Getting Raw Land Not A Raw Deal

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 by: Dan Auito

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 (or can be) 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.

Note: Loamy soil, which consists of a balanced mixture
of clay, 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, streams, 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.
  

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 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:

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!

About the Author

Dan Auito is a dual-licensed real estate agent and appraisal assistant. Dan is a 20-year veteran of the United States Coast Guard. He has acquired over 1.3 million in real estate assets in 14 years while also founding a non-profit drug prevention corporation, a real estate consulting group and is the author of “Magic Bullets in Real Estate.” This 300-page power-packed book (due out in early July 2004) comes with a website that further supports its readers. Dan lives with his wife Kimberly and their two children, Brandon and Briana, on the emerald isle of Kodiak Island, Alaska. Dan may be reached at magicbullets@alaska.com or by visiting www.magicbullets.com. Call 1 907 481-6300 or write 1619 Three Sisters Way Kodiak AK 99615

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