Total newbie: Need info about large land deals - Posted by Jennifer

Posted by Joe C. (AR) on July 27, 2005 at 08:09:55:

First, you don’t need to apologize for being a newby. Everyone was at some point. Trying to do what you propose is daunting for someone with no experience. You have several major hurdles.

  1. The deal. Raw land can be difficult to finance without seller financing. Check around.

  2. Check with a local engineer (surveyor) to determine the development costs. They know the rules and can help you with determining how many lots are feasible to develop. Road frontage is usually an important issue because back land requires access and roads can be expensive. Access to utilities is another major issue. They can also guide you through the process and estimate costs.

  3. You need to determing the market for the parcels once subdivided. Sometimes selling the lots can take a while and you have to be able to afford the carrying costs.

The bottom line here is money. This can be a lucrative game but requires access to cash. Maybe a partnership with a realtor, builder, contractor, or investor is is something to investigate.

Just my .02
Joe C. (AR)

Total newbie: Need info about large land deals - Posted by Jennifer

Posted by Jennifer on July 26, 2005 at 19:36:46:

Hi there,

First, I’m going to apologize for my “newbie-ness” and be upfront with all of you and say that I have absolutely no experience in this field. I’m trying to learn more about how to structure a deal for a large parcel of land that could be sub-divided into smaller residential parcels. I estimate that the 40 acres could be divided into approximately 7 parcels because the town it is in requires 5 acres to build a house.

Here is some background: We own a townhouse but are considering building a home in a rural but rather expensive area. We’ve looked at land prices that are out of this world, and found a parcel of 40 acres that is on the market for $860,000 (or as we like to call it, “more money than we will ever have” :))

Anyway, in an ideal world, we would somehow learn enough to be able to create some sort of deal that would allow us to purchase the land (using what money? Who knows…that’s why I’m here) and then sell off six of the parcels, save one for us, and hopefully make enough on the sale of the land to build a nice house for ourselves.

First, are we completely crazy to try to do this as our first deal? We have excellent credit, good jobs, but not enough income or money saved. We need to be creative and have no idea what to do first, what to research first, etc.

If you aren’t totally frustrated by my complete lack of knowledge, I would really appreciate it if you could post a tip or two that could help us find the right information. We are at the point where we don’t yet know what we are suppoed to research and learn more about. If we could sell the six parcels of land for $195,000 each (a steal!) we could make enough to pay off the land in full, get a piece of property, and put a nice chunk down for our own house so the prospect of being able to pull this off is really appealing.

Any tips, or a push in the right direction would be so appreciated!

Thanks in advance,


Re: Total newbie: Need info about large land deals - Posted by Killer Joe

Posted by Killer Joe on July 27, 2005 at 08:58:51:

Hi Jennifer,

Just some thoughts on the 40 acre parcel…

If you buy the land for $860K as your introduction to REI you need to understand the reality of the purchase will be considerable debt with NO cash flow. That means your staying power will have to be substantial in order for you to realize any gains.

The numbers you have ‘ceated’ that make this look like a real winner can come back to haunt you if you can not maintain the project through it’s final phases. Some primary considerations you need to address in your projections go beyond just the cost of the land.

In a typical situation where you are converting a larger parcel into smaller buildable lots the first consideration will be the property tax concequences of converting from an Argricultural or Recreational tax structure to a Residential tax structure. You need to find out how the county will reassess the lots, if at all.

To give you an example, one of the counties I have bought land in will change the status from Agricultural to Residential, thereby increasing the tax dramatically, and penalize you with an additional 5 years retroactive tax due at the residential rate. This is a windfall for the county and quite a burden on developers. If you were to buy a property to subdivide and didn’t include this burden in your projections, it would have a dramatic impact on the profits you thought you would realize. Be sure you know how this will be handled.

If you do indeed subdivide the parcel, you will want to create lots that do not completely compete with one another. For example, if the given terrain is equal across the entire parcel such that all the lots could be theoretical clones of one another, you would not necessarily want to make them all equal. This could work against you for the simple reason of supply and demand.

In this scenario you would be creating a ‘supply’ of 7 similar lots, yet the ‘demand’ side, ie 7 people that would all want the same lot may not be supported. In addition, you would be creating a ‘comp farm’ that could have an overwhelming effect on the prices those lots could be sold for. A better scenario is to create different lots that will attract a wider variety of different needs and/or wants on the part of the buyers. This will help insure the value of the lots so that if one of your buyers needs to bail after taking possession they won’t bring down the potential value of your unsold lots by selling out at a discount.

You will want to maximize the features of the land, and the shapes of the lots, so that some of the lots will be premium pieces and can fetch top dollar. This is especially true if the topography varies throughout the parcel. The notion that all the lots will be equal and all fetch the same sales price may prove to be unrealistic.

Find out how long other properties in that local, of similar size and charactoristics, take to sell (DOM) so you can anticipate how long it may take to sell your lots. Don’t forget that you are increasing the inventory in that local thus effectively diluting the ‘buyers/sellers’ ratio to some degree. This can effect the overall time it takes to sell all the properties unless you are in a red-hot market. Remember, your profit will come at the end of the selling phase, and that could be the last one or two properties you actually sell. So if your holding time projections are too optimistic, you could end up doing this for practice instead of profit.

All in all, if you have done your homework, and have the staying power to pull this off, the rewards will be well worth the effort. Don’t forget to include the taxes due on the sale of the individual lots relative to your income tax bracket. That figure should be included in your original projections and will be affected by the time it takes to sell the individual lots relative to the capital gains tax due on the individual sales. HTH