the Land Purchase
While not as common as flipping property that has already been built on, it is possible to acquire a lot at a below-market price, then resell it quickly at a higher price.
One route that land flippers use to do this is to owner-finance the lot purchase for the new buyer. Because the relatively easy owner financing makes the land purchase attractive, sellers can ask a higher price. That way, the seller has earned a profit on the resale and will also collect periodic interest.
The Pros and Cons of Buying Land
Land is often overlooked as a potential real estate investment. Yet, there are clear benefits as an investment option. Of course, there are limitations and downsides of which to be aware.
Pros of Buying Land
There are many arguments in favor of investing in undeveloped land. They include supply and demand, the comparatively small price tag of many parcels, and the hands-off nature of land as an investment.
- It’s a limited resource: Both Mark Twain and Will Rogers said in some fashion, “Buy land, they aren’t making any more of it.” That’s very true―and points to the simple investment reality that there’s a fixed supply of land.
- Land is an Inexpensive entry into investing: For a new investor, a land purchase can be a very inexpensive way to start investing in real estate. There are places in the country where building lots can be purchased for less than $1,000.
- It’s a hands-off investment: Vacant land is a passive investment. There are no toilets to fix, no tenants to evict, and no worries over roof damage in a storm. The only inescapable obligation is paying your property taxes.
Cons of Buying Land
Despite the noted benefits, land investments do have their downsides. Undeveloped land isn’t typically a cash generator, and there are costs involved in ownership.
- Doesn’t produce immediate income: Unless you are in the position to lease the land to a farmer or develop a mobile home park, your land purchase isn’t going to generate current income. It’s a long-term investment that may take years before producing a return.
- Has carrying costs: Even though land doesn’t typically generate current income, it does have current costs. Property taxes are due either annually or semi-annually. If you’ve financed the parcel, you’ll have periodic payments. Even if you paid cash, that money is no longer invested elsewhere, and you’ve also spent cash on closing costs, surveys, and title insurance.
Bottom Line
Buying land can be a lucrative investment, particularly as a long-term investment strategy. Buying good parcels involves careful research. Land investments are fairly passive, but generating returns often has a long timeline. However, they incur current costs.
If you are looking to uncover potential bargains in vacant land and want to investigate FSBO’s or even land foreclosures, REDX can supply you with FSBO leads and expired real estate listings, which often include land and lots. REDX can also supply listings of preforeclosures, which can be a great source of discounted properties.
