Raw land is the new up-and-coming investment star of the land industry. Previously, undeveloped land was considered somewhat worthless, and most people preferred to invest in developed land. In recent years, many landowners are starting to realize that raw land is a low-maintenance way to hedge against inflation and save for retirement. This article discusses the ins and outs of this land type and the basics of buying and selling undeveloped land.
What is Raw Land?
Firstly, let’s define “raw land.” Raw land refers to a property in its most natural state. Raw land has no commercial developments, like homes, buildings, or walking paths, and has not been cultivated for livestock or crops. Up until recently, most people didn’t invest much thought or time into raw land. It was dismissed as a poor moneymaker since it didn’t feature any artificial improvements and generated zero income. These naysayers failed to realize that although raw land doesn’t generate income on its own, the land itself can increase in value- land is one thing that cannot be created. As more and more land is developed, raw land becomes rarer, and its value increases. This gradual increase in value makes it a solid long-term investment opportunity. The value of raw land can also be increased by getting rid of environmental hazards or invasive plants.
Why Is Raw Land A Good Investment?
Land, in general, is a great investment choice to save for retirement. Raw land is gaining popularity as a means of retirement savings thanks to its low-maintenance nature, 1031 exchanges, and ability to change the land to a “higher value” asset. By developing the land to its highest-value, optimal use (i.e., for crop farming or subdivision lots), you can increase the value of this asset.
Raw land tax benefits are a bonus to investing in raw land for retirement. Raw land tax benefits are engineered to protect investors from losing money on their land investments. Bill Humphrey, CEO of New Direction IRA, notes that confident investors may not know that property is a permissible retirement asset. Tax-advantaged savings vehicles like 401(k)s and IRAs can own a commercial building, house, or vacant land the same way they can own stocks. These kinds of accounts boast tax benefits to help balance any tax-related concerns that may otherwise cause a real estate investor to hesitate. Thanks to these advantages, pre-developed land is becoming more prominent as a viable option for real estate IRAs.
Types Of Land
Investors can choose from different kinds of land, including raw, agricultural, commercial, and wetlands. Undeveloped land ownership opportunities and business ventures can generate significant ROIs for small investors while still offering traditional land ownership attributes.
Residential And Commercial Land
With a virtually limitless number of land development opportunities that can be structured to meet an investor’s time and capital constraints, commercial and residential land development offer a viable path to investment. Real estate investment trust (REIT) ETFs are an excellent choice for most small investors since they are broadly diversified by property and geography type, do not need direct management, are relatively inexpensive, and are geographically diversified. Some ETFs specialize in a specific kind of real estate. Still, others, like the Vanguard REIT ETF (VNQ), offer diversified exposure to office, industrial, healthcare, retail, residential, and public storage property developments.
However, residential and commercial real estate land development prevents the landowner from enjoying the land. For people who want to create security for their retirement and simultaneously enjoy the feeling of land ownership, residential and commercial land developments may not be the way to go. Moreover, residential and commercial land development may also require annexation to a city, zoning changes, entitlements, etc.
Row Crop Land And Livestock Operational Land
For those looking to enjoy the land in the home-owning sense while generating income, there is the option of purchasing land for row-crop farming or running a livestock operation. However, buying land for these kinds of enterprises comes with a host of issues. The scale necessary for operating a row-crop or livestock operation has to be extremely large to be viable financially. This requires a substantial upfront capital outlay, which puts the investment beyond the reach of most small investors. Moreover, there are incredibly high ongoing fixed costs that come with running these kinds of operations. Small-scale orchards or farm investment opportunities may be a better choice for investors with less capital.
What are the Risks of Buying Land?
There are certain legalities tied to specific uses and parcels of property. Land-use restrictions may restrict how the owner can use the land, and land easements may give unrelated parties access to part of the property. Mineral rights may grant outside parties the ability to extract and sell minerals from the property. Other risks include access to essential utilities like telecommunications and electricity, along with zoning violations and short-term lack of income.
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How To Buy Raw Land
Now that we’ve established the value of raw land as a long-term investment let’s discuss how to buy and sell land.
1.) Locate The Land You Want To Buy
While prospective landowners may dream of happening across a plot of land that happens to be the perfect investment, such situations are rare. If you are determined to purchase land but don’t have any specific properties in mind, you should begin by searching online. If you need help with sifting through all possibilities for a match that fits your specific criteria, you should reach out to an experienced real estate agent specializing in land plots.
2.) Research The Land Extensively
It’s not the Land Rush of 1889- don’t be scared about all the land getting snatched up. It’s essential to research your investment thoroughly before you make any significant moves. First, you should look into the zoning laws for the county you’re trying to buy land in. Zoning laws are local government rules and regulations stipulating how property can be developed. If someone is trying to sell off individual lots, for example, they’ll need to find out if they can legally subdivide the land. Such information can be found at municipal offices. Other information you should research include if the land has any entitlements, environmental problems, and overall usability. Analyze the soil, water sources, any prior chemical treatments, and location.
The most common zoning restrictions include:
- Building type
- Businesses NOT allowed
- Building size and height
- Utility line location
Some permits you may need include:
- Road access
3.) Decide How You Will Finance The Deal
If you can make a cash offer, you’ll need to get a couple of documents in order. The seller will want to see proof of funds to establish that you can cover closing costs and the down payment. If you’re going to finance the deal from agricultural lenders, you need to research and negotiate loan terms and types.
4.) Make An Offer To The Seller
A verbal agreement doesn’t hold up in a real estate transaction. Any details that may impact the value of the land you’re looking at will need to be put in writing. A bid-offer form is the most common kind of contract used to make an offer. The contract should include its location, price, any contingencies, and parcel number. When you make your offer, you may still have some lingering questions regarding the land, which is where contingencies come in. Contingencies allow the buyer to effectively back out of the deal if anything unsatisfactory comes up during the inspection period. After the seller accepts the offer, you may want to use a Sales and Purchase Agreement (SPA), another legally binding document. In certain states, the two forms may be integrated into a single contract, which is why you should do your research and carefully inspect any paperwork.
5.) Put Down A Deposit On The Land
If you’re making a cash offer, you’ll need to give the seller “earnest money,” which is a (usually) small amount of money that goes into escrow to indicate your seriousness as a buyer. If you walk away from the deal for a reason not covered by contingencies, the seller keeps the money.
6.) Conduct Environmental Tests
Environmental testing when purchasing land is as essential as getting a home inspection before buying a house. An environmental test will tell you if the soil is contaminated, sinkhole possibilities, or earthquake damage. Something else to watch out for is the soil’s moisture content. You’ll need to ensure the ground is stable enough to support any structure you’re planning on building.
7.) Conduct A Land Survey
Always have a land surveyor check the plot to mark exact boundaries and determine exactly how much land you’re buying. Surveyors will also mark any buried pipes and disclose certain parts of the land that are unusable.
8.) Conduct A Title Search
Liens may be placed on the land (just like with a house) for various reasons, which is why you should always check if the land has a clear title. A title search only costs around $100 and can determine if there are any special easements, assessments, or restrictions on the property.
9.) Do A Final Tour Of The Land
Before buying, it’s key to tour the land first. Exploring the property on foot gives you a better understanding of the shape of the property and allows you to confirm any findings from doing a title check or land survey.
10.) Close On The Land
You can pay the seller after everything is done to your satisfaction during the inspection period and the contracts are closed. If you’re buying the land with cash, you will probably close the deal with a cashier’s check, as personal checks aren’t accepted for large amounts of money. A cashier’s check can alleviate concerns regarding legitimacy since the funds are issued by the bank. If you’re paying through a loan, bank details need to be ironed out.
How Is Selling Land Different Than Selling Buildings?
Selling lots and land has a distinct dynamic from selling existing homes. Below are key differences between the existing homes market and selling a home lot or land:
- Land requires different sales techniques: A home has visual appeal like granite counters or wood floors. Vacant residential lots and land don’t make buyers fall in love.
- Lot and land buyers are different from homebuyers- These two groups of buyers have distinct desires, perspectives, and needs. Homebuyers are looking for move-in-ready properties, while land buyers are searching for the right opportunity and location that fits their vision.
- A less active market- The land market is almost always less vibrant than the market for existing homes, especially in recent years. This means that finding the right buyer will typically take more time and effort.
How To Sell Raw Land
While selling raw land is markedly different from selling homes, they both require sales acuity and preparation. Here are some steps to take when selling raw land.
1. Market To Your Buyer
You need to identify your target demographic. Your buyer profile depends on the kind of property you’re selling, whether the land has been developed, its market conditions and location, etc. Do your research to find the ideal buyer profile for your marketing efforts.
2. Prepare The Land For Sale
First impressions are vital, so make the land presentable (like you would a house). Get rid of trash, cut the grass, and take flattering photos of the land.
3. Price The Land Wisely
Account for your personal needs when pricing, and understand the ways pricing can impact buyers’ interest. Sometimes sellers have to choose between selling quickly and getting the highest price, so your pricing may be influenced by your current financial state. Another factor when pricing is understanding why people want to purchase the land and who they are. This is where an experienced real estate agent can come in.
4. Show Your Property
Use visual tools to construct a compelling story of your land listing. Be creative with your lot or land photographs, as it’s not as simple as showing photos of a great room or kitchen. Use flattering pictures of the site, the land’s natural features, and offer to “walk the property” with potential buyers.
5. Offer Financing
The lending market for land and vacant lots can be difficult, so many buyers may struggle with financing. If you can offer some owner carry or financing, you can expand your potential buyer pool.
6. Work With Professionals
Having a knowledgeable professional on your team will optimize the selling process. Work with a real estate agent specializing in land and lot sales who can help you set a price, understand the market, and market your land to the ideal buyers.
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