Buying land might seem simple, but it can be complicated by things not easily seen…
But don’t let the venerable Samuel Langhorne Clemens’ quote deceive you. It just isn’t that easy.
On the surface, buying a tract of land looks simple. It’s not like you’re trying to understand the complexities of a financially engineered stock derivative.
It’s land, right? You can walk on it, even pick some of it up in your hands and let it fall through your fingers. You can walk the property line.
Land is tactile. A stock product is abstract.
This certainly is as true as can be and investing in land has historically been a reliable, stable and productive choice for many people.
But buyer beware.
While investing in land can be less risky than putting your money into some other asset classes, land can be surprisingly complex and volatile, if you don’t know what to look for when conducting due diligence.
Take it from us. MacRo has been helping landowners and buyers for decades. Here are a few things we ask one to think about, when you are in the early stages of your land search.
Understand the Tract’s Zoning
Before investing in land, you need to determine what you can do with it. You might have dreams of buying 50 acres, sitting on them until you retire and then, when the time is right, starting your vineyard.
However, what you determine as the land’s best and highest use is not necessarily what city, county or state zoning parameters will allow.
If you don’t understand the zoning rules, you might wind up with just a 10-acre vineyard or no vineyard at all. It is essential to understand the zoning restrictions of a property before making an investment decision. And that does not mean simply knowing that the land is zoned LI (Limited Industrial) or PB (Professional Business). It also means understanding if there are ways to negotiate within the existing zoning laws. For example, you might be able to alter zoning parameters, if you can prove the change will add economic growth and value to a municipality.
But you don’t know what you don’t know, right?
This is where hiring a land expert pays dividends. A local land broker can help you determine what can and can’t be done with a property and provide you expert valuation services, so you can properly assess the risks against the potential rewards.
Access to Utilities
You might get entranced by rolling hills and golden grass waving in the wind. Or a lovely, fish-stocked pond. Or any number of the other possible alluring aspects of a piece of land.
But don’t get blinded by natural beauty, hard as that might be.
The bottom line is a land’s value very often depends on the opportunity to construct something on it. You’ll need to find out if the lot or acreage has existing electricity access; or if there is public water and sewer access or if you’ll need to drill wells and install a private septic field. You might even need to understand if the soil can handle a septic system by conducting a “Perc Test” to determine the rate at which the property’s soil absorbs water. What’s more, how deep will the well need to be and how many bedrooms are you allowed to build based on the septic capacity? Will it cost a fortune to run a gas line to a home or building? Will you have fast Internet access and reliable phone service?
Understanding what’s already in place, what can easily be put in place and what just can’t be done at all or without breaking the bank is critical to making a sound long-term investment choice.
Little Water, Big Water
You might be interested in seemingly landlocked acreage nowhere near a large river or lake. There’s just a harmless little stream meandering through farmland—you assume you can’t possibly be in a flood zone or flood plain and purchase the land.
After an inch of rain in a few hours that little, once-innocuous brook has jumped its banks and flooded the area where you picked to build your dream home. Again, looks can be deceiving, and you need to uncover any hidden risks before you buy. Having a broker-partner who understands topography and is adept at deciphering sometimes complex and hidden land details can be an investment saver.
What is the Tax Burden?
Many people invest in land and don’t plan on developing it for a while.
In cases like this, you need to understand what your tax obligation will be to determine the costs associated with buying and holding land that is generating little to no cash flow or the benefits of living there or working it.
If the tax rate represents a high percentage of the land’s market value, this might not be the best investment to hold long term. Understanding ongoing annual costs within the context of market value is an important factor to know and assess. A buy and hold strategy is not necessarily the right approach versus putting the asset to work for you.
Keep these four hidden risks top-of-mind, as you conduct your search for land and evaluate potential investment opportunities. Also, it never hurts to have a trusted land expert at your side to act as your adviser/private detective.
We hope you found this blog post helpful. The MacRo team is ready to help you with any of our land buying or selling needs.
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Rocky Mackintosh, President of MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland, has been an active member of the Frederick community for over four decades. He has served as chairman of the board of Frederick Memorial Hospital and as a member of the Frederick County Charter Board from 2010 to 2012. He currently serves as chairman of the board of Frederick Mutual Insurance Company. Established in 1843, it is one of the longest enduring businesses in Frederick County.