Real Estate
Investment
What is Raw Land?
Before
investing in raw land, it is essential to ask oneself these questions:
o Why are you buying the land?
o What purpose do you have
in mind it?
o Are you going to build a home, purchase a lot for
retirement or else for investment?
o Will you acquire
considerable acreage for farming or subdivision in related activities?
o Do you want commercial, residential, recreational or
agricultural land?
o Will it
be in the north, south, east or west directions?
The first question
should ideally be, 'what am I or we, buying this land for and will it
satisfy my or our, requirements?' To get answers to these questions it is
best taken care of by talking to those who will be most intimately
involved with the land, such as your spouse, partner, family members,
associated owners, etc. Once you have a clear understanding of what the
land is supposed to do, then your search can begin. Very often people
waste their time and effort because the significant partners have such a
wide gap in what each person truly wants from the purchase that they never
settle on anything or end up with much less than they could have had for
the same amount of effort.
Land or property can
consist of soil, geology, water and climate and whether you are looking at
beaches, mountains, deserts, high plains or city lots, they all have some
basic components. Some of the basic requirements we most often seek are
clean air, water, electricity, sewage disposal and trash removal for
hygienic habitation.
Clean Air might be
used to imply that you will have freedom from dusty roads, smog, foul
smells from industry or landfills, free from noise of traffic, airports
and / or neighbors.
Water Availability is
essential and is often desired for aesthetics as well as common
requirements like drinking, bathing, washing, cooking, cleaning, toilet
facilities and watering vegetation or else even enjoy lakes, rivers and
streams for recreation. Others prefer to enjoy the tranquil sounds that
our streams, rivers and oceans can provide. Without doubt, availability of
water is a major concern. It is interesting to note that a 1666 square
foot roof can capture 1000 gallons of water for each inch of rainfall and
can prove to be a good way to employ rain water harvesting to do away with
the water crisis; also, cisterns of all types have existed since the dawn
of man!
Electricity is another
necessity that we often take for granted but need not always be abundantly
available. Always enquire if there exists a power plant within a
reasonable distance from the land or whether it will cost you thousands of
your own dollars to run cables across public lands to get your electricity
hooked up? So also, it is good to know how far away the gas and oil
suppliers are.
Sewage Disposal is
another important factor. With 25% of the country being on a well and
septic system, in case you don't have access to public utilities, your
land should support a septic system as well as the sufficient amounts of
water to operate it.
Solid Waste Disposal
facilities will depend on how far the landfill is? Ideally there should be
a collection service or other means to dispose it off apart from burning
it.
While those are the
major necessities for modern, everyday living and that are easily
overlooked until after the contract is signed, certain other essentials
are a telephone, mail delivery, shopping, police, hospital/emergency
services, schools, churches, fire station, recreation facilities and
access by good roads as well as highways.
You will also want
answers to questions to county officials such as planning and zoning,
community development and building departments. It also helps to call
utility companies about electric and phone, water, sewer, and talk to
neighbors, contractors, appraisers, developers, real estate agents and a
local surveyor to have some of the more important questions addressed at
the beginning of the search. It is best not to rely entirely on the
sellers.
Again, planning and
zoning departments can offer the following items which can be very useful
like lists of planned new roads, utility extensions, maps of existing
uses, forecasts of future development, details on environmental areas,
locations of planned waste disposal facilities and future land uses.
They also regulate building codes, curb-cut permits, housing codes,
subdivision regulations, historic preservation, tree cutting and zoning
laws. They usually also have aerial photographs and plat maps that can
help you to better identify and evaluate the land in question.
If you already have
your location identified, it would help to check whether it is in the east
where the weather is often wet and humid or out west where it is
predominantly arid and dry. In the north you would be living in cold
weather or else gravitating towards the southern hemisphere. Concerning
location, you can look up what are you least comfortable with when it
comes to avalanches, landslides, earthquakes, hurricanes, tornados,
tsunamis, flooding, volcanoes and / or wildfires. You may want to
investigate areas of interest by going to websites like
http://www.officialcitysites to get
a better picture of what awaits you concerning it's economy, environment,
population, recreation, educational, medical and employment facilities to
name a few.
If we assume that you
know where you want to buy this land, why you want to buy it, and how and
when you will use it once you have it, the following general observations,
ideas and information would help you to further investigate the
alternatives that are available to you in your endeavor to find the ideal
land.
It is important to
remember that Raw Land is unimproved property; it has no utilities,
sewers, streets or structures and usually must be cleared.
Drawbacks
Associated with Raw Land
1. Negative cash
flow; normally the land does not generate any income while you pay the
principle, interest, taxes and costs of development
2. Tax
advantages are scanty as land cannot usually be depreciated
3. Normally, raw
land is considered a long-term ill-liquid investment that often takes a
long time before gains can be realized.
4. Risk of loss
on resale can occur if you choose poorly, fail to evaluate and negotiate
properly, or else if the economy slips or various other unforeseen events
occur.
5. It is tough
to obtain traditional financing on or borrow against accrued equity.
Benefits to
Raw Land
1. Raw Land has
the potential to experience tremendous appreciation if bought in the way
of growth, or if a higher and better use can be achieved for
it.
2. Owner
financing can usually be obtained through the seller at below-market
rates.
3. Subdividing
the raw land can create added value and provide for immediate
returns.
4. Privacy and
pride of ownership of the raw land can provide a secure feeling to the
holder.
Good Vs Bad
Land
The worst you can buy
is swamp or marshy land and should be avoided. Flat land is the least
expensive to develop and the most desired for building purposes. Land with
barren rock will increase costs and virtually eliminate a basement very
similar to a high water table.
You will most often be
contacting several sources by writing to them, however as the average
response rate is one reply for every eight letters that you send, do not
get discouraged when you don't get immediate replies. The pros will pay
services to monitor many of these potential sources; however, good
old-fashioned detective work does usually pay off. When researching in
this manner, secrecy is one key and fast action using all cash is the
other that will prove to be useful.
A special
consideration to note when hunting legally challenged property is to check
the sand and if there appears to be some organic matter which appears rich
and dark in color it is considered ideal for most purposes. As opposed to
good soil, it is not desirable to have hard cracking ground when dry and
sticky soil when wet. Check with your state offices for the presence of
expansive soils; avoid these since these crack foundations in the most
menacing ways, leading many investors to ruin.
Several people are
literally being driven to the hills. While the views can be spectacular
problems develop with regards to roads, utilities, water, sewer, and
foundations, such as pilings, and can add 25-30% to building costs alone,
there by further adding to this already expensive proposition. While
considering going vertical, an 8-degree slope is about the limit when
concerning building economically on hillsides.
Plots with trees, a
view, rectangular in shape, a gentle slope or none and a good location are
most often preferred, and the presence of streams can boost values by 100%
in some cases.
Ways to
Determine the Value of Raw Land
Using the appraisers'
standard view of estimating value can give some valid clues.
o Size and shape of the site, represented by frontage, width and
depth.
o Corner presence enhances visibility for commercial, or
privacy for residential
o Plotting, has assembly or combining of
parcels been accomplished?
o Excess or surplus land; surplus has
less value than what is required
o Topography: Land's contour,
grading, drainage, soil, view and general usefulness
o Utilities:
Sewers, natural gas, drinking water, electric, telephone, cable,
etc.
o Site improvements: Gutters, walks, landscaping, fences,
drives and irrigation
o Accessibility: Alleys, connecting roads,
parking, location, streets, and highways
o Environment: Climate, adequate water supply,
rivers, lakes, air quality, oceans and the absence of any hazardous
materials
Always try to buy land
that is located as close to the amenities that an area is famous for, as
that is often the reason why people come to certain areas. For instance in
Florida, having plenty of beachfront property located in tourist areas, is
highly desirable.
Where to find
Raw Land
You can start your
search by contacting farmers, investors, real estate agents, or even state
and federal agencies, bureaus of land management, federal marshals, cities
with odd lots they need to put back on their tax rolls, tax sales,
developers, property heirs, the elderly, bank foreclosures, and family and
friends. Use your networks and birddogs while driving through areas of
interest looking for further opportunities to buy.
Property is usually
advertised through newspaper ads, real estate brokers, 'For Sale' boards
by Owner, flyers, bulletin boards, the Internet, etc. A quick note on how
not to buy would be not to buy land from a glossy brochure or big
development company as it is almost always overpriced to cover large
overhead costs, advertising and profit. Also remember that when a building
boom is on, land prices will rise. You will do much better buying when the
demand is low. Another warning is to stay away from land that is
advertised outside its normal market as it is often overpriced or has
problems; otherwise, a local buyer would have bought it before it found
the need to be advertised elsewhere.
If you want to find
good deals, then most often you are going to have to dig for them. A few
successful methods may include visiting the county clerk / recorder's
office to search the public records for any of the following:
o New probate filings, use them to contact heirs of
properties
o Eviction proceedings are best to contact out of
state landowners
o Arrests since these people may need money and
may also be going away for a while
o Bail bondsman who may have
forfeited collateral in the form of real estate
o Divorces filed,
which would lead to a division of assets
o New guardianships to
contact uninterested heirs
o Deeds instead of foreclosure, private
sellers may in turn sell it to you
o 'Lis pendens' meaning
litigation pending cases, often signal foreclosure
o Title company
apart from the regular search of mortgage
o Easement and Tax
liens
o Files for I.R.S. liens, bankruptcy filings and
judgment liens
Quick Review
of Raw Land deals
In summary, it is
essential to not get conned when starting out and also note that it pays
to understand what everyone wants from the land to start with. Utilities
and basic necessities are very important considerations and also knowing
whom to contact to get further in-depth information on properties of
interest. Flat land with natural amenities is the most desirable and
economical to develop, while there are the risks involved with this type
of real estate and rock, marshes and hillsides can be expensive to
develop. An appraiser begins to determine value and you may have a few
ideas on how to find land and the people who own it.
Having seen the
various aspects of a raw land deal, it would help to also know about
business of evaluating, negotiating and financing our well-sought piece of
raw land. What follows is a basic checklist to get started.
Elementary Raw
Land Checklist
o One must get the most recent and
valid information available, for this, a copy of the deed containing the
legal description with any covenants and / or restrictions is usually
good.
o Acquire the street address along
with a plot plan indicating the specific property location. Anything
further like a survey, a preliminary title report, a recent map and any
aerial or land based photographs to locate fence lines, trails, roads,
streams, ponds, building locations, etc. is better. Walk the land to
verify, evaluate and correlate what is indicated, while also looking for
any signs of hazardous waste dumping, burying or burning.
o Determine
present use in zoning, as per what planning and zoning tells you.
Certain
symbols are used to designate uses - here are a few:
o R1 - Residential single family
o R1H - Residential
hillside
o C - Commercial business
o CO - Commercial
office
o R2 - Residential multifamily
o RT - Recreational
tourist / Residential transitional
o A1 - Agricultural with single
family home
o FP - Flood plain
o M - Industrial
General
categories include:
o Residential
o Commercial/Business
o Recreational
or Resort
o Farm, Ranch and
Timberland
o Industrial
o Mixed use
o Confirm who owns it.
o Find out whether they are dealers
in real estate
o Look for any ownership disputes
o Find
the annual taxes and assessed values
o Find the reason for the
sale
o Check possibility of a sale of the land in
part
The abbreviated
checklist is meant to get you started off on the right foot. Good research
must go into buying raw land and there are many good books that are
devoted solely to the subject of raw land. This type of investment is
generally not the best choice for the new investor but often people look
to build their dream homes away from developed areas and would require
help hence.
Finance
Considerations while buying raw land
Raw land as opposed to
improved property is much more difficult to finance by traditional
lenders. The main reasons are that it generates very little income,
development costs can be expensive, and further there are no buildings or
improvements that can be used as collateral since it is often considered
to be speculative.
Owing to these reasons
sellers are often the first choice regarding financing. It is typical for
a seller of raw land to accept 10% down and the rest to be paid over time
at a specified below market interest rate; this would be an example of an
installment land contract. Other forms are contract for deed, mortgage as
well as note and purchase money mortgages. In these cases, a real estate
attorney generally drafts these contracts and a bank will act as an escrow
agent to facilitate verifiable records of payments received. The seller
often retains the deed until the property is paid for in full as a
security.
While considering bank
financing, you may start out by offering 30% down with a seven-year
mortgage, with the bank getting an extra percentage point over and above
the current interest rates for standard loans. This may not be necessarily
be accepted but it does give you a starting point to see just what the
bank may be willing to do.
In case you plan on
building on your land, then having a development plan with an appraised
set of blue prints for the project will help the lender in justifying your
loan. If you can use equity from another property, then paying substantial
down payments may also be a suitable option.
It is important
however to know values and avoid overpaying. Always offer the least when
possible and research recent sales of comparable properties. The larger a
parcel, the cheaper it tends to get per acre; ask an agent what an acre of
land tends to go for in the area that you are considering and try to buy
more than one acre.
When buying residential plots, builders normally try to keep raw land
costs down to 10% of the overall value of the project. If streets and
utilities are already in place, then 25% is the norm. If you can
combine or assemble parcels or achieve zoning changes within the property,
you have a good chance of immediately increasing its value. Always
physically inspect the property and do ample research before obligating to
buy the land. As far as possible use contracts with contingencies put in
to protect yourself. In summary, these are options that let you control
the deal while you investigate and research the land's potential to
satisfy your objectives.
