It happens every year. People want to sell their home, building, or land and they get unrealistic with their prices. Most come up with super lofty prices and when their listing doesn’t get any bites, they wonder why.
This happens pretty much everywhere. When you’re located in a market that is hot, then obviously your reasoning is rational. But with any normal market, you’ll run the risk of your listing going stale.
The problem with that is that when it goes stale with no or hardly any bites, you’ll have to take it off the market then wait a few weeks and list it again at a lower price.
You’ll waste time this way, but all this hassle can be eliminated from the start if you’re more realistic with your price.
You’re thinking about selling your house that’s sitting on three acres and want to know what you could get for it.
But the real question is which value are you talking about – is it market, as is where is, highest and best use, quick sale or what if value?
Real estate appraisers define “market value” as the most probable price at which a property will sell in an arm’s-length transaction in a competitive market where both parties are motivated, and are acting knowledgeably and without duress.
Market value assumes that: the transaction is arm’s-length and that parties are acting in what they believe to be their own best interests the property is exposed on the open market for a reasonable period of time
payment is made in cash or cash equivalent (such as by a loan from a mortgage company)
the price is not affected by special terms, conditions, financing or concessions
“As is where is” value is what the property is worth in its current state and without any changes, and it takes into account the current property zoning, conditions and physical or other limitations. Buyers purchasing a property as is take it as they find it.
The purchase isn’t contingent on, for instance, satisfactory results of inspections or use and other types of development approvals.
The risk in an as-is scenario can be substantial. Buyers have to commit to purchasing the parcel before having development approvals in hand and without knowing all of the conditions that would limit or prevent them from using the property as they wanted. Consequently, as-is value is deeply discounted to reflect the amount of risk assumed by the buyer.
The highest and best use is the most profitable use that’s legal, physically possible and economically feasible. An 18-hole golf course wouldn’t be the highest and best use because it’s physically impossible to fit a golf course on just 20 acres.
Likewise, if a parcel were zoned for agricultural or low density residential, appraisers wouldn’t estimate value based on a use for apartments because that use wasn’t legal under the current zoning.
A quick sale value is similar to as is where is in that the buyer agrees to forego contingencies and assumes all of the risk. The difference is that the term “quick sale” usually describes a sale that’s forced by events like foreclosure, court order, bankruptcy or divorce.
Potential buyers can go to HUD for more info on housing.
The “what if” value is predicated on the occurrence of some future change to the property. This could be some type of zoning approval (e.g., variance), a different zoning classification, accessibility of public utilities, or subdivision approval.
What if value is predicated on the highest and best use of the property but it assumes there will be a change in the status quo. This value recognizes that something would have to be done to transform the property from its current state so that it could achieve its highest and best use.
Buyers of development property typically use the what if value in estimating what the property’s worth, but they also take into account the expenses they will have to incur in order to effect that transformation.
back to top
Determining the value of what you can get for your house, building, land, etc… is pretty much a complex formula.
For the most part, you’ll be working with your sales agent or broker and using recent comparables otherwise known as “comps.”
Comps are the recent sales in the area that are similar to your property.
For example, if you have a 3 bedroom, 2 bathroom house on an acre of land, they’ll look at comps that match your property, then factor in some other things such as location, zoning, condition, and other things like does it have a driveway, swimming pool, guest house, etc…
Other questions you’ll have to ask yourself are:
Do I want to maximize the sale price?
Is my goal to sell the property and get to closing within 60-90 days?
What terms and conditions (contingencies) am I willing to give the buyer?
Am I a motivated seller or am I just interested in throwing a fishing line out there to see who would bite?
Is the highest and best use of my property something other than what it is now (one house on three acres)?
What is the category of buyers likeliest to purchase my property – is the target buyer a homeowner like me or is it a developer or builder?
An offer is like a set of scales with price on one side and terms and conditions on the other. Offers are not just about price because price is relative to the rest of the offer.
The terms and conditions that you’re willing to give a buyer impact what you can get for the parcel. Although this is particularly true with development property, the contingencies (or lack of them) also have an effect on the price that’s ultimately negotiated.
The sellers need a longer settlement date because they’re moving into a home that’s being built. In accommodating the sellers on the closing date, the buyers may gain some leverage in negotiating a more favorable price.
Conversely, sellers who afford home buyers with mortgage, inspection and other contingencies should realize the top sale prices for their properties.
The development property’s value is greatest when the seller agrees to contingencies that give the buyer the opportunity to explore “what if” scenarios.
However, sellers should not blindly grab the offer that has the highest price without doing some investigation both about the buyer and the development scheme that’s being proposed. The buyer may want to pursue a pie-in-the-sky idea or one that’s only remotely possible of being approved by the municipality.
It could be damaging to the sellers to take the property off the market only to have the deal fall through months or years down the road because the buyer couldn’t satisfy the “what if” contingencies in the purchase contract.
If you do make additional money using the property for whatever reason, the value of your property is obviously worth more.
Here’s a guy making an extra $350,000 a year 1.5 acres of land.
If you want to maximize the sale price but don’t want to wait months or years to get to closing or a lot of risk, you may be looking at selling only to home buyers. Undoubtedly, if you have to sell fast, then your ideal buyer is someone interested in living on the property.
On the other hand, if you didn’t care how long it took to get to closing or what contingencies you gave the buyer because it was more important to you to get the highest price, then you should probably explore the developer or builder market.
Before you go running off in search of a builder to purchase your property, however, you should hire a real estate attorney who’s experienced in representing owners or buyers of real estate for development.
back to top
Without a doubt, the single most important thing to know about a development property you’re thinking of buying is its zoning. That’s the starting point for your evaluation because it tells you how you can use the property.
By enacting land use laws, state legislatures delegate to local governments the power to regulate development within their borders.
This regulation takes the form of local and county zoning, subdivision and other ordinances that implement the municipality’s overall land use plans and objectives.
Land development laws vary not only from state to state but also among municipalities within each state, so there’s no “one size fits all.”
The zoning ordinance contains classifications intended to cover different categories of residential, commercial, industrial, institutional, office, agricultural and conservation uses and the accompanying zoning map shows the geographic boundaries of the zoning districts.
To determine a parcel’s zoning, locate the property on the map and then review the ordinance (both of these documents are available at the municipal office).
You’ll find provisions for use, dimensional, area and other requirements listed under each of the zoning districts.
There are also general provisions that apply to every classification dealing with issues like non-conforming lots and uses, accessory structures, flag lots, fencing, signage and minimum lot frontage requirements. You should always read the chapter on definitions since it will help you understand the terminology that is used throughout the ordinance.
Uses listed in zoning districts often include those that are permitted “by right” as well as conditionally. For example, single-family detached dwellings, agriculture and governmental recreation areas are permitted in one district.
These are listed as by-right uses so they don’t require any zoning approval. Privately-owned riding academies, public or private day schools, 18 hole golf courses and places of worship are also permitted in that district but only when authorized by the municipal zoning board as a special exception.
These “special” uses are not permitted automatically. To get the special exception, you would have to demonstrate that your use falls within those defined in the ordinance and that it complies with any use-specific requirements, such as minimum site area, building coverage, buffering and parking.
“Rezoning” and “variance” are often used interchangeably, but they are not at all the same. A change of zoning is just that – the zoning of a property is changed from one classification to a different one.
Municipalities are not required to change a property’s zoning (absent a law or court order), so rezoning a property is not a slam dunk. In fact, depending on the state’s laws, the governing body may not even have to grant a hearing on the rezoning petition or justify its decision to deny it.
A variance, on the other hand, is relief from some zoning requirement. It modifies an ordinance provision as it applies to a specific property for a specific reason, but it doesn’t change the underlying zoning classification of that property.
To get a variance you would have to show the municipal zoning board that an unreasonable hardship (one you didn’t create in the first place) would result if it weren’t granted. You won’t get it, however, if your only argument is that you’d lose money, because the hardship has to be something other than economic.
A classic example of a situation in which a variance would be granted is where the parcel has some physical characteristic that would make it impossible to satisfy zoning requirements. Suppose, for example, that you wanted to build on a 100’ x 200’ parcel and the zoning required front, side and rear yards of 60’, 20’ and 80’, respectively.
Below is a video by Yale Professor Wargo discussing Land Use Law and Property Rights.
This means that the structure would have to be located within the “building envelope” which is the area of the lot after measuring off those setbacks. But the right side of the parcel drops off sharply and the steep slopes cut the building area in half.
The back third of the lot is relatively level, but most of this area lies outside the building envelope. Reducing the rear yard not only would create a building area large enough to accommodate your structure, but it would also be the least intrusive solution to the problem. So in this situation, the municipal board would probably give you a variance to allow the structure to encroach slightly on the rear yard.
Finally, some words of caution. Zoning and other municipal codes are available online. Don’t rely exclusively on this information.
Go to the municipality and review the ordinance or zoning map to make sure you have the most current and accurate information. And always page through the entire ordinance. Amendments that have been enacted are often printed in the back of the book without cross-referencing the provisions that have been changed.
There are many ways to develop real estate, but if you’re doing something more than renovating a fixer upper, like making structural changes, etc… you’re going to be needing permission from the city to move forward on your plans.
Before you can subdivide or develop a property, first you’ll have to submit plans to the local government for review and approval.
This happens in stages and can be a lengthy process depending on how complex your plans are. Again, this more for developing land than for rehabbing a fixer upper house.
You won’t need the city’s permission to fix a roof, redo the walls, carpeting, overhaul the yard, or to repaint a house.
But if you’re adding a room, knocking down a wall, building a garage out back, turning your downstairs into a mother-in-law apartment, or adding square footage of any kind to your house, then you will need to go through the city first.
Land Developing, Subdividing, Zoning Approval Process
As we mentioned in our article on real estate zoning, your engineer will prepare the plans in accordance with the requirements of the applicable subdivision and land development ordinance. This ordinance contains provisions relating to a variety of issues.
These include construction and design standards for public site improvements (e.g., streets, curbs, sidewalks, parking spaces, landscaping, utilities and drainage), safety concerns (angles at intersecting streets and lighting), and general matters such as data to be shown on the plans, scale, paper size, and submission deadlines.
The plans are scrutinized by a group of people and agencies. First on the list is the municipal engineer who, after examining the plans to make sure that they comply with all applicable ordinances, issues a review letter setting forth comments and recommendations.
In addition to the engineer, typical players in the approval process consist of local/county land planning agencies, water and sewer authorities, state environmental and transportation departments, and the municipal manager and solicitor.
The review letters generated by these people provide the structure for the discussions between you as applicant and the municipality, and this is an ongoing dialogue frequently marked by give and take and negotiation on both sides.
Although the ordinance specifies the number of plan submissions that must be made, usually these consist of 3 separate plans. The Conceptual or Sketch Plan shows the proposed layout or development and the relationship of the property to its immediate surroundings.
The benefit of preparing this plan, even when it’s not required, is to give the municipality an overview of the development on one sheet of paper. This plan can be used to address some basic issues like the location of the entrance to the development, alignment of proposed and existing streets, and existing features that may impact how the project can be configured.
The Preliminary Plan actually consists of a set of very detailed plans drawn to scale. These depict all of the basic existing physical features of the site (such as soil types, topography, floodplain, vegetation, wetlands, surveyed boundaries and existing structures).
Your engineer would then prepare a series of overlays illustrating exactly how the parcel is to be carved up or developed. So, for instance, the plans would show the boundaries of proposed lots and building envelopes, parking lots and structures, locations of new streets and utility lines, regrading and landscaping, and management of storm water to prevent flooding and erosion.
In short, the Preliminary Plan shows on paper how the property looks now and what it would look like when developed. The Final Plan contains all of the data on the Preliminary Plan together with revisions necessitated by comments from the reviewers.
The decision-maker is usually the governing body of the municipality. (This depends on the provisions of the particular state land use laws.)
In addition to public meetings held by the elected officials and the planning commission, private informal meetings or work sessions can frequently occur between the municipality and the applicant to brainstorm concepts, problems and solutions, discuss review comments, and negotiate terms and conditions of approval.
Each municipality is unique and the cast of players changes over time. Relationships and mindsets color official actions. Often the process takes on the appearance of a “board game”. Attempts by applicants to progress around the board towards their goals seem to be thwarted by waiting for review letters and responding to them, or by spending time, effort and money revising and resubmitting plans.
The length of time from application to Final approval varies widely, ranging from a couple of months to several years. Factors that impact the timeline include the preparedness of the developer team, the frequency of municipal meetings, the proposed development itself, public opinion and finally just plain politics.
The elected officials examine the plans, take review comments into consideration and vote to either grant or deny approval. Under the applicable laws, development applicants have certain rights and protections.
For example, when the governing body grants approval of your Preliminary Plan, you may be guaranteed approval of the Final Plan on the same terms and conditions that were imposed at the prior approval stage. In other words, the municipality gets only one bite of the apple, so it cannot raise new issues or conditions at final approval that it didn’t impose when it granted preliminary approval.
The particular state law might also provide that once you had submitted your Preliminary Plan and while it was in the review and approval process, the municipality could not require your property to conform to changes in the zoning and subdivision ordinances that were enacted after the date you submitted your plan.
Approval conditions usually range from minor revisions of plans to major considerations such as your having to obtain approvals, waivers or permits from other reviewing agencies. One condition will likely involve a contract between you (or the builder you sell to) and the municipality requiring that security be posted.
This insures that the local government will have the funds necessary to complete installation of the public site improvements in the future if the developer becomes unable to do so. Once this and all the other approval conditions are satisfied, you should be able to record the plan in the county courthouse, apply for building permits, and actually start installation of improvements and building of structures on the property.
Interested in real estate investing? If so, you have to ask yourself “What kind of investor do I want to be?”
You also have to factor in some other things like:
Do you want to be a landlord?
Do you wand to develop a piece of land and build on it?
Do you wand to “flip” properties by buying undervalued properties, fixing them up, then selling them for a quick profit?
Do you want to get into commercial real estate?
Do you want to buy apartment buildings?
Do you want to buy condominiums?
Do you want to buy single family homes?
Do you wand to buy land and rent it?
There are many things to consider and most of it will come down to the time you are able to commit to this endeavor and the funds you have access to.
If you were to guess that buying a home is not like buying a parcel of land, you’d be right – and you’d also be wrong.
Although the house purchase is different from the land transaction, it’s actually the same in certain key respects.
Buying plots of land to develop will require in-depth knowledge of the local real estate zoning laws. So make sure you or your broker go over every potential investment with a fine tooth comb.
The reason is there are a couple of critical principles that apply to all types of property – houses, land, retail centers or whatever – and they can have a big impact on a property’s value and its market appeal.
“Location, Location, Location” is the #1 Rule in Real Estate Investing
Any true real estate investor will tell you that there are 3 cardinal rules for investing in real estate and they are- “Location, Location, Location.”
Nothing else really matters if your investment isn’t in a good location.
We’ve all heard that location is THE most important thing about a property, but why is that true? You can demolish or add onto the house or maybe even pick it up and move it (although that’s expensive and often not feasible), but you can’t pick the land up and move it.
It’s the land that gives the property its location, and location is the only thing about a property that you can’t change. It determines how the property can be used (zoning), visibility and accessibility to public utilities, and it has a positive or negative effect on value based on the surrounding properties.
Property Value Is Really All Relative to Use
If it meets your needs and requirements, then that’s the first step. Simply put, if the property matches most of your needs and wants, it will be more valuable to you.
As an analogy, how often have you walked into a store and bought something you couldn’t use or didn’t really want only because you thought the price was ridiculously low? Would you have paid a lot more for it? Probably not.
A corollary of this principle is that the property’s inherent value increases if the property can be used by many potential buyers or categories of buyers. Suppose you’re thinking about buying a building lot that has a stream running through its front yard.
Your builder tells you he’ll have to put the house on the far side of the stream and the driveway (about 200’ long) will have to cross the stream. The cost for all of this work will be about $30-40,000.
That driveway could cost you more than the initial $30,000 over time in maintenance, repairs and resurfacing.
However, something even more important should make you hesitate. Someday when you try to sell the property, you could discover that most buyers won’t want the property because of the stream and driveway or they’ll offer you much less than you want for it. Now what’s this property worth to you? When you sell, you’ll probably have to discount the price or wait a long time for the “right” buyer to come along – or both.
Value = Price + Terms
So the best place to start off in real estate investing, if you’re just getting started, is in your neighborhood. If you’re interested in straying outside of your comfort zone, then try searching for a good city like one found on this Business Insider list.
Ultimately, buyers determine what a property is worth, but an offer is much more than just price. It’s a set of scales with price on one side and terms and conditions on the other. The real value of any property is the price a buyer is willing to pay in exchange for terms and conditions.
You want to buy that building lot with the stream running through it. Public water and sewer aren’t available and the seller hasn’t had the property tested to determine if some type of sewage disposal system would be approved by the county health department
You need to know if the lot is buildable. You don’t want to spend the money for testing unless the seller accepts your offer and you don’t want to have to buy the property if you can’t get a building permit.
What you might do here is give the seller an offer contingent on your being able to get the property approved for a certain type of sewage system and anything else you’d need in order to get a building permit.
You’d be more likely to offer the seller a higher price if the seller would agree to these conditions than if the seller wanted to sell “as is.” Sellers who get the highest price usually have to give the buyer favorable terms.
Buyers who want the lowest price will have to forego most if not all of their contingencies. The seller’s willingness to assume some of the risk and give the buyer time to satisfy conditions is as important (and sometimes even more important) as price in development property transactions.
Buyers Are Sellers
Before you decide to buy a property, you should evaluate it as objectively as possible. Put it under the microscope and try to identify objections that buyers in the future might have when you go to sell.
In short, when buying, think like a seller because some day you will be one. Whatever you buy should have appeal to the widest segment of the buyer market, and remember that there’s no substitute for a good location.
A good location is one that enhances the property’s value relative to the intended use. For instance, when builders purchase land for residential development, they take into account factors that will reduce the property’s appeal in the eyes of the end users (homeowners), such as location on a busy street. On the other hand, if they want to develop a property into retail space, visibility and high traffic counts are critical.
Don’t Over Improve Your Real Estate Investment
The value of residential property is generally defined by the uses and sale prices of neighboring “comparable” properties – those having the same characteristics as your property.
Investment property value (including land) is tied to the income or profit that the property can produce, either immediately or down the road. Value won’t increase in direct proportion to the cost of additional improvements if surrounding property values are equal to or less than the property’s value without the additional improvements.
For example, you live in a subdivision of homes that have two-car attached garages and sell for $250,000. Four years ago, you had a three-car detached garage built in your back yard because you wanted more garage space. Now you’ve got your property up for sale for $300,000.
Even if you find a buyer willing to pay your price, the buyer’s lender will have an appraisal done to make sure that the property appraises for the purchase price. The ideal buyer in this situation would be someone who wants mega garage space AND can either pay cash or doesn’t need a mortgage for more than 80% of the purchase prices.
Making money in real estate investing is glorious, but it won’t happen until you put some hard work into understanding all the fine print.
As buyers and sellers, you should be aware of your rights and responsibilities relating to disclosure of property conditions.
These exist because of laws enacted by Congress and state legislatures and from principles that have evolved from case law or court opinions.
Where you plan to invest, know that different states have different laws.
Many states have adopted laws requiring property sellers (record owners as well as equitable owners) to provide buyers with a written property disclosure statement or report prior to the signing of a purchase contract, regardless of whether or not they’re using a real estate agent or broker.
Why aren’t the real estate laws the same in every state? Although the requirements vary from state to state, the report typically contains questions about the existing structures and major systems, such as the basement, roof, plumbing, heating and electrical.
From the sellers side, the seller may have to disclose whether there are areas of wetlands and floodplain on the property, excavation and fill, underground storage tanks, etc…
Also they should disclose things like hazardous substances, defects and dangerous conditions, and issues that could affect title (e.g., boundary disputes, encroachments, easements, common driveways, judgments and liens).
The particular state law spells out types of property transfers that are exempt from the law – such as transfers through probate, foreclosure and divorce – or certain categories of properties, like commercial and multi-unit residential.
Are you investing in real estate? If you’re a buyer, you ought to consider attaching the disclosure statement to your purchase contract and incorporating it by reference in the contract.
By using a clause like “The property disclosure statement dated ____________is attached hereto as Exhibit ‘A’ and incorporated herein by reference”, the disclosure report may become part of the purchase contract, just like any other provision in the contract. Doing this could improve your chances of terminating or renegotiating the purchase contract if it turned out that something in the report was inaccurate or not true.
In addition, it would flush out situations where the seller was not being truthful in the disclosure statement. So, if a seller refuses to allow the disclosure statement to become a part of the purchase contract, that should tell you that perhaps the seller is trying to hide something. If a seller refuses to give you a disclosure statement, you should probably run away from the property as fast as you can.
In addition to property disclosures required by specific state laws, sellers may have to disclose any “material facts” that they have knowledge of relating not just to the property itself, but also to the surrounding area.
This is a gray area and may vary from state to state depending on specific rulings that have emerged from individual lawsuits and you should consult your attorney for guidance. For instance, in some states sellers may have to disclose if a violent crime or paranormal events took place on the property, while in other places, there is no requirement to do so.
However, you should always choose to disclose. If you have to ask the question “should I disclose?” then chances are, you should. I’ve always defined “material fact” as any fact that could be relevant to a buyer’s decision to purchase.
It doesn’t matter if the seller doesn’t think it’s relevant so long as reasonable people could agree that the issue or question could be of concern to the buyer in some legitimate way.
For instance, if there’s a property owner attempting to force the local government to permit a large quarry operation. This has been well-publicized with yard signs all over the area saying “ban the quarry.”
It’s recommended that some owners whose property is very close to the quarry property that they disclose the existence of this situation to potential buyers.
Suppose a seller knew that the state department of transportation intended to put a turnpike exit ramp down the road, or that there was a sewage treatment plant around the corner, or that the property across the street was going to be developed into a school or apartments or whatever.
They should disclose those facts because they could easily be considered “material” to the buyer’s decision to purchase.
Maybe the buyers wouldn’t back out of the deal even if they knew about these conditions, but the point is that they have the right to be told about them and then to make their decision with those facts in hand. Aside from avoiding potential lawsuits, there’s another benefit to disclosing: a good night’s sleep.
If you do eventually buy a rental house, then make sure you know that tenants have rights. Many states have areas called “rent control” which puts a cap on just how much you’re able to raise the monthly rent on any given tenant.
Every kind of real estate derives its value from four characteristics: demand, supply, utility and transferability. Demand is the need or want.
Supply is the quantity that’s available either immediately or in the foreseeable future. Utility is the property’s real (or perceived) capacity to satisfy the need or want. Transferrability is the ability for ownership of the property to change hands.
Obviously, value tends to rise where supply is short and demand is strong. A property’s utility, however, is often determined by perception and not reality.
For instance, buyers might purchase a property because they think it will meet their needs, even if it really can’t. Even if supply, demand and utility favored higher prices, a property’s value will be depressed just because the title to it couldn’t be transferred.
Suppose a builder is pre-selling home sites. He’s in the process of subdividing a parcel in a desirable location into 30 lots and six of them back up to open space. Buyers would quickly snap up those six home sites even if the builder charged hefty lot premiums for them.
However, the picture would change dramatically if the municipality imposed a two-year moratorium on issuing building permits. This would mean that no new houses could be built for two years (unless the building permit had been obtained before the moratorium went into effect).
The six lots backing up to the open space still have a desirable location, but the market for them would now exclude all of the buyers who wanted or needed to have their homes built in the near future. The lots could only be used by buyers who could afford to wait for two years. The value of the home sites would drop because their utility (usefulness) had substantially decreased.
The same result would be achieved but for a different reason if the municipality decided to stop approving subdivisions for two years. Buyers wouldn’t be able to get title to the individual lots because the builder wouldn’t be able to get the parcel subdivided until the subdivision ban was lifted.
The value of the prospective lots would plummet because they couldn’t change hands – they lacked transferability.
Why Location Is Key in Real Estate Investing
We’ve all heard about location, location, location. But why is it so important? The answer is very simple: location is the only thing about a property that you can’t change. Wait a minute, you say. That’s not correct because you can move the house. That’s true – maybe.
Look at the houses below. Quick. Is this a good location or a bad location?
It’s often not feasible physically or economically to pick a structure up and move it. The operation may require negotiating such modern obstacles as overpasses and wires in addition to tree limbs, hills, streams and gullies. It takes a long time to move a structure a short distance, and it’s not cheap to do.
But even if you can move the house, you can’t change the property’s location because you can’t pick the parcel up and move it. It’s the land that gives the property its location, not the house. The house isn’t permanent – only the land is. So for better or worse, you’re “stuck” with a property’s location.
What makes a location good? The answer depends on the intended scenario for the parcel. Commercial uses, such as retail and office facilities, thrive in areas that have high visibility and traffic and easy accessibility through public transportation.
Neighbors like power lines and water towers don’t negatively impact the value of these properties. On the other hand, sale prices of single-family homes are more sensitive to locational challenges such as train stations, busy roads and shopping centers.
Location has to be scrutinized differently and to some extent, more rigorously where residential uses are involved. The criteria for good and bad locations changes when home buyers are choosing where to live.
While a good location can’t necessarily overcome every negative about a property, it can go a long way. In addition, a parcel’s location determines many things, including the current zoning, the types and values of properties in the immediate area, and the proximity of public utilities.
And if you’re thinking about developing a property, these issues can mean the difference between success and failure so a quick scan over at realtor.com or zillow can give you a good idea where your potential investment is
Importance of Screening and Evaluating Land
Sometimes a property you buy has things on it that you didn’t realize at first. This video below is from a guy who bought a piece of land at an auction and discovered (through use of a drone) that there was an abandoned house on it. Watch video below-
Some builders and developers search for residential development property strictly by geographic area. Others search for land parcels that would enable them to reach specific buyer sub-markets (housing type, price range, lifestyle, age group).
Either way, builders begin the investigation by casting the net into their areas or markets of choice and sifting through potential acquisition candidates. They have to pick through dozens of sites before they find one they think they can develop profitably.
Sometimes they can tell quickly if a property is worth pursuing further. More often, however, they don’t know this until they spend varying amounts of time, effort and money collecting information about a parcel.
They spend their resources on investigating critical questions and often have to obtain answers to them in relatively short periods of time. Land buyers need to focus on everything that might impact and restrict how the parcel could be developed profitably.
Literally and figuratively, the range of issues involved covers a lot of ground. It includes, for instance, all of the property’s physical characteristics (such as soils, floodplain and topography), uses permitted by-right and by special exception or conditional use under the current zoning, those that may be possible given changes in use, prohibitions and limitations imposed by private land use controls (e.g., deed restrictions and restrictive covenants), development costs, and the location, availability and capacity of existing public utilities.
Most of what land buyers need to know about a property isn’t visible or readily apparent, so due diligence is a critical component of their evaluation process. Their research begins with their introduction to the parcel (if they decide to purchase it) and it methodically, persistently continues through the day of closing.
back to top
If you’re into real estate of any kind, here is a list of common real estate investing terminology.
Accessory Structure- building other than the principal structure that is used for purposes incidental to those of the principal structure; e.g., garage, barn, storage shed
Acre- unit of measuring land, equivalent to 43,560 sq. ft.
Appraisal– detailed document giving an opinion of value of real estate using uniform standards of practice and accepted valuation approaches; it is prepared by an appraiser possessing requisite certification, education and field experience; some jurisdictions permit individuals without any type of real estate license to be certified as appraisers
Building Envelope- that area of a parcel remaining after marking off the front, rear and side yard setbacks required by a particular zoning classification; portion of the parcel within which a structure can be built
Building Lot- parcel of vacant land separately deeded and having all the approvals necessary
Comprehensive Plan– document used by local, county and regional bodies in the land planning process that contains a statement of objectives, projections and short and long-term planning strategies and goals
Conditional Use– use allowed by municipal governing body in accordance with specific standards and after a public hearing
Deed Restriction– any written provision that places limitations or conditions on some aspect of use of the property, such as size, location or height of structures, materials to be used in structure exterior, activities carried out on the property, or restrictions on future subdivision or land development
Due Diligence- any process used to conduct research and investigation
Easement– conditional or qualified right granted by one property owner to permit another to cross or use the property for a specific purpose, such as the construction of a driveway or the installation of signage or utility lines; title to the easement area is not conveyed to the recipient of the easement
Equitable Owner- person or entity acquiring by contract an ownership interest in a property but not the actual title to it, as in buyers prior to the date title is transferred but subsequent to the full signing of a purchase contract
Flag Lot– lot lacking the requisite minimum lot width or frontage on an existing or proposed street, having direct access to the street through a narrow leg or land; sometimes known as a “land lot”
Final Plan- the subdivision or land development plan as to which final approval has been given by the municipality and other reviewing agencies
Floodplain– land areas adjoining streams or ponds subject to being flooded over some period of time (e.g., 500 years, 100 years, 10 years, etc.); in land development, usually taken to mean the 100-year flood
Frontage– the width of a parcel running along an existing or proposed street
Governing Body– officials elected by residents of a municipality whose powers and responsibilities are defined by state laws
Improvements– used in land development to include curbs, sidewalks, streets, storm water management, utility systems – everything on or off site except the building of structures
Land Development & Land Development Approval– synonym for subdivision or construction of a property; municipal and other approval of plan for the future development of a parcel that is kept as an entirety and not subdivided into individuals lots (typically non-residential property)
Land Planning– process undertaken at local, county and regional levels of government to project and provide for future land use needs on a broad range of issues, such as housing, commercial and other non-residential facilities, roads and transportation, schools and utilities
Lien– monetary right or interest in real estate held by one other than the owner of the property – e.g., mortgage lien
Moratorium– stoppage of some regulated activity by a governmental agency imposed in government’s exercise of its police powers to protect the public health, safety or welfare
Non-Conforming– a lot, structure or use that does not comply with the current zoning requirements but which was legal under the prior zoning; e.g., a 50’ wide lot in a zoning district that used to permit 50’ lot widths but which now requires 100’ of frontage on a street
Ordinance -law enacted by local governments
Planning Commission- common name for the municipal, county and regional planning bodies charged with formulating policies, strategies and recommendations concerning land use of property in their respective geographic areas
Preliminary Plan– in some jurisdictions, the first set of land development or subdivision plans submitted to a municipality in the approval process
Record Owner– owner named in a property deed whether or not it is recorded in the jurisdiction in which the property is located
Restrictive Covenants– any written provision that places limitations or conditions on some aspect of use of the property, such as size, location or height of structures, materials to be used in structure exterior, activities carried out on the property, or restrictions on future subdivision or land development
Rezoning– change granted by municipal governing body of zoning classification of a property
Setbacks– collectively, the areas of the front, rear and side yards of a parcel, the dimensions of which are defined by zoning classification in the zoning ordinance, where buildings are not permitted to be placed or constructed
Sketch Plan– to-scale plan of a parcel, prepared to illustrate a concept or development configuration; sometimes required as the first step in the subdivision and land development approval process
Special Exception– use allowed by municipal zoning board in accordance with specific standards and after a public hearing
Subdivision– the act of dividing a parcel into two or more separately deeded parcels so that title to each of them may be conveyed independently of the other; subdivision approval is the official permission granted by the municipal governing body to the dividing of the parcel and enabling the owner to record the plan of subdivision in the county courthouse
Subdivision & Land Development Ordinance– law enacted by a municipality regulating the subdivision and development configuration of property; deals with design standards for improvements and generally, everything that will have to be done to the property except the building of vertical structures
Subdivision Plans– collectively, a set of plans submitted by the applicant for subdivision approval; alternatively, the first sheet in the set of plans that is recorded after all of the municipal requirements have been satisfied
Topography– contours of a parcel measured in feet above sea level
Variance– relief granted by municipal zoning board from some requirement of a zoning ordinance as it relates to a specific property, such as a change in requirements for setbacks, height or lot width
Wetlands– environmentally sensitive areas of a parcel possessing the statute-defined conditions of vegetation, soil and hydrology
Yard- unoccupied space on a lot; front, rear and side yards are those areas measured from the front, rear and side boundaries respectively of the parcel, as defined by the zoning provisions for that zoning classification, where structures cannot be built
Zoning– function of government’s police power to regulate, restrict and control the use of land within its jurisdiction
Zoning Classification– defined category of land use; e.g., Village Commercial, Highway Commercial and Regional Shopping Center might be names of zoning classifications used for sub-categories of commercial use while R-1, AG and C Residential would apply to types of residential use
Zoning District geographic boundary on the zoning map of all land area having the same zoning classification
Zoning Map map showing the boundaries of zoning district in a municipality
You own a property that has “prime development potential” written all over it. It’s got everything – great location, public utilities nearby, and zoning for a use that’s in demand. The market’s really hot and developers are contacting you every day to ask if you’re interested in selling. So you ask yourself “why sell now?” If you wait, you’ll get much more for the land – right?
Maybe and maybe not. How much you can get for the property 3 or 4 years from now could hinge on issues that have nothing to do with interest rates and market conditions. The second most important rule in real estate (and especially with development property) is that value is relative to use.
The future value of your property can dramatically increase if events occur to make it more desirable to potential buyers. Conversely, your land could be worth much less in the future if things happen to decrease its utility to buyers. Simply put, time can either work for you or against you.
Higher Future $$$
With a little luck, your parcel could be in just the right place at the right time – like an area that’s been targeted for growth. A cross-county expressway is in the works as the result of years of planning at the state and county levels, and your property is along the corridor of the proposed highway. The local government is updating its master or comprehensive plan and decides that properties in this area should be zoned to permit more intensive development.
Perception becomes reality. Residential and commercial developers zero in on the area. Soon plans emerge for housing developments and major retail and commercial facilities (a regional mall, shopping centers, theme parks and office campuses), and public utilities will be extended or expanded to handle the growth that’s expected to occur in this area.
Sit back and enjoy the ride. You could see a substantial rise in the value of your property because of these anticipated changes. But stay on top of events to make sure that you sell before the area reaches its peak.
Lower Future $$$
On the other hand, the passage of time can bring changes that either limit how your property can be used or impact its economic or physical feasibility for development. Local, county and state governments have the power to enact laws that prohibit or suspend a particular activity such as development or review for a specified period of time to allow a condition to be corrected or a change to be put into effect. These “moratoria” can last weeks, months or even years.
Suppose your property is in an area that has been exploding with development. Builders have bought up virtually all of the available sewer permits. The local government imposes a moratorium and stops issuing any more sewer and building permits until the existing sewage treatment plant is expanded or a new plant is designed, built and put on line.
Either way, development could be put on hold for years because only the properties that have sewer permits can be built out. You’d have a hard time finding buyers after the moratorium went into effect because builders wouldn’t be interested in tying up resources on a property they couldn’t develop for the foreseeable future. If you couldn’t wait to sell, you might have to cut your price by 30-50%.
Next week, your local government might decide that it wants to change the zoning classification of your property and it would set the wheels in motion to make the change official in a matter of months. Or it could adopt amendments to the ordinance that would increase the minimum lot size or reduce the allowable density of development for properties in a particular zoning district. Once these changes went into effect, the inherent value of the affected properties would drop to correspond with the decrease in their projected yield.
Changes to the subdivision and land development ordinance could have the effect of increasing the cost of site improvements and decreasing value. Development potential of properties that don’t have access to public sewer would be severely impacted by passage of tougher approval standards by state or county governments for on-site sewage disposal systems. These regulations determine not only the type of disposal system permitted, but ultimately the number of lots.
Land development approvals and permits don’t remain effective forever. Laws of individual state, county and local governments dictate the life of these approvals. You decide you want to subdivide and sell your property, and you get final approval from your town government of a plan for 10 lots. A couple of years go by before you get an acceptable purchase contract from a buyer.
During the due diligence period, the buyer finds out that time has run out on the subdivision plan that was approved. It’s no longer valid so the buyer is going to have to start from scratch and submit a new subdivision plan. The worst of it, however, is that over the past few years, the town has enacted changes in the subdivision or zoning ordinances. These changes now apply to your property and they adversely impact the economic feasibility of developing it. Your buyer wants out of the deal unless you’re willing to renegotiate price and terms.
Events don’t happen overnight. There’s a time lag between when ideas, proposals or plans are formulated and when they’re finalized and ready to be put into effect. So you need to project into the future and then work back from that to determine the timing and length of your window of opportunity to sell your property. In short, know when to hold and when to take the money and run.