Not unlike its developed counterpart, raw land can hold incredible value for residential redevelopers and investors. In the right hands, it can result in a lucrative payday, provided due diligence is minded. It’s worth noting, however, that while vacant property can be flipped successfully, it’s not without it’s caveats: If for nothing else, there are several differences between the strategies used to develop raw land into an investment opportunity and your average developed suburban home.
I maintain that raw land investment strategies award savvy residential redevelopers the opportunity to realize unparalleled success. However, success will not come without the appropriate knowledge and due diligence. If you want to flip raw land successfully, there are several things you need to know. I highlight five of the most important differences between an average flip and a raw land transaction below.
There are several things raw land investors need to pay special considerations to before investing. After all, raw land investing is riskier than traditional exit strategies. That said, here are some of the most important thing raw land investors need to think about ahead of time:
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We’ve all heard it before; real estate has one cardinal rule: location, location, location. For what it’s worth, buying raw land puts the age-old adage to the test, as the location in which you intend to buy vacant land is of the utmost importance. Think about it: Regardless of your intentions, location is the one fundamental indicator that will influence how everything transpires from the moment a property is acquired. Remember, location is the one thing you can’t change once you take ownership of a property, so make sure it checks all of your boxes.
Residential redevelopers, or those intent on developing the land to flip it (real estate new build), must first acquire a lot with not only resale value, but demand as well. There is no other way around it; the land you buy must coincide with a value that you deem worthy of a viable return on investment. Neglecting to mind due diligence up front could result in the acquisition of a property without much value, let alone enough to recoup your initial expenses.
The land you purchase should compliment your intentions. Those looking to start a business shouldn’t buy isolated land far from customers. And it should go without saying, investors shouldn’t buy land they can’t build on. Having said that, it’s a good idea to compile a check list — criteria, if you will — of everything you need in a property to carry out a successful investment.
Once you are confident that you can build a home on the land in question, take note of whether or not it has everything you will need to move forward with a real estate investment. Remember, everything missing from your checklist will coincide with an additional expense later down the road, in addition to the cost of building a home. Above all else, be sure that the land you intend to purchase has everything you need, including the permission to build a property. Location isn’t only about where the home will be, but whether it fills your most basic needs as an investor or not.
The most successful investors in today’s industry are more than aware that real estate requires both an investment of time and money. That said, you are more likely to spend your money in an efficient manner if you put the time in before hand to mind due diligence and educate yourself on the proper procedures to develop raw land. Only by doing your homework can you fully expect to know the true costs associated with buying raw land and developing it. I maintain that a proper education and a clear understanding of what lies ahead is the only way to successfully invest in vacant lots, and the costs of developing raw land are no exception. It’s in your best interest to know exactly what you are getting into.
In the event you decide to buy raw land to build a property, you will need to account for a litany of expenses that are likely headed your way. For starters, you will need to have the land surveyed to identify its boundaries. Depending on the location, you may have to clear natural obstacles in order to make room for a sturdy foundation. Remember, nothing comes free; building on raw land comes complete with a lot of additional expenses, all of which can add up very fast. Before you buy the land, be sure you have accounted for every additional cost you will incur.
There is, however, one cost those investing in raw land for the first time must become acquainted with, and fast: utilities. Not unlike your average property in a developed neighborhood, the house you intend to build will need utilities — no surprise there. However, it’s safe to assume the raw land you are building on is void of such a luxury. There is a reason they call it raw land. It’s not uncommon for raw land investors to incur additional costs for the sole purpose of running water and electricity to your unbuilt home. Some lots may even require you do dig a well or install a septic system, and that’s before you even break ground on the home itself.
In their trust form, zoning laws are essentially a list of rules that identify what can or can’t be done with the land in question. They are integral to an investor’s project and not to be overlooked. In fact, you could argue that nothing is more important to a land investor than the zoning laws that govern the property up for sale. Neglecting to account for zoning laws can be a costly mistake, and one that can potentially ruin the bottomline of any investment. That said, it’s in your best interest to know which zoning laws apply to the land you intend to buy.
Fortunately, identifying zoning restrictions isn’t complicated. It’s entirely possible to find out the necessary information at your local zoning office, which can be found in any U.S. county. You can also find a great deal of information online or in county records made available to the public.
It’s worth noting, however, that you should not only pay attention to what your land is zoned for, but also any long-term plans the county may have. If for nothing else, you want to have a clear picture of the long-term prospects of the land you purchase. The last thing you want for a real estate investment property is to find out a highway is planned to bisect your backyard sometime in the next decade.
Again, zoning restrictions identify what a property can and can’t be used for. If you intend to build a home on a property, you had better be certain you can do so. But don’t stop there; find out what else you can and can’t do with the property and make sure it meets your criteria.
While not something the average real estate investor has to contemplate on a daily basis, those looking to invest in raw land must address the issue of access. If for nothing else, a parcel of land — no matter how great it is — will be of no use to an investor who can’t access it.
It’s easy to underestimate the importance of road access, especially when it is a luxury you have grown up with for the better part of your adult life. However, there is a good chance that the majority of raw land plots you intend to purchase don’t come complete with their own roads. While less of a problem in urban areas, a distinct lack of road access in rural areas can be a major problem. Road access not only impacts the development of the land itself, but also those who intend to live there in the future.
Those familiar with the real estate investing industry are already well aware of the prevalence of permits. It’s sad, but a reality nonetheless: nearly everything you attempt to do as a residential redeveloper will require some sort of permit. While annoying, permits are a necessary evil, and prevent some people from making huge mistakes. If for nothing else, construction permits keep your efforts honest and building codes at the forefront of every undertaking. Seeing as how those building codes were put in place to protect occupants, you could argue that permits are an important safety measure we should all be thankful for. Adhering to building codes will result in a sound investment you can bank on, figuratively and literally, for years to come.
You should be ready to apply for a variety of permits if you ever hope to build a house on the recently acquired raw land. According to How Stuff Works, “the construction process is laden with permit requirements, from plumbing to electrical work; on the bright side, at the end of the day, all that paperwork will guarantee a solid, completely legal investment.” How much more can you ask for?
It is entirely possible to get a loan for raw land. Many traditional banks and mortgage brokers will offer loans specifically tailored for raw land deals. It is worth noting, however, that getting a loan for raw land will be more difficult than a traditional residential loan. If for nothing else, raw land loans are more risky to the lender, so they will need to conduct more due diligence on their part. Usually, when a borrower defaults, the bank may use the home as collateral for the missed payments, but there are no homes on raw land, meaning the bank is taking on more risk. As a result, the borrower will need to demonstrate they are capable of handling the loan, even more so than a traditional homebuyer.
Investing in real estate has become synonymous with flipping homes. However, real estate investments are as varied as they are lucrative. In fact, one doesn’t even have to invest in a home to invest in real estate; they can invest in raw land. While traditionally riskier and harder to manage, a raw land deal could prove incredibly lucrative under the right circumstances.