Investing in Land

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Most financial experts will tell you that investing in land is a bad idea. And they’re probably right. At best, on average, in many cases and places, land will only appreciate at the rate of inflation. And it won’t produce any income while sitting there. Worse still, it will cost you in property taxes every year.

Twin MeadowsSo buying vacant land probably shouldn’t be your first, second, or third investment choice on the way to financial independence. If you’re early in the investing game, and not interested in the stock market, then rental property is a much more predictable avenue for real estate investing. Though it’s one that will require more of your time to manage.

Despite all that, I spent a good part of the first half of this year shopping for vacant land in the southwest. How could that make sense for me, a longtime passive investor in mostly stock and bond indexes? Begin with understanding that, unlike the vast majority of retirees, my wife and I do not already own a home or any real estate. (We remain quite happy renting in Santa Fe.)

But, being a conservative investor, I am a major fan of diversification. And the record-setting bull market has had me wondering when the party for stocks will be over. For more than five years, since downsizing our family home, all our money has been in paper assets. Lately I’ve been pondering how we could diversify into some sort of physical asset without taking on undue risk or creating a management headache for ourselves.

Vacant land could serve that purpose nicely. I could diversify a small portion of our assets out of the stock market. Unlike rental property, it would require minimal management or maintenance. If I did my homework, made my choices carefully, and found good bargains in growing areas, it could turn out to be a decent investment. We have the financial resources to hold it indefinitely, not needing to liquidate in a hurry or at a loss. Meanwhile, we could enjoy visiting and camping on our land in our small RV. Eventually, we might build a nice, small, low-maintenance cabin where we could vacation or even live full-time in a pinch. Or, if we never need the land, we could donate it for conservation.

It’s an experiment, so we’ll see how it unfolds. The outlay is small compared to our other investments. To see what I’ve learned in the process so far, read on. If you’re interested in land investing, the tips and resources here may help you stay out of trouble….

Styles of Investing in Land

Buying land is not a single style of investing. There are several ways to go about it, differing in their time frames and what you do with the land once you own it.

Flipping — just like people flip houses, you can also flip land. Buy it at a bargain price and sell it quickly to another buyer at a higher price. That second sale could be retail — to an individual for personal use, or wholesale — to a developer for construction. How do you buy property at a bargain price? Generally that requires some legwork and expertise on your part. The most common pattern I see is pursuing unwanted properties. Perhaps the owner inherited a parcel long ago and has difficulty paying the property taxes. A lowball cash offer with a quick closing that pays off the taxes can work. There are public and proprietary databases you can use to search for such properties. (See the “Resources” section below.)

Subdividing — another model of land investing is to purchase large parcels, subdivide them into smaller lots, and sell off those lots. The economics of land usually dictates that several smaller lots will be worth more than their single parent lot, because you can charge a higher markup on each, especially if you’ve done some minor improvements. However, note that as you subdivide into smaller lots, the regulations and red tape can increase substantially. In some western states, you’ll notice a number of 35-acre properties on the market. That’s because more rules apply — roads, utilities, etc. — as you subdivide below that size. In general, subdividing is probably a game for the full-time land professional.

Developing — the obvious reason most people buy land is to develop it, usually with housing. Commercial development is beyond my scope here, but buying land and building a custom home is a common dream. For starters, understand that the relationship between owning land and a finished home is kind of like the relationship between owning a domain name and having a successful web site. There is a vast amount of work involved — planning, permits, contracting, inspecting, and more — on the way to completing a home. As desirable areas get more crowded, and regulations get thicker, the process only gets more difficult. Buying property is the very tip of the iceberg in creating a home. If your goal is home ownership, and you can possibly buy an existing home that meets your needs, you are very likely to save money, time, and risk. On the other hand, if you are selling land, this dynamic can work in your favor. When marketing land, you are often selling the “dream,” and leaving the hard/expensive part of the process up to the buyer.

Buying and holding — the final style of land investing that I’ll mention is like buy-and-hold passive index stock investing. You purchase property at a competitive price, and plan to hang onto it for a decade or more, aiming for diversification that is uncorrelated to the stock market, and perhaps some price appreciation. But this is risky. Especially if you need growth to achieve your financial objectives. Average real estate, over the long haul, is unlikely to do much better than the inflation rate. And while you are holding it and hoping for growth, you must pay real estate taxes. Thus you really need outsize growth just to avoid losing money. There are a couple of ways you can get this: buy in a desirable area with above-average long-term population growth, or make cheap improvements to the property that significantly increase its appeal. Examples of the latter include pruning/landscaping, putting in a driveway, or adding utilities. But since those improvements generate no value until you sell, there is still risk involved.

Note, whereas with flipping and subdividing you are better off without any personal attachment to or use for the land, when it comes to developing or buying and holding, that personal attachment is actually a benefit. You can use the land while you own it and get personal enjoyment in addition to the profit potential.

Inspection: Location

When you buy a house, chances are you do a few walk-throughs, hire a home inspector, and read their report. At that point, you’re done and ready to buy. Most of the major risks of living in that location have been flushed out by the previous owners and must be reported to you by the realtors. Buying land can be different. There are at least as many variables to consider. But the “inspection” process is less well-defined and possibly more critical. Here I’ll examine the major variables, and point you to information on more….

The old adage about “location” in real estate is no less true when buying land. The biggest driver of the cost of a lot will likely be its proximity to other desirable locations and infrastructure — neighborhood, schools, shopping. In my case, I’m always interested in the proximity to public lands and hiking/biking trails. That said, especially with rural land, other less tangible factors come into play: the lay of the land, the privacy it offers, and the views afforded of the surrounding scenery. There can be downsides to location also. If it’s a beach or lakefront property, what are the flood risks? If it’s a mountain property, is there year-round access, or will it be snowed in?

A related issue is your neighbors. In city living, your neighbors are close and their behavior — noise, home and yard condition, lifestyle — can have a dramatic impact on your quality of life. It would be nice to think that country living is different. And it’s true that you generally have a larger buffer between your world and your neighbor’s. Inconveniences like their barking dog or their engine rebuild project might be off your radar. But it’s also true that people living in the country can have a larger footprint. Noise from animals or equipment can carry for hundreds of yards. Without zoning, somebody can run an intrusive business next door. Even living on dozens of acres in a rural setting is no guarantee of peace. No matter where the property, vet your neighbors and neighborhood before making an offer!

It’s wise, early in the process, to establish just what you are buying. That means a survey that clearly shows property boundaries. In many cases, while the property will have been staked in the distant past when it was subdivided, those markers may no longer be visible. There may be no accurate map available other than a large-scale county plat book. Google Earth or Maps can sometimes get you in the ballpark, but won’t be highly accurate and certainly not sufficient for legal or financial purposes. With luck, you can pay a surveyor a few hundred $ to go out and flag the existing corners of the lot, and this will give you enough context to decide on purchasing the property or not. Failing that, you may have to pay several thousand for a full boundary survey and an accurate map.

If you’re buying raw land without any improvements, one of your first orders of business will be to construct a driveway so you can access the property without parking on public roads. This is also one of the simplest ways you can add value. A driveway immediately gives a prospective buyer a frame of reference. They can drive in and see where a house could go. That perspective can add thousands to the value of the property, enough to cover the cost of the driveway (figure about $20/foot for a gravel all-weather surface depending on the terrain), and more. A driveway is likely to require a permit from the county for connecting to public roads, so check on that before committing. In some rare cases, a property could be “landlocked” by other private properties, with no public access. Personally, I’d never consider owning such a potential headache. However if you get a deeded easement for accessing the property, or know how to go about obtaining one in court, the risk could be lower.

Inspection: Rules and Restrictions

One of the most critical factors when buying vacant land is to understand any restrictions on how you, or the next buyer, can use it. Much as you might feel it’s “your” land and thus you should have total freedom, there are very few spots in today’s world that come with no limitations on use. Here is a not-necessarily exhaustive list:

Covenants, conditions, and restrictions (CC&Rs) — these are rules generally built into the deed for the property. When you close on the land, you are agreeing to these rules. They are set in legal stone and it’s highly unlikely you’ll ever be able to change them. You might get away with bending them, if your neighbors don’t complain, but that’s a dangerous gamble in my opinion. One of the most critical rules in my view is the type and size of home you must build. Virtually all upscale communities in desirable locations will enforce a “minimum” square footage, and will prohibit RV living. As a frugal, downsized couple that enjoys camping, such restrictions are deal-killers for us.

City/county ordinances — these can run the gamut from driveway or utility permits, to rules about parking or living in RVs, to zoning for commercial uses for the property, to setbacks from the property lines in which the local authorities can have their way with your land. Though none of these may be immediate concerns, if you plan to develop or live on the property, they could impact your options. Best to do your homework, talk to locals, and consult government agencies on the web, before investing your money.

Homeowner’s associations (HOAs) — these are legal entities, usually created by the original developer and required by the property deeds in a subdivision, that will have more or less impact on your life depending on the zeal of the members. As a rule, it’s best to assume that any HOA will be populated by opinionated homeowners with free time on their hands to watch over your affairs. There could well be an “architecture committee” that must approve any construction on your property. In short, if you want to be in an upscale neighborhood where everybody is required to keep up appearances, then an HOA might be your friend. But if you want the freedom to camp, live out of your RV, and putter around on your land while marching to your own drummer, avoid HOAs like the plague.

Inspection: Utilities

If you intend to spend any time on your land at all, you will soon be thinking of utilities to connect it with the outside world. Even if you don’t intend to live on the land personally, the available utility options could significantly affect its value in the eyes of other buyers. So it’s wise to do your due diligence and understand the feasibility and costs potentially involved.

The first utility I like to check is simply cell service. There is a world of difference, in my view, between a property with a strong cell signal and one without. Practically speaking, the latter is much more remote. With a good cell signal, I can park my small RV and immediately connect to the world — both voice and digital. Without a signal, I’m roughing it, limited by the number of nights I can afford to be out of touch. Yes, you might be able to install a land line, but that’s substantially more expense and bother than simply picking up your existing cell phone.

Soon after the cell signal, I’m thinking of life’s other first necessity: water. In the east, property with water — a running stream and/or a well — is much more common. In the west, water is far more precious and cannot be taken for granted. If the land isn’t being sold with a water source — tap, surface, or well — then do your homework to understand what will be involved in getting one. City water will likely require a tap fee. Surface water, if even available, is likely seasonal and too polluted for human use without extensive treatment. Any sizable body of water will also be governed by a hierarchy of drawing rights that could stretch back for decades. Drilling a well, depending on the area, could be a risky and expensive endeavor. Drilling costs are as high as $50/foot in difficult terrain, and 300 foot wells are not uncommon in the west. That’s a lot of money. As a last resort, you can install a cistern and have water delivered. It’s surprisingly inexpensive, especially if you aren’t irrigating and won’t be there full time.

The other end of the water line is sewage which, in rural locations, will mean a septic system. In today’s increasingly crowded and developed world, counties are clamping down on wastewater discharge. In many rural areas you are likely to encounter a complex web of rules and regulations for installing septic systems. First comes percolation testing the soil on your site: can it even support a septic system? If so, what kind of system will you need? Gone are the days of dropping a simple concrete tank in the ground. Many modern systems must be engineered for more stringent requirements. The numbers I’m hearing start at $15K for a small system and go up from there depending on the size and site work required.

The last critical utility to consider is electricity. If there is already service on your street, you’re in luck. Though you will still be responsible for connecting and extending the line to any structures. Your local electric company will likely have published forms and procedures for getting a connection. The process should be straightforward, but is likely to involve both time and expense on your part. In today’s world, not having nearby electric service isn’t the deal killer it once was. Especially in the southwest, sites with southern exposure should be able to generate all the solar electricity required for a small home. The cost is within range for many people. EnergySage reports an average cost of installed solar currently around $3 per watt. A 5 kilowatt system suitable for many families would cost $15K, not counting widely available tax credits or incentives. Though the batteries and inverter needed for a true off-grid system could be more.

Inspection: Taxes Etc.

When it comes to vacant land, property taxes, are a mixed picture. The good news is that they are likely low, especially in a rural area — perhaps just a percent or two of the purchase price. The bad news is that you have to pay those taxes year after year, whether or not the property is producing any income or value for you. In fact, property taxes are probably the most significant expense of owning vacant land. Be aware that, in the absence of outsize growth or property improvements, they will tilt the financial equation against you from the start. And know that many people wind up dumping their land back on the market after getting behind on taxes.

Another consideration is insurance. Though I haven’t researched the topic in depth, I was told by my insurance company (USAA) that the liability coverage of our existing umbrella policy would extend to any vacant land we own. Only in the event that we began building would we need to pursue additional construction or homeowner’s insurance. Your insurance company or geographic location could be different. As far as insuring the value of the vacant land itself — the scenic or economic value of timber against fire — I’m not aware of such insurance being available for non-commercial purposes.

So those are most of the key inspection items you’ll want to consider in shopping for land anywhere in the country. But in some areas with certain histories there are many other factors that could apply. It’s up to you to assess how critical these might be. In many rural areas, if the land is above water and has never been used for commercial purposes, these might be a non-issue. But, on occasion, one of these factors could torpedo your investment, possibly even leaving you in the hole with additional liability. Know the local history, and buyer beware!

Miscellaneous factors:

  • easements — does anybody else have rights to cross your property?
  • mineral/timber rights — does anybody else own the rights to resources on or under your property?
  • hazards — are there any features of the property like cliffs, tunnels, or junk that pose a hazard to you or others?
  • fires — is the property or area particularly susceptible to wildfire?
  • hydrogeology — what are the prospects for potable surface or groundwater, and the risks for contamination?
  • environmental assessment — was there ever any industrial pollution on or near the property?
  • wetlands — are there wetlands on the property that might be singled out for special government regulations?
  • flood zones — is the property in or near a flood zone or could it be impacted in any way by water flows or lack thereof?

See the “Resources” section below for web sites offering databases for researching these and other factors.

Buying and Selling

The essence of a land deal, like any real estate, revolves around price. A bargain price could guarantee you’ll make money over the long haul, no matter how other factors come into play. On the other hand, if you pay top dollar for a lot, that could increase the risk of losing money, especially if the land generates no income or if you discover liabilities after the purchase.

In my experience, pricing land is an even less exact science than pricing developed real estate. If you spend any time searching in an area, you’ll see per-acre prices all over the map, with variations of several 100% depending on the location, size, features, and motivation of the seller. In my opinion, there is no substitute for doing your homework: Spend the time to walk dozens of properties, and develop your own feeling for the price/value curve in the area. Then, when a bargain crops up, you’ll recognize it.

There are inherent inefficiencies in the land market that can advantage you, as a patient buyer. You’ll see rampant errors and missing information in the MLS listings: Many realtors don’t want to get their shoes dirty and will just plant a sign a few feet from the road, snap a few bland low-contrast photos, and throw up a stock paragraph for the listing. If it’s a large lot with vegetation, key features might be missed. In other words, there are good odds for finding a mispriced property, especially in more remote locations. But you’ll need to do enough looking and walking to make those odds work in your favor.

When buying/selling existing homes, I’ve advocated for getting an appraisal. When it comes to vacant land, I’m not so sure, even if you could commission an appraisal, whether it would be worth much. Many of the factors are more subjective, and some simply require more research than an appraiser is likely to perform. I’d prefer to put in the time on my own, driving and walking properties, then make my own assessment.

There are many web sites for buying and selling real estate and land. That said, I’ve concentrated most of my efforts on just two: Zillow and Craigslist. These are enough to get you started. Then, once I’ve identified neighborhoods and price ranges, I’ve worked with a local realtor who could advise me with their knowledge of the area and access to the local MLS. (Which, I’ve found, will turn up plenty of properties that never make it onto Zillow or Craigslist.)

Ideally, you’d work with a realtor who specializes in buying and selling land, though that person may be hard to find. Land is usually going to be less profitable and thus less interesting to mainstream realtors. That is probably why commissions tend to be higher than for developed properties, often in the 8-10% range. (Remember, as an eventual seller, if you will be paying that high commission, it’s yet another hurdle to clear for a profitable land deal.)

Yes it is possible, and almost certainly more profitable, to buy and sell land without the help of realtor. Most of the people in the “Resources” section below who specialize in land deals do their own prospecting and marketing, without the involvement of a real estate professional. But, unless you are making a business out of buying and selling land, I couldn’t advise going it alone. You run the risk of making an expensive mistake that you can’t amortize over future deals.

It’s even possible to do your own closings on land deals. Some of the sites under “Resources” below will show you how. But, even more than bypassing a realtor, I wouldn’t advise bypassing the lawyers for a once-off land deal. A title company will handle critical items like title insurance, warranty deed, and recording the transaction, for well under $1K on many land deals. And that’s money well spent, in my opinion, to ensure you are getting what you thought for your real estate dollars.

Resources for Investing in Land

So that’s much of what I’ve learned about investing in land. Be advised I have very limited experience. I am by no means an expert. If you are serious about investing in land, you’ll want to go well beyond this article. Here are a few places to start:

REtipster — Seth Williams puts out an excellent blog, podcast, and training on the art of making land deals. The essence of his business model is making below-market offers on unwanted properties via direct mail marketing. He is then very savvy about effectively marketing those properties to prospective buyers at a profit. Even though I don’t follow his business model, listening to his podcasts has taught me a lot about inspecting and assessing land.

(There are a number of other prominent land-buying trainers such as LandFlippers and LandAcademy. But I can’t recommend them or their content personally, whereas I can say that Seth puts out a wealth of valuable information, much of it for free.)

Three prominent sites for buying and selling land online are LandWatch, LandAndFarm, and LandsOfAmerica. As mentioned, I’ve primarily used Zillow and Craigslist. Spot-checking these land sites, it doesn’t seem that I’ve missed much. But to scour for every opportunity, you might want to monitor them as well.

AgentPro247 — This is a tool for real estate pros that allows you to search and generate property profiles with transaction history, foreclosure, and ownership data. If you are gearing up for a commercial land investing effort, this could be a critical tool. If you’re just buying an individual property, you can probably get most of the same information from a local realtor.

Final tip: there are various sources on the web for obtaining commercial-scale parcel data if you will be buying and selling many properties. But, for my purposes, the parcel lines that show by zooming in to the street level on Google Maps have been adequate.

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