Resources-DueDiligenceinVacantLandInvesting

Due Diligence in Vacant 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, 2007

SouthWest Land Net
sales@southwestlandnet.com Old Robles Ranch 2C, POB1782, Cortaro AZ 85652 1-866-463-8757

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