Vacant Land is one of the most overlooked and misunderstood real estate investments in the world.
Most real estate investors completely fail to recognize the superior benefits that come with owning land in its raw form.
It's unfortunate, because the simplicity and stability that comes with owning the right piece of land (purchased at the right price) can far outweigh the myriad of problems that are certain to come up with any other type of real estate.
While I firmly believe that vacant land is one of the best places you can put your money, there is another side of the story that needs to be carefully considered.
As an experienced land investor, I've learned (sometimes the hard way) that there are a number of things that need to be evaluated before purchasing a parcel of vacant land.
Land Can Be Deceptively Complicated
On the surface, it seems like such a simple creature – but there can be A LOT of potential problems lurking beneath the surface of any piece of land. I wouldn't necessarily say all these issues are common, but the fact is – any one of these things could potentially be a deal killer if not addressed properly. When you take it all into consideration, it adds up to a sizable list of things that ought to be investigated as part of your due diligence process.
Don't get me wrong, land is a rock-solid investment. It's just a matter of knowing what to watch out for, and under what circumstances you should re-adjust your offer price (or walk away from the deal altogether).
1. What is the Zoning on the Property?
First and foremost, it is vitally important to understand what a property can be used for, and what the highest and best use of the property is. With a simple phone call to your local planning & zoning department, most offices can give you the answer to this question in a matter of seconds. Once you know the zoning classification (e.g. – residential, mixed-use, commercial, industrial, agricultural, etc.), ask them to give you some examples of what type of property would be allowed under each of these particular zoning classifications. They may even give you some ideas that you hadn't previously thought of. Once you understand the most ideal use of the property – you can quickly determine whether it will fit your needs (or the needs of those you intend to market the property to).
2. What is the Topography of the Property?
Especially when I'm buying vacant land out-of-state, my first line of business is to understand the topography of the property. There are many, many places around the world that have very unpredictable elevations, cliffs, mountains, valleys, ravines and more. In many cases, the topography of the land can have a huge impact on the build-ability of a property. For the same reasons you can't build a house on 90 degree cliff, you should be doing some preliminary research to find out where your property is located, and what the lay of the land is.
One of the best ways to do this is by using Google Earth (which is free). You can download the software, search for your property (using the address or coordinates) and zoom in using your mouse buttons and the control and shift keys on your keyboard. This will also allow you to tilt the earth on its side so you can see precisely where all the hills and valleys are in your area. This software has given me a crucial perspective on hundreds of occasions.
3. What is the Annual Tax Obligation?
If you intend to hold onto a property for any length of time, beware of a super high tax bill relative to the actual value of the property itself. I haven't run across this issue very often, but for various reasons there are some properties that have some ridiculously high taxes in proportion to the property’s actual value (for example, if a $10,000 property has an annual tax bill of $2,000, THIS IS TOO HIGH). In my experience, I've found that a reasonable annual tax bill usually falls in the range of 1% – 4% of the property’s full market value.
4. What Public Utilities are Available? (Water, Sewer, Electric, Gas, Phone)
If a property doesn't have access to one or more of these staples of reasonable living, the property (for all intents and purposes) may not be considered build-able. After all, who would want to build a house where they can't flush the toilet or get access to clean water? If a property isn't build-able, you will lose a massive portion of the property’s usability, marketability and value. Since most people buy land with the intent building on it, you will definitely want to be aware of anything that could become an obstacle to that objective.
5. What are the Required Building Setbacks?
First, you need to understand the exact dimensions of the parcel of land you are evaluating. Next, call the local zoning department and ask them what the designated building setbacks are for the property in question (building setback requirements are very common, and are imposed as a way of giving order and consistency to the buildings in any given area). When you take these setbacks and regulations into account (relative to the size of this parcel of land), is there still enough room to build something worthwhile – or does it render the property useless? I've come across several properties that were designed (albeit, unintentionally) to be too small and after factoring in the setbacks – you can't build anything on them at all, leaving them virtually worthless!
6. Does the Property Have Any Usage Restrictions?
Most of the vacant land you'll encounter will have SOME kind of zoning requirements and/or usage restrictions in place (there's a reason you'll never see a 100 acre pig farm next to a 100 story skyscraper, or a massive shopping mall next to a landfill… it just doesn't make sense).
Every municipality in America has a plan (even if it's a vague one) for how they want different sections of their land to be used, regardless of who owns it. As such, you should always expect your property to come with some reasonable limitations on what it can be used for.
If the property is part of a Home Owner's Association (HOA) it will most likely have even more stringent restrictions in place to help maintain the “quality” and formality of their neighborhood. The idea is to keep any bizarre behavior OUT of the neighborhood (e.g. – cars in the front yard, lawns nobody takes care of, houses that look out-of-place or aren't built to code).
Usage restrictions aren't necessarily a bad thing – they almost always make sense on some level. They're designed to help maintain order and support the value of each property in the subdivision. On the same coin… if you aren't aware of these restrictions before you purchase, they can also create some conflict with the plans you had in mind for the property. This isn't common for most land investors (because most people have no intention of using their property for purposes that don't jive with their surroundings), but even so – you should always make sure you understand what the rules are BEFORE you buy a parcel of vacant land. This will help you avoid owning a property that requires maintenance you don't want to do, or that can't be used for your intended purpose.
7. Is the Property Located in a Flood Zone?
In some parts of the country, parcels of land are vacant because they are literally under water. In other areas, there are many properties located within close proximity to bodies of water that is prone to flooding. In either case, if a property is at risk of flooding – you'll want to know about this before you buy, because properties in a flood zone can be extremely expensive to insure. Land that is located near a state of federal body of water can be extremely valuable, but this close proximity to the water can also create a flurry of issues… so be sure you understand the ramifications of your particular location.
Want to check and see if your property is located in a flood zone? One quick way to verify is to check the FEMA flood maps in your area. You can do this by visiting msc.fema.gov and following the instructions in the video above. You can also try FreeFlood.net for another user-friendly way to find the same information.
8. Does the Soil Percolate (aka – “Perk”) or have Access to a Nearby Sewer System?
If you're planning to build a “dwelling” of any kind on your parcel of land, there is one issue that may seem insignificant at first glance, but it has the potential to make or break a land deal. It's called a “Perc Test” – and if you're dropping some serious coin on land in a rural area, this is an issue you'll want to be sure about before you sink your money into it.
A Perc Test (also known as “Perk Test”, and more formally known as a “Percolation Test“), is a soil evaluation that tests the rate at which water drains through soil. If a property doesn't have easy access to the local sewer system, a perc test is required to determine whether a septic system (the alternative to a sewer) can be installed on the property.
If a property doesn't pass this test, you could have a very difficult time building any type of dwelling on the property, so unless you're able to tap into the municipal sewer system (which will negate this issue altogether), be sure to give the county health department a call and ask them what is required to install a septic system (or connect to the local sewer) in your area. For a detailed overview of how a perc test works and how to verify the status of this issue, check out this blog post.
9. Is the Property Landlocked (Are there any Easements or Access Roads to the Property)?
It’s an odd phenomenon, but believe it or not – there are thousands of properties all over the country that have no road access. They are surrounded on all sides by other private property – which (according to some) deems the land virtually useless. In a sense, these properties might as well be on the moon – because nobody can legally access the property.
This issue can be overcome if you can establish a legal, recorded easement to the property. This can be done if one of the neighbors is willing to allow you access through their property – to yours. In many cases, a neighbor shouldn't be expected to do this for free, you'll have to give them a reason to help you (usually in the form of money). Again, this isn't an impossible issue to overcome, but it is definitely something you'll want to be aware of before you purchase.
10. What is the Size and Shape of the Parcel?
I've seen a number of properties that are virtually useless due to their size and shape. I remember on one occasion, I came across a parcel of land that was 5 feet wide and 900 feet long. I've also seen properties that were 10 feet by 10 feet. If you see a parcel of land with an odd shape, use your common sense. If you can't think of a legitimate use for a property with its given dimensions – you'll probably want to think twice before buying it.
11. Does the Property Have Access to a Municipal Water Supply? If Not, Can You Drill a Well or Have Water Trucked In (and if so, at what cost)?
There are a lot of properties in the world that don’t have access to a municipal water supply (i.e. – city water). This isn't necessarily a problem, but it does mean you'll have to drill a well in order to access a clean water source beneath the surface. There are a few ways to determine whether or not you'll be able to do this but in most cases, if there are other buildings in the near vicinity (e.g. – homes or other dwellings built next door), this is usually a good indication that you won’t have any problems accessing water either.
If you’re looking at a vacant lot in the middle of the desert or near the top of a mountain with nothing around for miles, you will probably want to verify with a professional that water will be accessible if/when you need it (and if your only option is to have it hauled in by truck, you'll want to get an idea for how much this will cost on an ongoing basis).
12. Is there a Moratorium on Building?
I've actually never encountered this in my time as a land investor, but there are some municipalities that will impose a temporary “moratorium” on building from time to time. For various reasons, a town will determine that they want to hit the “pause” button on all new development, which means that for the time being, you (or anyone else) will not be able to build anything in that area. Again – you can call the local planning & zoning department to see if this is an issue in your area.
13. What About Junk, Tires, Rubble, Gas, Oil, or Other Contaminants on the Property?
On a few occasions, I've discovered that what I thought was a piece of vacant land, was actually a makeshift landfill. If you’re going to buy a piece of land, make sure that all you’re getting is LAND (and if anything else is coming along with the deal, make sure it’s something you actually want).
These kinds of messes can be very expensive to clean up and as I explain in the video below, companies like WeGoLook offer some very convenient and cost-effective ways to verify what the property looks like BEFORE you buy.
If you're interested in learning more about how WeGoLook works, be sure to check out the full review I did on their service in this blog post.
14. What Were the Previous Uses of the Property?
Most states have environmental laws that pertain to commercially zoned property (i.e. – properties zoned “Residential” generally aren't held to these standards). If you’re considering a vacant lot zoned for commercial development, make sure you're not inheriting any environmental contamination with the property.
For most commercial properties, the best way to do this is by ordering a “Phase I Environmental Report” (many banks will automatically require this, because it affects their collateral). This report will identify if there are any “Recognized Environmental Concerns” (RECs) on the property that you need to worry about. If you neglect to do any environmental due diligence, the liability for any existing environmental contamination on the property could ultimately fall on your shoulders – making it very difficult and expensive to sell the property in the future.
For the most part, properties located in an undeveloped area are generally not going to have these problems, but if you’re looking at commercially zoned property that was previously occupied by anybody or anything, I’d recommend (at the very least) ordering a “Records Search & Risk Assessment” (RSRA) or an “Environmental Transaction Screen” (ETS) from a local environmental professional. These usually cost around $500 and will do a high level review of the property to determine the likelihood of any potential environmental contamination.
15. What Do the Surrounding Properties Look Like?
The properties next door can have some MAJOR implications for the value and “sale-ability” of a parcel of land (e.g. – Think about it, would you rather live next to Yosemite National Park or a Landfill?). For understandable reasons, most people care a great deal about who and what they live next to, so be sure to get a good idea for what the surrounding properties look like (hint: this is another potential area where a service like WeGoLook can help).
Is this a desirable area? Is it the type of place where you (or anyone else) would want to live? If the surrounding properties have any obvious issues that are beyond your control, you'll want to think very carefully about what this means for the property's value and whether or not you want to own it.For a quick tutorial on how to very QUICKLY find out what the adjoining properties look like next to the parcel you're researching, this video explains one way to do it:
These are the questions I ask myself before I buy any piece of vacant land. This isn't intended to be an all-inclusive list of EVERY possible issue you could ever encounter, but I’d say it covers about 95% of the potential concerns you ought to be aware of. Most of these issues come up very infrequently, but they are very important things to consider nonetheless. Remember, you don't need to be afraid of buying vacant land. You just need to be informed.
Don't Be The “Greater Fool”
The trick with vacant land is to understand why it's vacant in the first place. I've run across quite a few vacant lots that seemed attractive at first glance, but eventually I discovered that the reason nobody was using them was because you CAN'T use them. If one (or more) of the issues above are prohibiting someone from putting a property to good use, believe me – you don't want to find out after you already own it.
When some people look at the prospect of owning land, they get wrapped up in the dream of property ownership. The idea of owning a large tract of property can seem very appealing, even if it is of no practical use to them. This kind of trap is especially easy for people to fall into with land, because it's a low maintenance property and doesn't seem complicated (even though there are a lot of factors to consider).
MANY people buy into the dream of property ownership – even if the investment makes absolutely no sense from a financial standpoint. If you don't believe me, check out this guy who sells property on the moon:
Unfortunately, many parcels of land are sold to “the greater fool”. When people don't do their homework and think things through, they can get hurt.
Don't be the greater fool. Always be sure you have done a reasonable amount of research and don't take on a property until you thoroughly understand what you are getting into.
Want to Learn More About Land Investing?
The truth about land investing is that most people have no idea how powerful it really is. Land is a massive opportunity that most investors aren't paying attention to – and for the few land investors who know how to pursue this business with the right acquisition strategy, it's an extremely lucrative way to build wealth and financial freedom with real estate.
If you want to get the inside scoop on how to start and run you own land investing business, come and check out the REtipster Club – where you'll get access to a full 12-week course, videos, bonuses, downloads and a members-only forum (where I spend time answering questions every week). There is no better place to learn this business from the inside out.