How to Buy Land with an Eye on Development

An empty lot can be a thing of beauty. It’s a like a blank canvas, an open field with limitless possibilities, ready to be turned into the perfect property.

At least, that’s how it looks through a certain lens. Change your angle and suddenly investing in undeveloped land starts to look like miles of red tape, an endless building process, and more money spent than you’ll ever be able to recoup.

If you buy an open lot, you’re going to find a lot of pros and cons, some of which you might not have expected. While you do get a little bit of freedom when trying your hand at land development from scratch, you’ll spend a lot of time and effort earning the right to build the project you envision. No matter how great your plan is, someone along the way will demand that you make it better.

If you don’t get discouraged and play your cards right, buying land can be a good investment. However, you won’t make it far unless you have a good grasp of how to buy land and work your way through the development process. Before you start location scouting, here are four things you need to know.

1. Location Outweighs Taste

Let’s say you have a really great design for an extraordinary house and you find a lot that’s the perfect size with all the utilities already in place. Even with so many things working in your favor, if the house you want to build will have a construction and property value that drastically exceeds nearby lots, don’t expect to get a loan or building approval.

Even if you plan to live in the house you build, permits are difficult to get when there’s a risk that the price will be too high for the land to be resold. A grandiose project also raises red flags for lenders, leaving room for doubt as to whether or not construction will ever get completed.

Two things always need to line up before you can acquire undeveloped land:

1. Location

2. Value

The home you plan to build can’t be too far off from what already exists in the region, even in rural areas where every property seems like its own county. It comes down to the financial realities of the area, no matter how big a check you’re willing to cut.

Because you can’t overlook the characteristics of the area in which you’re looking to buy, you don’t have as much liberty as you might like when it comes to land development concepts. In addition to superficial stylings, you also have to meet building codes and regulatory norms. Some places require gas hookups, even if you want to heat with an old-fashioned wood-burning stove. The height of a structure can be affected by everything from neighborhood guidelines to nearby commercial zoning.

Even if you meet every requirement on the exterior of your building, you don’t have carte blanche when it comes to the inside. It might seem a little ridiculous (and in some cases it really, really is), but every new building will have thousands of boxes to check in order to be approved by local builders, permitters, community members, and other associations. Understanding how these factors limit development possibilities is a major part of knowing how to buy land as an investment or for a new home.

I’m sure this sounds disheartening, but it’s a reality you have to come to terms with before you get too far into visualizing the dream home you want to build. If the house in your mind’s eye looks too different from the other houses on the block, you probably need to make some mental renovations.

2. You Need Help

I’ve worked with a lot of builders who became discouraged by the process of land development. They have all the know-how, connections, and financing to buy and improve land, and yet the process still presents too many challenges to make it worthwhile. Until you’ve bought, constructed on, and sold undeveloped property, it’s hard to know exactly how much work can go into investing in land.

For this reason, I think it’s essential to arm yourself with friends and associates who can help sort through the minutia and make sure you’re leaving no stone unturned. Few things are more disappointing than working tirelessly to put together loan and permit applications, only to have your proposal denied because of an uncrossed T or an undotted I.

As with any real estate purchase, you’ll want to start with a good and trustworthy agent. While your licensed friend might be able to help with an ordinary purchase, buying undeveloped land requires a delicate touch; you’ll want to find a realtor with the right experience and knowledge of your location to ensure you don’t end up buying land you can’t use or missing out on the perfect property because of a botched application.

When land has yet to be developed, the concerns go far beyond asking price and credit scores. Have you ever thought about sinkholes and other naturally occurring disasters? Have you considered local wildlife and what animals might come and go with the changing seasons? Do you know how far away the nearest hospital and fire department are? Any idea what the plans are for future freeways and school zones, or other nearby developments that affect the value of land? Do you know whether or not you can dig a well on the property?

Some of these questions can be answered by a realtor and many cannot. In my experience, you can get a lot more useful insight from an actual contractor who’s jumped through these hoops before. While real estate agents want sales to close, developers want permits to go through, and there’s a wide gap between those two motivations. If you buy an empty lot, whatever your intentions are for the project, you need to think through the entire process before the acquisition is complete. If you try to take it one step at a time, you might walk yourself right off the end of a very expensive plank.

In addition to working with contractors and builders, don’t skip the surveyors and environmental testers. Proper surveying lets you know the actual boundaries of the land, which could reveal that a neighbor built a fence 20 feet over your property line. The exact acreage will also inform what type of building you can erect. Different cities have different ordinances about what structures can go up on plots of a certain size. It would be a real drag to go through the process of buying land only to find out it’s 500 square feet too small and you aren’t legally allowed to build on it.

Environmental tests are just as important when it comes to zoning and construction issues. If you find out the soil has been contaminated by oil or a harmful chemical, running water may not be an option. No matter how much of a minimalist you are, it’s hard to have a dream home with no working faucets.

Bringing in the necessary experts can quickly drive up the expenses involved in land development, but it’s almost always worth the extra money. Any corners you decide to cut could end up costing you everything, as in all the money you spent to get the land is essentially lost if you aren’t able to make use of it. Buying undeveloped land never ends up being as easy as it seems; it always benefits you to play it safe and spend a little more upfront.

If you don’t know exactly how to buy land in a certain region nor who you should reach out to for help, try to find someone who’s been through the process before. Every mistake is a costly one when it comes to investing in land, so you’ll want to surround yourself with people who will help you get it right the first time.

3. Don’t Hold Your Breath Waiting on Land Development Loans

Lenders LOVE helping people buy homes. Real estate makes up just shy of 10% of U.S. GDP, and you can bet there’s no shortage of people looking for their slice of the pie.

That being said, people don’t lend for the love of lending, but rather for the love of getting lots of money back over time. If there’s a chance borrowed money won’t get paid back, purse strings suddenly become a lot tighter. With an existing house, it’s easy to determine the approximate value and prospective buyers have an easy time securing financing. When the parcel in question is just made up of grass and dirt, the value of the land is harder to estimate and bankers become much less excited about pending loan applications.

You can still borrow money to buy undeveloped land because lenders love making loans. However, you typically won’t get nearly as much upfront without the guarantee an existing building provides. Instead of 20% down and 80% borrowed, it’s much more reasonable to expect a loan of closer to 40% of the value of the land. That’s still a lot of cash, but it means you have to have even more ready to go.

Frankly, you shouldn’t be thinking about buying undeveloped land unless you have the means to buy it outright. The initial purchase ends up looking like small beans compared to the subsequent development costs. If you need help covering 60% of the land price, what makes you think you can afford the rest of the project? Maybe you had success flipping a property without spending your own money in the past, but that’s a much harder thing to pull off when you’re starting from scratch.

Aside from struggling to secure financing, you might also find yourself losing out on the properties you’d hoped to purchase. In the time it takes to get approved for a loan on a good piece of developable land, 10 or 15 buyers with suitcases full of cash will likely have swooped in and pulled the rug out from under you. If you can get pre-approved on a lesser percentage of the total you might have a shot, but buying outright is definitely your best hope. Then you can go about borrowing for construction once you’ve secured the deed.

Empty land is different from developed property in countless ways, and loan availability belongs at the top of the list. Keep that in the front of your mind as you start to shop around.

4. Opposition Is Everywhere

I’m not just talking about the competitive shoppers looking at the same land as you. After you have a bid accepted and you begin gearing up for development, everyone from your neighbors to city council members to local grade school teachers will line up to present their case for why your new property should not be developed.

In some cases, the opposition will have merit. If you want to build a house that increases a communal fire risk or ruins a sightline and diminishes other homeowners’ property value, people raising those concerns have every right to be heard. On the other hand, you’ll almost certainly deal with some bogus claims for why a new home will lead to endless noise pollution and ruin the lives of everyone living within 50 miles.

Craziest of all, you might get tricked by people living in the area. There are thousands of stories about people trying to get friendly with who they thought would be their future neighbors, only to later discover those neighbors were gathering information in hopes of building a case contesting building permit requests.

Because development has a significant impact on the surrounding community, it shouldn’t come as a surprise when you get pushback. And because city council members have any number of residents bending their ears and asking favors, some of the regulations will seem like they were specifically designed to impede your progress.

Construction is a battle, and it’s one you can’t really fight on your own terms. Like it or not, you’ll have to cater to a lot of people’s demands. Then, when the powers that be come along trying to shut down your efforts completely, you push back and hope someone with the right authority comes to your aid. The whole thing will be messy and tiresome, but that’s just how it goes. Buying land is no small matter, as Earth only has so much of it to offer.

Potential buyers benefit from analyzing every detail of a transaction while also staying tight-lipped about their plans. Don’t advertise your blueprints or say the word “development” in front of city council members. Make sure your project adheres to established guidelines and otherwise keep your head down as you forge ahead.

The price tag on an empty lot entices many a buyer, but it’s a mistake to think going after undeveloped land will help you score a cheap home. For every benefit that comes with your own construction project, there is an equal number of potential setbacks. Make sure you know what you’re doing – and the people around you know what they’re doing – before you set your sights on an undeveloped piece of property.

Make it happen!

Taylor & Megan Kovar

The Money Couple