Why Land
Why Land
People who invest in land for a living, like builders and developers, know that
following a couple of cardinal rules can mean the difference between having a
deal that's potentially viable and one that is a disaster in the making. Here are the
principles that influence their purchasing decisions.
Rule 1: Location
Location is the most important aspect of a property because it's the only thing that
cannot be changed. You can demolish or add onto a house or maybe even pick it up
and move it, but you cannot pick the land up and move it. Location determines not
only how the property can be used (zoning) and accessibility to public utilities, but
also the parcel's value based on the surrounding properties. There is no substitute for a
good location.
Rule 2: Value Is Always Related to Use
The value of land for development hinges on its ability to be used by buyers. A 10
acre parcel with substantial areas of floodplain, steep slopes or wetlands may produce
only one building lot. Its value will ultimately be determined by what a buyer can do
with it (i.e., build one house) and not by the number of acres it has.
Rule 3: More Target Markets = Higher Value
Value increases if the parcel can be used by many potential buyers or categories of
buyers. Several factors determine the market appeal of development land. These
include uses permitted under current zoning, location, availability of public or on-site
utilities, physical characteristics, and legal restrictions. Suppose you're thinking about
buying a property that abuts a pig farm. It has everything you want, including a cheap
price tag. But chances are, you won't find many buyers for it when you go to sell.
Conversely, you will have to pay more for a parcel abutting parkland, but you'll have
your choice of buyers willing to pay a premium price for it.
Rule 4: Value = Price + Terms
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 development land is the price a buyer is willing to pay in
exchange for terms and conditions. For example, you want to buy a landlocked
parcel. You need to know if the owner of the adjoining property will sell off some
frontage. You don't want to purchase the frontage unless the seller accepts your offer
and you don't want to have to buy the property if you can't get the requisite amount of
frontage. So you would give the seller an offer contingent on your being able to get
the frontage and anything else you'd need to be able to sell the parcel to builders.
You would offer the seller a higher price if the seller would agree to these conditions
than if the seller wanted to sell "as is."
Rule 5: When Buying, Think Like a Seller
Before you decide to buy a land parcel, you should evaluate it as objectively as
possible and try to identify objections that buyers might have when you go to sell. In
short, when investing in land, think like a seller because your goal is to sell the parcel,
not live on it. When builders purchase land for development, they evaluate it in the
context of the property's appeal in the eyes of the end users (i.e., home buyers or those
leasing or purchasing office and retail space).
Rule 6: Do Your Due Diligence
Most of what you need to know about the land parcel cannot be seen. So many issues
need to be investigated, including zoning, utilities, surrounding property uses and
values, deed and other title restrictions, and the site's physical features. It's absolutely
critical that the due diligence be performed thoroughly, even if that means you have
to hire somebody to do it for you. There are no short cuts here. Incorrect assumptions,
bad information and what you don't know could come back to haunt you.
Nancy Chadwick is a PA licensed real estate Broker and Instructor specializing in land
brokerage, consulting and development. Her experiences and real estate
development courses provided the foundation for her books Land Buying & Selling
and Selling Land: The Owner's Guide available at
http://www.LandBuyingandSelling.com/
People who invest in land for a living, like builders and developers, know that
following a couple of cardinal rules can mean the difference between having a
deal that's potentially viable and one that is a disaster in the making. Here are the
principles that influence their purchasing decisions.
Rule 1: Location
Location is the most important aspect of a property because it's the only thing that
cannot be changed. You can demolish or add onto a house or maybe even pick it up
and move it, but you cannot pick the land up and move it. Location determines not
only how the property can be used (zoning) and accessibility to public utilities, but
also the parcel's value based on the surrounding properties. There is no substitute for a
good location.
Rule 2: Value Is Always Related to Use
The value of land for development hinges on its ability to be used by buyers. A 10
acre parcel with substantial areas of floodplain, steep slopes or wetlands may produce
only one building lot. Its value will ultimately be determined by what a buyer can do
with it (i.e., build one house) and not by the number of acres it has.
Rule 3: More Target Markets = Higher Value
Value increases if the parcel can be used by many potential buyers or categories of
buyers. Several factors determine the market appeal of development land. These
include uses permitted under current zoning, location, availability of public or on-site
utilities, physical characteristics, and legal restrictions. Suppose you're thinking about
buying a property that abuts a pig farm. It has everything you want, including a cheap
price tag. But chances are, you won't find many buyers for it when you go to sell.
Conversely, you will have to pay more for a parcel abutting parkland, but you'll have
your choice of buyers willing to pay a premium price for it.
Rule 4: Value = Price + Terms
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 development land is the price a buyer is willing to pay in
exchange for terms and conditions. For example, you want to buy a landlocked
parcel. You need to know if the owner of the adjoining property will sell off some
frontage. You don't want to purchase the frontage unless the seller accepts your offer
and you don't want to have to buy the property if you can't get the requisite amount of
frontage. So you would give the seller an offer contingent on your being able to get
the frontage and anything else you'd need to be able to sell the parcel to builders.
You would offer the seller a higher price if the seller would agree to these conditions
than if the seller wanted to sell "as is."
Rule 5: When Buying, Think Like a Seller
Before you decide to buy a land parcel, you should evaluate it as objectively as
possible and try to identify objections that buyers might have when you go to sell. In
short, when investing in land, think like a seller because your goal is to sell the parcel,
not live on it. When builders purchase land for development, they evaluate it in the
context of the property's appeal in the eyes of the end users (i.e., home buyers or those
leasing or purchasing office and retail space).
Rule 6: Do Your Due Diligence
Most of what you need to know about the land parcel cannot be seen. So many issues
need to be investigated, including zoning, utilities, surrounding property uses and
values, deed and other title restrictions, and the site's physical features. It's absolutely
critical that the due diligence be performed thoroughly, even if that means you have
to hire somebody to do it for you. There are no short cuts here. Incorrect assumptions,
bad information and what you don't know could come back to haunt you.
Nancy Chadwick is a PA licensed real estate Broker and Instructor specializing in land
brokerage, consulting and development. Her experiences and real estate
development courses provided the foundation for her books Land Buying & Selling
and Selling Land: The Owner's Guide available at
http://www.LandBuyingandSelling.com/
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