Real Estate Investing Article Land Values
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.