Why lots are the overlooked gem in REI.
For many people, daily commutes to work consist of thinking about tasks and projects they need to do once they arrive at their destination. Often, the entire drive has been a blur. Ironically, real estate professionals and investors experience a similar journey to those commuting to an office each day. Real estate agents and investors drive directly to a subject property with the same determination of those getting to an office; however, they often fail to notice investment opportunities along the way. One of those opportunities is vacant lots.
The real estate professional’s formal training starts with myriad courses aimed at securing listings and or assisting buyers. All are focused on sales volume of existing homes and real estate. Real estate investors focus on some form of wholesaling, rehabbing, flipping, renting, and owner financing. All are tied to distressed people and homes that typically need immediate attention. The standard process is marketing to target areas for homes within a certain price range or demographic. Once the investor is contacted, an immediate visit ensues with the hopes of putting the property under contract. Well, what about the empty lot next to the listed or distressed house? Unfortunately, most real estate professionals have no idea how to evaluate lots or assign a value.
Development all starts with the ability to foresee potential in a parcel of land or an available lot. That means first knowing the basic rules before you buy. Here are some of the crucial elements of purchasing lots:
- Location: Does it make sense to develop or build on this property?
- Zoning: Can the land be used for the intended purpose?
- Lot Size Requirements: Do the dimensions meet the project scope criteria?
- Access: Can the lot be accessed from front or rear?
- Restrictions: Are there restricted-use covenants preventing intended use?
- Permits: Will special permits be required?
- Utilities: Does the property have access to utilities?
- Budget: Are land costs included in construction budget?
- Easements: What is usable for the property owner?
- Function: Will the project fit the neighborhood?
It is also important to understand the different types of lots: inner city, suburban, and undeveloped.
Inner City Lots
Inner city is more of a socioeconomic term that typically focuses on the older, poorer, and more densely populated central section of a city. The economic framework of a city starts near the downtown area with architecture that contradicts the traditional style of homes built today. Great opportunities can now be found here due to urban decay.
Urban decay is the sociological process by which a previously functioning city, or part of a city, falls into disrepair. You will notice vacancies and boarded up homes due to population migration or de-urbanization. Due to economic restructuring and lack of monetary support, abandoned buildings, vacant lots, and failing infrastructure are common. Many real estate agents and investors do not like to work in these areas because they may take a while to reestablish. Additionally, these areas tend to have high local unemployment, fragmented families, and high crime. These are not the most comfortable environments and can create challenges finding property owners. In addition, vacant lots in the center of urban decay may have delinquent taxes, liens, or squatters.
Finding the owners or heirs may require skip tracing, letter campaigns, and county clerk research. Typically when located, owners will not want to pay any accumulated taxes or penalties. This can be a great opportunity to either wholesale or keep for long-term appreciation. Look for houses that are boarded-up, then scan the neighborhood for lots close by. These lots typically can be purchased for pennies on the dollar. They will be valuable again!
Suburbia is a residential area on the outskirts of a city. A suburban area is frequently a large community comprised of subdivisions. Look for advancement of housing and spread of urbanized areas into undeveloped, rural areas. This is known as suburban sprawl. It can be recognized by a few single-family homes and new road networks spreading into the undeveloped land and agricultural fields outside of cities. Land in these areas sell for pennies on the dollar prior to an urban plan or development. However, once projects receive approval, an immediate price increase occurs. This is a trigger to real estate professionals that development is about to occur.
The key is to identify when sprawl is about to occur. This will be a hint to acquire land quickly and avoid price creep. Look for the beginning stages around metro areas and assess where development is happening. Some clues are the building of new fast food restaurants or newly developed strip centers.
History tells us that land value follows the size of the American dream. Single-family homes in the United States are now on average twice the size of those inhabited in the 1950s. One or two-acre lots are now common, and many subdivisions now offer homes each built on 5 or 10 acres. It is not uncommon for areas in the western U.S. to even boast lots 25 acres in size. This trend leads to a hungry demand for land, accelerated road construction, and further spilling into fields, grasslands, forests, and other undeveloped lands.
An undeveloped lot is land that has not been previously developed for significant residential, commercial, or industrial uses. For our purpose, routinely it means no utilities or underground infrastructure exists.
Land development is significant as the costs can range from $8,000 to $25,000 per lot depending on the type of construction and city requirements. That can easily make or break a project budget if not accounted for during the acquisition phase. Most of the land that is on the outskirts of mid-to-small cities sits without infrastructure, typically waiting for a large developer with deep pockets to fund a sizeable development. Usually this is the reason undeveloped land remains unused. The vital step is to ensure costs can be recovered and profits made if development occurs. If you are considering acquiring undeveloped land, here are some steps to follow:
- Work with a pro who knows land in the area.
- Don’t expect to get a loan.
- Consider the value of homes in a neighborhood.
- Make sure to get a survey and have an environmental test.
- Consider utility infrastructure costs and road access.
- Identify permits and zoning up front.
Remember the adage “they aren’t making any more land”? It is true. Look for areas that may not seem attractive now but are near developing areas for great opportunities and value buys. If it’s near a downtown metro area, chances are, developers or companies will one day want to redevelop the area. Capitalize on it before someone beats you to the punch.