A raw, vacant, undeveloped parcel of land can represent a golden opportunity for a savvy investor eager to build residential or commercial real estate on the property or flip the location. But plenty of risks and ambiguities are involved -- from zoning worries and easement issues to utility problems and restrictive covenants. To allay your concerns, investigate key aspects involved before committing to this transaction, including:
- Why it's important to do your homework.
- The complexities of purchasing vacant land.
- The crucial questions to ask.
This could be the biggest financial decision of your life as an investor. Don't take anything for granted; learn the truth about the property you're eyeing and determine whether the plusses outweigh the minuses.
Why it's important to do your homework
There can be a lot of huge costs and "ifs" involved that some investors don't understand when pondering the purchase of an empty lot. Even if you're going to leave it undeveloped in the hopes of selling it for more later, you want to know before buying that the land can be developed to your vision or the next buyer's liking. And that requires a lot of probing, according to Kristen Butler, owner of Galloping Properties in Louisville, Kentucky, a remodeling/rehab firm that flips properties.
"This includes finding out about neighborhood restrictions, easements, running utilities, septic systems, getting supplies to the location, and future appreciation," she says.
Without proper contingencies in place, you could be in for a big disappointment, cautions Willie Mandrell, owner of The Mandrell Company, a Boston-headquartered real estate investment and consulting firm.
"For example, maybe you think you can build 20 units on the parcel when, in fact, the municipality will only allow 10 units," Mandrell says.
Put another way, your intended use may not be possible or otherwise permissible, says Brian Morris, an attorney with Morris Law Center in Las Vegas.
"The due diligence period is not the time to cut costs and take shortcuts; spending $500 now could save $50,000 later," Morris says.
Complexities of purchasing vacant land
That's not to say that you should necessarily expect the worst during this process.
"Purchasing vacant land can range from extremely easy, especially in rural areas with few guidelines, to extremely complicated in areas where you may be dealing with county restrictions, zoning issues, and other complicating factors," says Butler.
Often, complications involved will depend on how "pro-development" the municipality is, Mandrell believes.
"Often, the hardest part, especially in a major city, is taking your project through the neighborhood process and zoning board," says Mandrell. "I bought a piece of land 18 months ago intending to build four to five rental units but have not yet put a shovel in the ground. Having your investment funds tied up for an extended period with no guarantee that the neighborhood or city will support your project is a tough pill to swallow."
Mandrell notes that for the aforementioned project, he didn't include a contingency in the purchase agreement -- something he strongly recommends.
"A contingency allows the buyer to back out of the transaction if the neighborhood or city doesn't allow the project to pass," he says.
Crucial questions to ask
Before purchasing any vacant land, prepare to ask essential questions and parse the answers carefully. These questions should include:
- Does the property have the correct zoning for your intended use? "Independently research what zoning is required for your planned construction, as well as the property's current zoning. If the property isn't zoned for the intended use, don't assume it can be rezoned," recommends Elizabeth Whitman, an attorney in Potomac, Maryland. "Work with the local zoning office and a zoning attorney to confirm that rezoning is possible and determine how much rezoning will cost."
- Do building and zoning laws allow for the type of construction you intend? "Even if the property is zoned for your intended use, it still might not be possible to construct the buildings it plans. There could be building height restrictions that prevent the construction of a high-rise apartment building, for example," Whitman says.
- How long will this project take to get approved by the zoning board?
- Will the neighborhood likely be for or against this project?
- What's the environmental condition of the property? Suzanne Hollander, a Florida International University real estate faculty and Miami-based property attorney, says the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (Superfund) is a Federal law that holds the owner of a property strictly liable for remediating hazardous waste on the land, even if the owner didn't cause the problem. "Order a Phase I Environmental Site Assessment to determine if there's an environmental problem on the land, and include in your contract the right to cancel and have your deposit returned if there is an environmental problem," she says.
- Will you have the necessary access to the property? Confirm that the property has access to a public road without relying on using easements across other properties, advises Whitman.
- Is any part of the property in a flood zone?
- Is the development of the property subject to environmental restrictions? "If part or all of the property is protected wetlands, it may not be available for development. Also, some properties are home to protected wildlife, and laws may prohibit development that displaces the wildlife," Whitman notes. "It's usually not permissible to obstruct or reroute any small creeks, streams, or other navigable waterways on the property without a log of red tape."
- Does the property have access to working utilities? "Access to utilities like water and sewer is critical to any development project. It may be possible to bring utilities to a property that lacks them, but that will increase project costs," notes Whitman. "And if the property currently has well water or a septic tank, local laws may require that those be upgraded to public water and sewer before the property can be developed."
- Are there any restrictive covenants that affect the buyer's planned use? "Some properties include plat or deed restrictions that limit how they can be used and may supersede zoning rules," says Whitman.
- Are there any unresolved easement, soil, or mineral rights issues with the property?
- What is the expected return on the project? "Also determine how economic conditions, including issues related to COVID-19, can affect the project," Morris says.
Be forewarned: It can be challenging to get financing to buy undeveloped land.
"Be prepared to pay cash for non-agricultural raw land. Since it doesn't generate income for its owners until it's developed, it can be difficult to obtain a mortgage loan at a reasonable interest rate or get a mortgage at all," Whitman says.
If you buy land with the intent to simply entitle it, expect bumps in the road as well.
"This means going through the process to obtain all the permissions (entitlements) to build and then selling the land, with the permissions to a developer," says Hollander. "If this is your goal, confirm that you have the financial wherewithal to endure through the planning process, which can take a year or two."
Lastly, your decision to invest or not should factor in the expected return multiplied by the likelihood of success.
"For example, a 50% chance of success might be worth it if the return is expected to be high enough," says Morris. "This is where partnering with an experienced developer and real estate attorney can pay off."