Resources-DueDiligenceinRawLandInvesting

Due Diligence in Raw Land Investing

With care a small or large fortune can be made in
undeveloped land.

By Forbes J. Douglas

PART 1

There is more to buying raw land than meets the eye and
more than a few individuals have wished they’d had a second
chance upon finding themselves duped, conned, misled, ill-
advised, uninformed, oversold, undereducated and often
unprepared. They realize, often too late, that a raw land
purchase should be properly investigated, evaluated and
negotiated using a logical and rational plan.

Let me start by saying I’m not a geologist, soil analyst,
surveyor, engineer or land consultant. I’m a passionate real
estate investor, licensed agent, appraisal assistant and
landlord who purchased various raw lots, as large as a 15-
acre parcel, for investment and building projects. In addition, I
have consulted with numerous individuals proficient in real
estate, who have contributed to my general awareness of the
conditions and merits of raw land. We, as small investors, can
further use this information to our advantage in wisely
choosing land and utilizing it to it’s highest and best use
regarding fulfillment of our needs, wants and desires.

This chapter is not a technical sleeper and as such, it will not
go so far as to tell you how much lime to add to your soil to
adjust PH levels (7.0 is neutral) but it does try to get you
thinking about some of the more general considerations that
can lead you to further investigate your options using this
material as your starting point.

With that said, the first question I’ll ask you is what exactly do
you intend to do with this land once you have it? Why are you
buying it? What purpose do you have in mind for land? Are
you going to build a home, purchase a lot for retirement or
investment? Will you acquire considerable acreage for
farming or subdivision? Do you want commercial, residential,
recreational or agricultural? Will it be in the north, south, east
or west?

So your first question should be, what am I, or we, buying this
land for? Will it satisfy my, or our, requirements? To get
answers to these questions you would best be served by
talking to those who will be most intimately involved with the
land, such as your spouse, partner, family members,
associated owners, etc. Once you have a clear understanding
of what the land is supposed to satisfy, then your search can
begin. So often people waste their time and effort because the
significant partners have such a wide gap in what each person
truly wants from the purchase that they never settle on
anything or end up with much less than they could have had.

Land can be said to consist of soil, geology, water and
climate. Whether you’re looking at beaches, mountains,
deserts, high plains or city lots, they all have some basic
components. Some of the basic requirements we most often
seek are clean air, water, electricity, sewage disposal and
trash removal.

Clean Air might be construed as freedom from dusty roads,
smog, foul smells from industry or landfills, free from noise of
traffic, airports and/or neighbors.

Water Availability is essential and is often desired for
aesthetics as well as drinking, bathing, washing, cooking,
cleaning, toilet facilities and watering vegetation. We also
enjoy lakes, rivers and streams for recreation. Others enjoy
the tranquil sounds that our streams, rivers and oceans can
provide. Without a doubt, water availability is a major concern.
Note: A 1666 square foot roof can capture 1000 gallons of
water for each inch of rainfall; cisterns of all types have
existed since the dawn of man.

Electricity is another necessity that we often take for granted.
Is a power plant within a reasonable distance from the land or
will it cost you thousands of your own dollars to run cables
across public lands to get your electricity hooked up? How far
are gas and oil suppliers?

Sewage Disposal - 25% of our country is on a well and septic
system. If you don’t have access to public utilities, will your
land support a septic system as well as the water to operate it?

Solid Waste Disposal - how far is the landfill? Is there a
collection service? You can’t burn everything; how will you get
rid of it?

Those are the major necessities for modern, everyday
living…things that we really need, but can often overlook until
after the contract is signed. Others essentials are a
telephone, mail delivery, shopping, police, fire station,
hospital/emergency services, schools, churches, recreation
facilities and access by good roads and highways.

You‘ll want answers to questions like those above and county
officials such as planning and zoning, community development
and building departments are a good place to start. I would
also call utility companies about water, sewer, electric and
phone, and talk to neighbors, contractors, developers, real
estate agents, appraisers and a local surveyor to have some
of the more important questions addressed at the beginning
of my search. I wouldn’t rely on the sellers to be all-knowing,
either.

Again, planning and zoning departments can offer the
following: Maps of existing uses, forecasts of future
development, lists of planned new roads, utility extensions,
locations of planned waste disposal facilities, details on
environmental areas and future land uses. They also regulate
building codes, curb-cut permits, historic preservation,
housing codes, subdivision regulations, tree cutting and
zoning laws. They usually have aerial photographs and plat
maps that can help you to better identify and evaluate the
land in question.

Do you already have your location identified? Will it be in the
east where the weather is often wet and humid or out west
where it is predominantly arid and dry? Will you be living in
cold weather in the north or gravitating towards the southern
hemisphere? Concerning location, what are you least
comfortable with: Avalanches, landslides, earthquakes,
flooding, hurricanes, tornados, tsunamis, volcanoes and/or
wildfires? You may want to investigate areas of interest by
going to websites like http://www.officialcitysites. You will get a
better picture of what awaits you concerning it’s economy,
environment, population, recreation, educational, medical and
employment facilities to name a few.

Let’s assume you know where you want to buy this land, why
you want to buy it, and how and when you will use it once you
have it. The following general observations, ideas and
information may help you to further investigate the
alternatives that are available to you in your endeavor to find
the land of your dreams.

Raw Land is unimproved property; it has no utilities, sewers,
streets or structures and usually must be cleared.

Here Are a Few Drawbacks That Are Sometimes Associated
with Raw Land

1. Negative cash flow; usually the land does not generate any
income while you pay the principle, interest, taxes and costs of
development.

2. Tax advantages are scanty as land cannot be depreciated.

3. Generally, raw land is considered a long-term ill-liquid
investment that often takes time before gains can be realized.

4. Risk of loss on resale can occur if you choose poorly, fail to
evaluate and negotiate properly, the economy slips or various
other unforeseen events occur.

5. It is difficult to obtain traditional financing on or borrow
against accrued equity.

Here Are Some Possible Benefits to Raw Land

1. Land has the potential to experience tremendous
appreciation if bought in the way of growth, or if a higher and
better use can be achieved.

2. Owner financing can often be obtained through the seller at
below-market rates.

3. Subdividing can create added value and provide for
immediate returns.

4. Privacy and pride of ownership can provide a secure
feeling to the holder.

What is Considered Good and Bad Land?

The worst you can buy is swamp or marshland. Most often flat
land is the least expensive to develop and the most desired
for building purposes. Land with barren rock will increase
costs and virtually eliminate a basement just the same as a
high water table.

You will most often be contacting many of these sources by
writing to them. Don’t get discouraged when you don’t get
immediate replies, as the average response rate is one reply
for every eight letters that you send. The pros will get on lists
and pay services to
monitor many of these potential sources, however, good old-
fashioned detective work does pay off. When researching in
this manner, secrecy is one key and fast action using all cash
is the other.

A special consideration to note when hunting legally
challenged property is to have a sand and some organic
matter, appears rich and dark in color and is considered ideal
for most purposes. As opposed to good soil, you don’t want
hard cracking ground when dry and sticky soil when wet.
Warning! Check with your state offices for the presence of
expansive soils; this stuff cracks foundations in the most
insidious ways, leading many to ruin.

Many people are literally being driven to the hills. Granted the
views can be spectacular but roads, utilities, water, sewer, and
foundations, such as pilings, can add 25-30% to building
costs alone, further adding to this already expensive
proposition. When considering going vertical, an 8-degree
slope is about the limit when concerning building economically
on hillsides.
Plots with trees, a view, rectangular in shape, a gentle slope
or none and a good location are most often preferred, and
streams can boost values by 100% in some cases.

How to Determine the Value of Raw Land

Using the appraisers standard view of estimating value can
give us some clues, so let’s look at what appraisers do!

* Site size and shape, represented by frontage, width and
depth.

* Corner influence equals visibility for commercial, or privacy
for residential

* Plottage, has assembly or combining of parcels been
accomplished

* How much land is excess or surplus; surplus has less value
than what is required

* Topography: Land’s contour, grading, natural drainage, soil,
view and usefulness

* Utilities: Sewers, drinking water, natural gas, electric,
telephone, cable, etc.

* Site improvements: Landscaping, fences, gutters, walks,
drives and irrigation

* Accessibility: Parking, location, streets, alleys, connecting
roads and highways

* Environment: Climate, adequate water supply, air quality,
rivers, lakes, oceans and the absence of any hazardous
materials

An old timer once gave me this advice: He said, “Dan, always
try to buy land that is located as close to those amenities that
an area is famous for, as that is often the reason people come
to certain areas. He lived in Florida and had plenty of
beachfront property located in tourist areas, which clearly
illustrated his point.

Who Has This Raw Land and How Do We Find It?

You may start your search by contacting farmers, investors,
real estate agents, state and federal agencies, cities with odd
lots they need to put back on their tax rolls, bureaus of land
management, federal marshals, tax sales, bank foreclosures,
developers, property heirs, the elderly, and family and friends.
Use your networks and birddogs while driving areas of interest
looking for further opportunities to buy.

Property is often advertised through newspaper ads, real
estate brokers, For Sale by Owner signs, flyers, bulletin
boards, the Internet, etc. A quick note on how not to buy is in
order here. I would not recommend buying land from a glossy
brochure or big development company as it is almost always
overpriced to cover large overhead costs, advertising and
profit. Also remember when a building boom is on, land prices
rise. You will do much better buying when demand is low.
Another caveat is to stay away from land that is advertised
outside of its normal market as it is often overpriced or has
problems; otherwise, a local buyer would have bought it!

If you want to find the deals, then most often you are going to
have to dig for them. A few successful methods may include
visiting the county clerk/recorder’s office to search the public
records for the following:

* New probate filings, use them to contact heirs
*

* Eviction proceedings to contact out of state landowners

* Arrests - these people may need money and may also be
going away for a while

* Bail bondsman who may have forfeited collateral in the form
of land

* Divorces filed, leading to a division of assets

* New guardianships to contact disinterested heirs

* Deeds in lieu of foreclosure, private sellers may in turn sell it
to you

* Lis pendens means litigation pending, often signaling
foreclosure

* title company in addition to the regular search of mortgage

* Tax and easement liens

* also check files for I.R.S. liens, bankruptcy filings and
judgment liens

Quick Review

Up to this point we have talked about not getting conned when
starting out. We also noted that it pays to understand what
everyone wants from the land to start. You are aware that
utilities and basic necessities are very important
considerations. You know whom to contact to get further in-
depth information on properties of interest. You know flat land
with natural amenities is the most desirable and economical to
develop. You are more familiar with the risks involved with this
type of real estate and you also know that rock, marshes and
hillsides can be expensive to develop. You have a better idea
of how an appraiser begins to determine value and you may
have a few ideas on how to find land and the people who own
it.

With that said, we are ready to get down to the business of
evaluating, negotiating and financing our well-sought piece of
terra firma. What follows is a basic checklist. There is more to
consider but this will get you off to a running start.

Basic Raw Land Checklist

* Get the most recent and valid information available: A copy
of the deed containing the legal description with any
covenants and/or restrictions

* Get the street address, a plot plan indicating the specific
property location, a survey, a preliminary title report, a recent
map and any aerial or land based photographs to help you
locate fence lines, trails, roads, streams, ponds, building
locations, etc. Walk the land to verify, evaluate and correlate
what is indicated, also looking for any signs of hazardous
waste dumping, burying or burning

* Determine present use in zoning, according to what planning
and zoning tells you. Symbols are used to designate uses -
here are a few:

A1 - Agricultural with single family home
C - Commercial business
CO - Commercial office
FP - Flood plain
M - Industrial
R1 - Residential single family
R1H - Residential hillside
R2 - Residential multifamily
RT - Recreational tourist/ Residential transitional

General categories include:

Farm, Ranch and Timberland
Recreational or Resort
Industrial
Commercial/Business
Residential
Mixed use

* Confirm who owns it, their full name, address and phone
number

* Find out what they do; are they a dealer in real estate?

* Ask if anyone else is on the title or has authority to act

* What are the annual taxes and assessed values?

* Ask why they are selling and how long they have owned it

* If the owner doesn’t want to sell, ask if they would consider
selling a parcel of it

The preceding is an abbreviated checklist. It is meant to get
you started off on the right foot. Many people will research
buying a new car more thoroughly than they would when
buying raw land; there are many good books that are devoted
solely to the subject of raw land. This type of investment is
generally not the best choice for the new investor but often
times people look to build they’re dream homes away from
developed areas and for that reason I have included my two
cents here.

Finance Considerations $$$

Raw land as opposed to improved property is much more
difficult to finance through traditional lenders. The main
reasons are that it generates very little income, development
costs can be expensive, there are no buildings or
improvements that can be used as collateral and it is often
considered speculative.

For those reasons mentioned we find that sellers are often
our first choice regarding financing. It is typical for a seller of
raw land to accept 10% down and the rest to be paid over
time at a specified (below market) interest rate. This would be
an example of an installment land contract. Other forms are
contract for deed, mortgage and note and purchase money
mortgages. In these cases, a real estate attorney usually
drafts these contracts and a bank will act as an escrow agent
to facilitate verifiable records of payments received. The seller
often retains the deed until the property is paid for in full.

If you want to investigate bank financing, then you may start
out by offering 30% down with a seven-year mortgage, with
the bank getting an extra percentage point over and above
the current interest rates for standard loans. This may not be
accepted but it does give you a starting point to see just what
they may be willing to do.

If you plan on building on your land, then having a
development plan with an appraised set of blue prints for the
project will help the lender in justifying your loan. If you can
use equity from other property, then paying substantial down
payments may also be an option.

My final words of caution here would be to know values and
don’t overpay. Always offer less when possible and research
recent sales of comparable properties. The larger a parcel is,
the cheaper it tends to get per acre. Ask an agent what an
acre of land tends to go for in the area that you are
considering; try to buy more than one acre.

When buying residential lots, builders try to keep raw land
costs down to 10% of the overall value of the project. If streets
and utilities are already in place, then they will use 25% as
their guideline. If you can combine or assemble parcels or
achieve zoning changes with property, you have a good
chance of immediately increasing its value. Always physically
inspect the property and do your research before obligating
yourself to buy it. Try using contracts with contingencies put in
to protect yourself. In essence, these are really options that
let you control the deal while you investigate and research the
land’s potential to satisfy your objectives. Happy Hunting and
buy the high grounds!

Forbes John Douglas is a retired Realtor and vacant and farm
land development specialist with 30+ years successful
experience.

Forbes J. Douglas
December 12, 2009

For more information please visit
TheForbesDouglasRawLandLetter.Com

Source: http://TheForbesDouglasRawLandLetter.Com

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