Getting Raw Land - Not a Raw Deal!|
by Dan Auito
There is more to buying raw land than meets the eye and more than a few individuals have wished they'd had a second chance upon finding themselves duped, conned, misled, ill-advised, uninformed, oversold, undereducated and often unprepared. They realize, often too late, that a raw land purchase should be properly investigated, evaluated and negotiated using a logical and rational plan. Let me start by saying I'm not a geologist, soil analyst, surveyor, engineer or land consultant. I'm a passionate real estate investor, licensed agent, appraisal assistant and landlord who purchased various raw lots, as large as a 15-acre parcel, for investment and building projects. In addition, I have consulted with numerous individuals proficient in real estate, who have contributed to my general awareness of the conditions and merits of raw land. We, as small investors, can further use this information to our advantage in wisely choosing land and utilizing it to it's highest and best use regarding fulfillment of our needs, wants and desires. This chapter is not a technical sleeper and as such, it will not go so far as to tell you how much lime to add to your soil to adjust PH levels (7.0 is neutral) but it does try to get you thinking about some of the more general considerations that can lead you to further investigate your options using this material as your starting point. With that said, the first question I'll ask you is what exactly do you intend to do with this land once you have it? Why are you buying it? What purpose do you have in mind for land? Are you going to build a home, purchase a lot for retirement or investment? Will you acquire considerable acreage for farming or subdivision? Do you want commercial, residential, recreational or agricultural? Will it be in the north, south, east or west? So your first question should be, what am I, or we, buying this land for? Will it satisfy my, or our, requirements? To get answers to these questions you would best be served 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 satisfy, then your search can begin. So 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. Land can be said to consist of soil, geology, water and climate. Whether you're 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. Clean air might be construed as 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 drinking, bathing, washing, cooking, cleaning, toilet facilities and watering vegetation. We also enjoy lakes, rivers and streams for recreation. Others enjoy the tranquil sounds that our streams, rivers and oceans can provide. Without a doubt, water availability is a major concern. Note: A 1666 square foot roof can capture 1000 gallons of water for each inch of rainfall; cisterns of all types have existed since the dawn of man. Electricity is another necessity that we often take for granted. Is a power plant within a reasonable distance from the land or will it cost you thousands of your own dollars to run cables across public lands to get your electricity hooked up? How far are gas and oil suppliers? Sewage disposal - 25% of our country is on a well and septic system. If you don't have access to public utilities, will your land support a septic system as well as the water to operate it? Solid waste disposal - how far is the landfill? Is there a collection service? You can't burn everything; how will you get rid of it? Those are the major necessities for modern, everyday living…things that we really need, but can often overlook until after the contract is signed. Others essentials are a telephone, mail delivery, shopping, police, fire station, hospital/emergency services, schools, churches, recreation facilities and access by good roads and highways. You'll want answers to questions like those above and county officials such as planning and zoning, community development and building departments are a good place to start. I would also call utility companies about water, sewer, electric and phone, and talk to neighbors, contractors, developers, real estate agents, appraisers and a local surveyor to have some of the more important questions addressed at the beginning of my search. I wouldn't rely on the sellers to be all-knowing, either. Again, planning and zoning departments can offer the following: Maps of existing uses, forecasts of future development, lists of planned new roads, utility extensions, locations of planned waste disposal facilities, details on environmental areas and future land uses. They also regulate building codes, curb-cut permits, historic preservation, housing codes, subdivision regulations, tree cutting and zoning laws. They usually have aerial photographs and plat maps that can help you to better identify and evaluate the land in question. Do you already have your location identified? Will it be in the east where the weather is often wet and humid or out west where it is predominantly arid and dry? Will you be living in cold weather in the north or gravitating towards the southern hemisphere? Concerning location, what are you least comfortable with: Avalanches, landslides, earthquakes, flooding, hurricanes, tornados, tsunamis, volcanoes and/or wildfires? You may want to investigate areas of interest by going to websites like http://www.officialcitysites. You will get a better picture of what awaits you concerning it's economy, environment, population, recreation, educational, medical and employment facilities to name a few. Let's assume 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 may help you to further investigate the alternatives that are available to you in your endeavor to find the land of your dreams. Raw land is unimproved property; it has no utilities, sewers, streets or structures and usually must be cleared. Here are (or can be) a few drawbacks that are sometimes associated with raw land:
- Negative cash flow; usually the land does not generate any income while you pay the principle, interest, taxes and costs of development.
- Tax advantages are scanty as land cannot be depreciated.
- Generally, raw land is considered a long-term ill-liquid investment that often takes time before gains can be realized.
- Risk of loss on resale can occur if you choose poorly, fail to evaluate and negotiate properly, the economy slips or various other unforeseen events occur.
- It is difficult to obtain traditional financing on or borrow against accrued equity.
Here are some possible benefits to raw land:
What is considered good and bad land? The worst you can buy is swamp or marshland. Most often 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 just the same as a high water table. Note: Loamy soil, which consists of a balanced mixture of clay, sand and some organic matter, appears rich and dark in color and is considered ideal for most purposes. As opposed to good soil, you don't want hard cracking ground when dry and sticky soil when wet. Warning! Check with your state offices for the presence of expansive soils; this stuff cracks foundations in the most insidious ways, leading many to ruin. Many people are literally being driven to the hills. Granted the views can be spectacular but roads, utilities, water, sewer, and foundations, such as pilings, can add 25-30% to building costs alone, further adding to this already expensive proposition. When 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 streams can boost values by 100% in some cases.
- 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.
- Owner financing can often be obtained through the seller at below-market rates.
- Subdividing can create added value and provide for immediate returns.
- Privacy and pride of ownership can provide a secure feeling to the holder.
How to determine the value of raw land Using the appraisers standard view of estimating value can give us some clues, so let's look at what appraisers do!
An old timer once gave me this advice: He said, "Dan, always try to buy land that is located as close to those amenities that an area is famous for, as that is often the reason people come to certain areas. He lived in Florida and had plenty of beachfront property located in tourist areas, which clearly illustrated his point.
- Site size and shape, represented by frontage, width and depth.
- Corner influence equals visibility for commercial, or privacy for residential.
- Plottage, has assembly or combining of parcels been accomplished.
- How much land is excess or surplus; surplus has less value than what is required.
- Topography: Land's contour, grading, natural drainage, soil, view and usefulness
- Utilities: Sewers, drinking water, natural gas, electric, telephone, cable, etc.
- Site improvements: Landscaping, fences, gutters, walks, drives and irrigation
- Accessibility: Parking, location, streets, alleys, connecting roads and highways
- Environment: Climate, adequate water supply, air quality, streams, rivers, lakes, oceans and the absence of any hazardous materials
Who has this raw land and how do we find it? You may start your search by contacting farmers, investors, real estate agents, state and federal agencies, cities with odd lots they need to put back on their tax rolls, bureaus of land management, federal marshals, tax sales, bank foreclosures, developers, property heirs, the elderly, and family and friends. Use your networks and birddogs while driving areas of interest looking for further opportunities to buy. Property is often advertised through newspaper ads, real estate brokers, For Sale by Owner signs, flyers, bulletin boards, the Internet, etc. A quick note on how not to buy is in order here. I would not recommend buying 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 when a building boom is on, land prices rise. You will do much better buying when demand is low. Another caveat is to stay away from land that is advertised outside of its normal market as it is often overpriced or has problems; otherwise, a local buyer would have bought it! If you want to find the 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 the following:
You will most often be contacting many of these sources by writing to them. Don't get discouraged when you don't get immediate replies, as the average response rate is one reply for every eight letters that you send. The pros will get on lists and pay services to monitor many of these potential sources, however, good old-fashioned detective work does pay off. When researching in this manner, secrecy is one key and fast action using all cash is the other. A special consideration to note when hunting legally challenged property is to have a title company in addition to the regular search of mortgage. Tax and easement liens also check files for I.R.S. liens, bankruptcy filings and judgment liens.
- New probate filings, use them to contact heirs
- Eviction proceedings to contact out of state landowners
- Arrests - these people may need money and may also be going away for a while.
- Bail bondsman who may have forfeited collateral in the form of land.
- Divorces filed, leading to a division of assets
- New guardianships to contact disinterested heirs.
- Deeds in lieu of foreclosure, private sellers may in turn sell it to you.
- Lis pendens means litigation pending, often signaling foreclosure.
Quick review Up to this point we have talked about not getting conned when starting out. We also noted that it pays to understand what everyone wants from the land to start. You are aware that utilities and basic necessities are very important considerations. You know whom to contact to get further in-depth information on properties of interest. You know flat land with natural amenities is the most desirable and economical to develop. You are more familiar with the risks involved with this type of real estate and you also know that rock, marshes and hillsides can be expensive to develop. You have a better idea of how an appraiser begins to determine value and you may have a few ideas on how to find land and the people who own it. With that said, we are ready to get down to the business of evaluating, negotiating and financing our well-sought piece of terra firma. What follows is a basic checklist. There is more to consider but this will get you off to a running start.
Basic Raw Land Checklist
- Get the most recent and valid information available: A copy of the deed containing the legal description with any covenants and/or restrictions.
- Get the street address, a plot plan indicating the specific property location, a survey, a preliminary title report, a recent map and any aerial or land based photographs to help you locate fence lines, trails, roads, streams, ponds, building locations, etc. Walk the land to verify, evaluate and correlate what is indicated, also looking for any signs of hazardous waste dumping, burying or burning.
- Determine present use in zoning, according to what planning and zoning tells you. Symbols are used to designate uses - here are a few: A1: Agricultural with single family home
C: Commercial business
CO: Commercial office
FP: Flood plain
R1: Residential single family
R1H: Residential hillside
R2 : Residential multifamily
RT : Recreational tourist/ Residential transitional
General categories include: Farm, Ranch and Timberland
Recreational or Resort
- Confirm who owns it, their full name, address and phone number
- Find out what they do; are they a dealer in real estate?
- Ask if anyone else is on the title or has authority to act
- What are the annual taxes and assessed values?
- Ask why they are selling and how long they have owned it
- If the owner doesn't want to sell, ask if they would consider selling a parcel of it.
The preceding is an abbreviated checklist. It is meant to get you started off on the right foot. Many people will research buying a new car more thoroughly than they would when buying raw land; 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 times people look to build they're dream homes away from developed areas and for that reason I have included my two cents here.
Finance considerations $$$ Raw land as opposed to improved property is much more difficult to finance through traditional lenders. The main reasons are that it generates very little income, development costs can be expensive, there are no buildings or improvements that can be used as collateral and it is often considered speculative. For those reasons mentioned we find that sellers are often our 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 and note and purchase money mortgages. In these cases, a real estate attorney usually 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. If you want to investigate bank financing, then 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 accepted but it does give you a starting point to see just what they may be willing to do. If 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 other property, then paying substantial down payments may also be an option. My final words of caution here would be to know values and don't overpay. Always offer less when possible and research recent sales of comparable properties. The larger a parcel is, 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; try to buy more than one acre. When buying residential lots, builders 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 they will use 25% as their guideline. If you can combine or assemble parcels or achieve zoning changes with property, you have a good chance of immediately increasing its value. Always physically inspect the property and do your research before obligating yourself to buy it. Try using contracts with contingencies put in to protect yourself. In essence, these are really options that let you control the deal while you investigate and research the land's potential to satisfy your objectives. Happy Hunting and buy the high grounds!
Dan Auito is a dual-licensed real estate agent and appraisal assistant. Founder of a non-profit drug prevention corporation, a real estate consulting group and is the author of “Magic Bullets Real Estate.” This 300-page power-packed book (due out in early July 2004 comes with a website that further supports its readers.
Dan may be reached at firstname.lastname@example.org or by visiting www.magicbullets.com
Call 1 907 481-6300 or write
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Kodiak AK 99615