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Land Development 101

Investing in real estate doesn’t always mean you’re buying an existing building, or even constructing a new one for that matter. One of the many niches in real estate involves buying on a much simpler level – the land. Land development can be one of the most lucrative areas for a property investor. Some of this country’s foremost communities have been created by successful real estate entrepreneurs who built their fortunes by subdividing and developing tracts of land. Think of Las Vegas, it’s one of the nation’s most prosperous land developments and its origins can be traced to the concept and foresight of one single developer.

So before you go and build your own teeming metropolis, take a look at some of the basics of land development. Making sure you’re familiar with the industry and its terminology will help ensure your project gets off the ground successfully.

Location Logistics

Whether you plan to purchase your property to hold, subdivide, build on or any combination of these, the first step is determining where to buy. Performing your due diligence is going to payoff big in the long run. If you’re planning to use your property for a residential development, check out the neighborhood. Are the surrounding areas synergistic to this plan? Are there other neighborhoods and are they at the same price level you’re considering? Are there good schools nearby? Or if you’re planning commercial development on your property, is there adequate traffic flow? How are nearby businesses performing? Is there a glut or a shortage of inventory in the market for what you had planned? Knowing the strengths and weakness of the location will help you understand what development is most like to succeed on the property.

Show Me the Money

There are almost as many ways to finance for land development as there are development projects. You may get your money from private investors interested in your project, or a more traditional private loan from a bank. Either way, any lender will be basing your loan on several things – value of the land “as is,” projected value of the finished project (if you’re planning to build), credit history (both personal and as it relates to previous investments), and most will want to know what your exit strategy will be – in other words, how you’re going to get this development sold and ultimately make your money back.

Buy and Hold

Probably the most passive approach to land development is the buy and hold strategy. If this is your plan, you will be doing exactly that – buying a property and holding onto it until a later date when you are ready to sell (hopefully for more than you originally paid). There is one major point to consider before taking this route: Will the land appreciate in value over time? Two examples of land that tends to appreciate without your development are location based properties such as those that are waterfront, adjacent to a ski area, open space or other desirable and scarce amenity and properties that have increasing surrounding infrastructure and are in the path of growth. Property that is on the water, open space or is in some way highly desirable tends to remain so over time as more and more people compete for those locations. These property values tend to rise faster than those in less desirable locations, so the buy and hold tactic often works well there. Land that is near growing infrastructure, such as a new road extension or that is directly in the growth path of town also tend to appreciate faster than the overall market. Timing however, is everything as a vacant parcel on the edge of town may sit for years without any prospects of a price increase, or the value may skyrocket within just months of the announcement of the arrival of a new employer to town. Land speculation is not for the faint of heart and often requires great foresight and patience.

Divide and Conquer

The other strategy is to force a price increase by developing the property for a higher use than vacant land. The most basic development is to just subdivide your land, meaning simply, to separate the property into parcels. If you only planned to buy, split, and resell, this is your only step of development. Since you are selling land not buildings at the end of the project, the market in the region will need to be quite good with vacant land at a premium. Your project should be located in a high-demand area such as an expanding downtown or located next to a high-end neighborhood experiencing strong sales. If you’re planning to build on the property, there are a few more steps involved. Once a large section of land is separated into smaller pieces, the segments can be developed for specific uses from single- and multi-family homes to office buildings, commercial retail, and schools. Subdivision laws and ordinances largely govern the process of land development, so it’s imperative for developers to understand the process of subdivision.

State and city laws dictate land use and have planning ordinances at the local level. In certain instances, some states don’t require local approval because of statutes that allow division of land by right, and subdivision can be done without much hassle, only having to create and record a deed with the clerk’s office.
In those area’s, armed with just a deed and a description of the land, any property can be subdivided. Even then, however, it is essential to ensure that your division conforms to governmental regulations, or the result could be that your newly divided property may be rendered useless for any further development such as building dwellings on it. Make sure to get proper clearance from the local zoning board in order to get the land correctly codified for your planned usage, as well as any other governmental authorities that have jurisdiction over the property. Working with your local planning office will assure compliance with zoning and subdivision laws and ordinances in the area, and ultimately help you avoid headaches down the road.

10 Steps to Land Development

So you’ve purchased your property and you’re ready to subdivide. Here’s what you need to know to get going.

Conduct a title search – Doing a title search will help determine possible issues that could affect your land and what the impact could be on your development plan. Performing your usual due diligence beforehand will save you potential problems in the future. Pay close attention to environmental issues, flood plains and other concerns that could spoil your plans and resale potential. You can get help with your search from your local title companies. Be clear with your title professional and let them know you’re planning a subdivision on your land, and be sure to get a full chain-of-title abstract that encompasses any easements, right of ways or other documents recorded against the title.

What’s your location? – Your first task once you’ve got your title is to determine where exactly your property is located. Is it in a township, village or city, or unincorporated part of the county? If you’re not sure, your local tax assessor can help since they have the most accurate and current maps.

Collect preliminary local information – You can get preparatory information on development procedures and ordinances from your local governing authority. Also check with the American Planners Association on their Web site at www.planning.org. Or just go pick up a copy – and a zoning map – at the planning department office.

Review ordinances and regulations – This is the long, tedious part – but also the important one. Go over all your paperwork and be sure to jot down any questions you may have on how the laws could affect to your project.

Get with your planning department – Once you understand the type of development you are planning, what your property can support, and what it will take to get approved, schedule an appointment with the planning department. Don’t forget to bring your list of questions, your title search results, a map of your land, and your basic concept plan for reference.

Conduct the meeting – Politeness and professionalism are the keys to a successful meeting. Keep in mind that the planning official you’re presenting to is trying to fulfill the needs of the community and will be looking for well-planned, well-presented ideas. This is your chance to make a positive first impression for both you and your project, so present your idea clearly and concisely, listen attentively to any suggestions, and get answers to your questions.

Keep in mind during this meeting that if you are to be a successful developer, you’re going to need to hone your negotiating skills and realize that everyone is not going to like all of your ideas all the time. Get used to criticism from time to time… some constructive and some not. If you want to be successful, you need to develop thick skin.

Create a formal plan – With the additional information obtained from the planning department meeting, it’s time to put together a more formalized plan and projected budget. You’ll need to engage the services of a land surveyor or land planner to assist in laying out the subdivision in accordance with governmental requirements. This will enable you to calculate how many lots – and their size and shape – your plan will create. Depending on the complexity of infrastructure requirements (for example, roads and storm drainage), you also may need to hire an engineering firm to develop plans.

Create a budget – When calculating expenses, it is important not only to include the hard costs of building roads and bringing in utilities, but also the administrative costs and fees assessed by local authorities. Be conservative in this phase, since projects of this type often cost more than initial projections. It’s much better to find out early that a project isn’t going to be profitable than to wait until after you’ve mortgaged the house and emptied the kids’ college funds.
Apply the same reasoning when calculating projected sales. Just because one empty lot sold in three weeks doesn’t mean that 25 more will. It is imperative that you base your business model on realistic sales prices and absorption rates (a measure of how long it will take the local market to absorb the new inventory that you create). In areas with small populations, even a slight increase in the number of properties on the market can have a significant impact, whereas in large metropolitan areas, new developments may not cause a ripple.

Before going on to Step 9, make sure your plan is well funded, with all needed money lined up. Don’t forget any requirements to post performance bonds or make contributions to government agencies prior to receiving the final approval for your subdivision. Realize that most development failures occur because they are under-funded.

Prepare the subdivision application – With budget prepared, you can put the subdivision application together and submit it for approval. If you are not comfortable with the legal documents, consider hiring a real estate attorney with experience in subdivision and development work to assist you in this step.

Prepare your communications plan – If your project will require public hearings, pay special attention to the neighbors and politely talk to them about your plans in advance of the formal notice of public hearing. Since each person will view your plans from a different point of view, it’s wise to listen to any objections now so that you can resolve them in advance or, if that is not possible, be better prepared to make your case at the hearing.

If you are uncomfortable or not particularly effective with public speaking, find someone who can attend the meetings with you and act as your spokesperson. Whenever possible, it is better to be your own advocate, but it is more important that your message gets delivered in a clear and focused manner.

The time frame for moving through the process from application to approval varies from community to community and by the complexity of the project. Large complex developments or projects in environmentally sensitive areas can take years to make their way through the process, while simple subdivisions that comply with local zoning plans can breeze through within weeks.

With a lot of work, a good plan and a little luck, you’ll receive approval and make the land development of your dreams come to life.