Digging Up the Dirt on Land Sales
These Tips for Buyers and Owners Help Increase Profitability.
Of all the real estate disciplines, buying and developing raw land presents the greatest amount of risk. Buyers often encounter pitfalls because of development issues that weren't properly investigated: road changes, inadequate capacity of existing utilities, a change in local development requirements, subsurface problems such as sinkholes or rock, or environmental problems, for example.
Part of the problem stems from the unique characteristics of land, which is simply dirt covering a multitude of unknown factors. The other part involves the numerous regulations that exist in the marketplace today as well as those that may be enacted in the future.
Buying land is a complicated process, but learning a few tricks of the trade can help commercial real estate professionals and their clients overcome many challenges.
Land Buying Techniques
In addition to the traditional due diligence, the following considerations can aid buyers in their land transactions.
Choose a Site With Potential.
Predicting a land parcel's future is difficult, especially since land trends move at a snail's pace. However, look for good indicators of future growth areas. Talk to regional planners to determine what roadway and sewer changes are planned for the area in the coming decade. Speak with local officials to find out where permits are being issued for both commercial and residential new construction projects.
Today's brokers and developers must be creative problem solvers, since sometimes the only difference between a dead deal and a done deal is an innovative solution.
Consider, for example, frontage parcels that were on the market for more than a year. The price per square foot was in line with the market; however, the site's unusual depth made it hard to find a buyer. A fast-food company wanted to purchase the site, but did not need the last 100 feet of the property. The owners refused to subdivide the rear portion and wouldn't consider less money for the entire property.
A participating broker looked at the parcels in relation to the surrounding properties and devised a plan to assemble the rear 100 feet with an adjoining tract that had an unusable configuration.
After a little orchestration, the result was a free-standing fast-food restaurant with a neighborhood retail center behind it. All participants in the deal walked away with their needs met because the brokers involved were creative.
Walk the Property.
There is no substitute for actually walking the entire property. Navigate the site to become familiar with its physical features. Will the site need to be cut or filled? Are there any rock outcroppings that indicate the presence of subsurface rock? Observe the site after a hard rain to determine how it handles water drainage. Notice the traffic patterns around the site during different times of the day. Also note if there are any unappealing property uses adjacent to the site.
In addition, walk the site with a dirt contractor. Don't assume that because a site is flat that grading costs will be minimal. To the contrary, a perfectly flat site can create problems if it is not draining storm water properly. Dirt contractors are a valuable resource to consult when determining issues and costs associated with developing land.
Know the Seller's Transaction History.
Examine a seller's past sales activity in the market. Also, ask questions about the particular piece of land for sale. Why is the property for sale? Is the seller in financial duress and being forced to liquidate all of his properties? When did the seller buy the property and what did he pay for it? Does the seller have debt on the property?
Buyers can glean significant information from other purchasers, brokers, and lawyers who have dealt with the seller. By examining the terms of the seller's previous transactions, a buyer is in a better position to structure the purchase agreement and get the best possible deal.
Talk to Adjacent Property Owners.
Generally, neighbors are collective recipients of an area's problems such as traffic, noise, odors, or flooding. Sometimes conversations with nearby property owners can reveal problems that are not evident. For example, even a site that is not located on a flood plain or one that has passed a civil engineer's inspection can flood periodically. By talking to a neighbor, a potential buyer can learn this information beforehand and install proper storm pipes to alleviate possible flooding.
Talk to Planning and Zoning Officials.
Prior to expending time and money on due diligence, buyers need to understand permit processes for drainage, access, utilities, and signage. Every city has different procedures for zoning, development, and building approval.
After establishing a development and site plan, meet with the building inspector and zoning officials to review the plans and determine if there are any issues or problems. Questions to ask municipal officials include:
- What is the approval process for a building permit?
- Will the site plan need to be approved by a public body or a neighborhood association?
- Will the proposed use be allowed under the existing zoning? Ask the zoning official to provide written verification.
- Will the proposed points of access be allowed and are there other governing authorities that must grant approval, as is the case when developing property on state and federal highways?
- Are there any problems with the site plan such as setbacks, number of parking spaces, loading area, signage area, and drainage requirements?
- Will the proposed plan necessitate the developer improving any public right-of-ways, such as acceleration/deceleration or turn lanes?
- Will the development require on-site retention? What are the erosion control standards for the municipality?
Create a Due Diligence Checklist.
Land buyers must address more than 100 items before purchasing a parcel of land. Since every municipality has different regulations, checklists should be customized to a specific area. However, every checklist should include these items: title policy with copies of all exceptions; topography map; geotechnical and soils report; phase 1 environmental report; zoning verification; utility verification and fee schedules; impact fees; compliance with local codes; cultural resources/historical survey; endangered species study; and wetland delineation.
Get an ALTA/ACSM Survey.
The American Land Title Association and the American Congress on Surveying and Mapping have established specific standards for surveying land. ALTA/ACSM surveys are more comprehensive than regular boundary surveys and enable buyers to remove the survey exceptions from the title policy. Have a surveyor plot any encumbrances on the survey that are listed on the title binder declaration page. Don't assume that a power easement listed as an exception to the title policy is the power line located on the back of the property. That easement may give the power company the right to cross the middle of the property, which could ultimately impair future development plans.
Locate and Verify the Availability of Utilities.
Identify the size and location of the nearest water, sewer, gas, power, and phone supplies. Determine if these utilities can be extended to the site and if they have the capacity to serve the development. A buyer shouldn't assume he will be able to tap into a sewer line simply because it is located in front of his property. Ascertain the cost to extend the utilities to ensure the estimated cost is within budget. Also, ask utility officials if they foresee any contemplated moratoriums on utility taps.
Get Everything in Writing.
Obtain a zoning certification letter from the appropriate municipal authority that states the site's current zoning classification and that the intended use is allowed under the classification. The letter also should identify and describe the property clearly. Get written copies of all other approvals and agreements when dealing with municipalities and utility boards.
Obtain a Building Permit Prior to Closing.
Having a building permit prior to closing will limit a buyer's exposure to unknown development standards that may be required from the governing municipality, such as roadway improvements, storm drainage, landscaping, and fire codes.
Get Good Professional Help.
Always hire the best possible architects, engineers, lawyers, accountants, and commercial real estate brokers who deal with land. Using local engineers is preferred because of their familiarity with drainage, utilities, and local codes and approval processes.
During the holding period, whether it is one year or 20 years, property owners are required to pay real estate taxes, mortgage and insurance payments, and some maintenance expenses. Many times, income derived from interim usage of the property can reduce and even completely cover these costs.
Income-generating activities vary widely depending on a property's location and condition. But many may be used simultaneously to increase profit.
Landowners in isolated or wilderness areas may open up their properties to timber sales or hunting and camping leases. Land along highways or major roads can be leased as billboard sites. Property in heavily congested areas can be leased as cellular tower sites, automobile lots, or Christmas tree lots. Other income-generating ideas include golf driving ranges, fireworks stands, or ice cream stands.
All leases should be cancelable by the property owner within a short notice period to give the owner flexibility should he decide to sell or develop the property.
Saving on Development Costs
Developing raw land is not cheap, yet methods do exist for cutting costs without cutting corners. A few unique ways to save money include the following:
- Ask for help from municipalities. Government entities today are more willing to assist in development costs if projects will increase their sales tax revenue stream. It is not uncommon to see municipalities giving land to big-box developers as inducement for locating within their jurisdictions.
- Persuade adjoining neighbors to help pay for utility extensions and roadway costs. A good negotiator can position himself to receive compensation from some adjoining landowners who also will benefit from an extended sewer line or other utility.
- Contact surrounding property owners to determine if they are willing to share the expense of basic due diligence items such as surveys, geotechnical studies, and phase 1 environmental reports. Some of the primary costs in performing these reports are equipment and mobilization expenses, which remain the same for a 1-acre site as they do for five 1-acre sites.
- Make your property available to take dirt or to receive dirt, reducing one of the highest development expenses. A proactive property owner can save thousands of dollars on excavating costs. For example, the owner of a hilly site can contact area contractors to make them aware of free or low-cost fill dirt. By making his hill available to developers who require dirt for their projects, the owner may find that most of the excavating can be accomplished within a few years.
With a little bit of planning, land buyers can use these simple techniques to save thousands of dollars and potentially prevent costly mistakes.