5 Things to Consider When Purchasing Land
Written by Taylor Schmidt, Lee & Associates Houston
Real estate has proven that it can be a great investment. Many have either made their fortunes in real estate or invested their fortunes to be held in real estate. Land acquisitions in the Houston area real estate market are a great example. The economic growth in Houston has contributed to rising real estate prices that have current landowners cashing in on wise investments previously made in real estate; however, there are investors that do not make their desired return on real estate investments. This is mainly because they did not perform enough due diligence and either bought a property they could not fully utilize or overpaid for the market conditions of the property. The following checklist shows various items to consider when making a land purchase and can be a helpful tool when making an informed and smart real estate acquisition.
1) Know your real estate goals: There are many classes of real estate – unimproved raw land, development-ready land, residential property, apartments, commercial property, industrial property, and others. Each has its own particular ways of purchasing, financing, and managing. The key to the buyer is to determine their venture goal. Is it to hold the property for a period of time until it appreciates to a certain return? Is cash flow the objective? Will the property have tax advantages that could lower overall income taxes for a period of years? Real estate properties can provide benefits like no other investment vehicle. These due diligence items can be powerful tools for building wealth through real estate.
2) Location, location, location: This is an old tried and true axiom in the real estate industry, but don’t discount it as a necessary component to buying and owning real estate. Location matters. Many considerations need to be looked into for the location of a real estate investment. These include:
- What are the demographics and surrounding land uses of the area?
- Where is the growth around the property headed? Is development headed towards this property or is this area dying, or possibly redeveloping?
- Where will future customers come from? How about commute times if employees will be working here?
- Know about area amenities, schools, parks, businesses, transportation, and other infrastructure that could impact the real estate holding.
These items should be evaluated for the type of future use being contemplated for the land acquisition.
3) Development-ready land versus raw land: There are various advantages in buying a development-ready property over raw land. These advantages include several factors that make purchasing raw land riskier if proper due diligence is not completed. These properties are already equipped for development; therefore, the buyer can bypass significant time and approval hurdles from local authorities. Site plans can immediately begin for the property improvements and the value of these development-ready tracts tend to be built into the price for the property because many of the items listed below are already completed and available to the property.
The process of buying raw land differs considerably from buying development-ready land. The value of raw land lies in its potential for future development and proper due diligence is a must to avoid overpaying for the property. Under-market or off-market deals are frequently found in this category and can have immediate added-value gains to the property. Raw land can also come with agricultural or other exemptions. These exemptions can be a great way to hold raw land as it appreciates in value; however, if purchased or held in this manner, rollback taxes will need to be factored into the investment equation by the buyer/developer. Rollback taxes can add significant cost to the development of the property and are often overlooked by new buyers.
4) Developing land tracts: Due diligence is essential when buying and/or developing land tracts. Buyers and developers should make sure they know the implications and costs of developing the property in regard to each of the following items:
- Zoning classification, restrictions, and requirements.
- Deed restrictions and mineral lease obligations.
- Pipelines, powerlines, easements and building lines.
- Flood plain zones and regulations.
- Drainage, storm water detention, and storm water quality facilities needed.
- Utility availabilities, locations, and costs for electricity, natural gas, telephone, water, sanitary sewer, and storm sewer infrastructure or alternatives.
- Jurisdictional regulations, taxing authorities, and overlay architectural and investment zones.
- Subdivision platting requirements.
- Major thoroughfare and road widening requirements, and allowable driveway locations.
- Wetlands mitigation and jurisdictional water regulations.
- Environmental issues disclosed by a Phase I Environmental evaluation.
- Rollback taxes.
Any of the items listed can have a significant impact on the value and developability of land tracts if they are not accounted for in the investment equation.
5) Choosing an experienced broker. An experienced, trusted, and knowledgeable broker in the market will be an invaluable asset. The right broker will help run through the maze of information needed for the buyer to make an informed land acquisition. The broker will also know the history and dynamics of the area including off-market deals and unannounced new developments that could affect the value of a property. The main goals are to find a property that fits the buyer’s requirements and to determine the current and possible future market value of that asset.
The right broker will also have beneficial relationships in the market, including a team of professionals ready to provide guidance on any technical issues that may arise. These relationships include landowners, developers, brokers, bankers, lawyers, engineers, architects, land surveyors, and contractors.
The bottom line — a land acquisition can be an extremely profitable endeavor. The key components of buying a tract of land are hiring a trusted real estate professional and performing the proper due diligence for the property purchase.