8 Rules for Developing Raw Land
Let’s face it; developing raw land can be a massive headache. Just the mention of zoning laws and environmental studies can set your anxiety into overdrive. The other major questions are what to build; retail, mixed-use, subdivision; what will bring in the most profit and be best for the community.
We've put together eight jewels of wisdom to help make your raw land development process as painless as possible.
First: What is "raw land"?
Raw land is a property in its most natural state. The land has not been cultivated for any sort of crop or livestock. There are no improvements such as walking paths, buildings, or fences.
8 Rules for Development
Rule #1 -Have a plan
You need to know exactly what you’re going to do with the land you’re looking for. This means considering the “highest and best use” for that land. It’s all a matter of perspective, however.
As mentioned before, “What to build” is a big problem for raw land development. Below are some common examples:
1. Mixed-Use Development- Mixed-use developments, often referred to “Live/Work/Play” developments, are a combination of residential and non-residential buildings, ranging from a single building to an entire neighborhood. When done well, mixed-use developments promote improvements in home affordability, walkability to homes, workplaces, and amenities, and strong neighborhoods. For investors, this means the combined benefits of both property types in one property (think: low vacancy rates and high-quality tenants).
2. Retail Developments - Retail developments refer to a brick and mortar building or grouping of buildings that engage in the act of selling goods or services directly to consumers or end-users. The most common examples of retailing include giants such as Best Buy, Wal-Mart, and Target.
3. Subdivisions- a subdivision is typically a large tract of land that is divided into smaller pieces for individual sale and development. Many subdivisions can be formed to create a neighborhood.
No matter what your building, key questions to ask yourself and your team include:
What is reasonably probable?
What is physically possible?
What is supported by the market?
What will return the highest value to the land?
Rule # 2- Understand the pitfalls
We’ve all seen development sites sit idle after the owner ran out of money; empty shells left standing where once great things were imagined.
This is a very real possibility. If you don’t do your research, this danger intensifies.
Undeveloped land has little tax benefits but usually does not depreciate in value.
If you are using the land purchase as a long-term investment and plan to hold it, you must be aware of the times, and those circumstances may change. The piece of attractive land you purchased long ago may not turn out to be the gold mine you thought it would be.
You will also have to have deep pockets or investors because typically in land development, banks consider these ventures a speculative investment and will rarely offer a loan for more than 40% of its value. Plan to make a down payment investment of between 20-50% of the total price of the property.
Rule #3 - Estimate the real price and budget accordingly
When dealing with raw land, unless you are inheriting it from someone, you are going to need MONEY; no if, and, or buts about it. To that note, calculate the actual price of the land, which is more than just the selling price. Things like tree removal, drainage, sewage, and construction are just a few of the factors that will add to your total development cost.
In addition to loan payments, you can expect to pay fees for:
Municipal or county taxes (check with your tax advisor to learn whether you qualify for a deduction)
Insurance on vacant land or abandoned buildings
Any upkeep required, such as repairing fence lines, managing drainage, etc.
Building costs, if you ever decide to build, add services, or improve access to the property
Permit fees, for any activity you have planned on the property
The list of "hidden" costs can be long, so it’s a good idea to have the land surveyed by a professional before bidding.
Rule #4 - Surround yourself with people more knowledgeable than you
No matter how smart you are, everyone, can’t know everything. There are people whose job it is to know the minutiae of what you’re about to encounter. You will want people on your team who will tell it to you straight and not pull any punches.
Electricians, construction workers, architects, and yes, even your loan officer, are just some of the people you’ll get to know well as you develop your new piece of land.
Rule #5 - Know your zoning
You can’t open a warehouse in the middle of residential properties. You have to know what can and can’t be built on that piece of land you’re eyeing (e.g. – residential, mixed-use, commercial, industrial, agricultural, etc.). Ask the city officials to give you some examples of what type of property would be allowed under each of these particular-zoning classifications.
Rule #6- Spend time enjoying the environment
Spend some quality time with your land, (before or after purchase), it is important. While you’re hanging out on your empty plot, note any weird smells or noise pollution. You may notice issues that you can address; for example, is the land close to power lines or will you have to pay for running cables. Is it near a creek that may rise, etc.…)?
It would also help to visit the site at different times of the day, in different kinds of weather.
Some other things to consider while you’re hanging out:
Is the land in a flood zone?
What is the topography like?
How will people gain access to the property?
What are the crime rates in the area?
Rule #7 -Get your timing right and be flexible
When it comes to land, timing is everything. You can do all the other steps perfectly, but if there isn’t a need for what you’re building, it won’t work. Perform research on your own and determine whether or not you’re fulfilling a community need.
Rule #8 -Patience is a virtue
The permits to get started sometimes take up to 180 days to be returned to you. Start early with your request for city, state, and local governments.