In today’s market, many home buyers are buying residential lots instead and building custom homes. Improved market conditions in many areas are also allowing investors to return to the business of buying land and building custom “spec” homes or small subdivisions. If you’re thinking about buying unimproved residential land and building – whether for a home or investment – here are a few tips for finding the right property and closing the sale.
1. Site Selection Criteria
Buying an existing home or buying land starts with similar criteria – the right location, total cost and ability to use the property as we want. Here are common selection criteria for buying residential lots.
- Location: schools, business center(s) commute, shopping/services, public facilities/services/transportation, public safety (police, fire, medical), Walk Score® (1), crime rate, noise, traffic
- Neighborhood value: median prices for comparable properties, escalation forecast
- Lot characteristics: Size, topography, view, drainage, exposure, surface features (water, rocks, trees, foliage), soil and sub-surface conditions
- Improvement entitlements and restrictions: Zoning, boundaries, easements, encroachments, limits (set-backs, footprint, height, total square footage, type and number of structures), architectural mandates, homeowner association requirements
- Utilities and services: Availability of gas, water, electric, sewer, trash collection and communications.
- Ownership, Improvement and Occupancy: Clear title, total acquisition costs, total construction costs, permit costs and schedules, estimated recurring ownership costs
(1) Walk Score® is a property rating based upon availability of goods and services within walking distance. Some property search systems provide a Walk Score® automatically with their listings, click on Northern California Property Search (my site) and look up any property. You’ll see a Walk Score® tab. A high score means goods and services are close, a low score means the property is “car-dependent.” A high or low Walk Score® is usually immaterial to the value of rural properties, but a high score adds value to urban properties.
2. Property Search
There are many tools available to conduct a thorough property search. We can work with a broker to scour the local multiple listing service (MLS), search online, read the real estate section of print publications, and drive neighborhoods looking for For Sale signs on properties that are not otherwise advertised. We might look at properties that are not for sale and ask the owner if they’ll consider an unsolicited offer. We can also inform our circle of friends and business acquaintances that we are in the market for residential lots.
We should also consider tear-down properties in our search. These are homes in great locations that have outlived their “economic life” and would be costly to repair or rehabilitate. Sometimes removing the existing structure and replacing it with a modern home that makes best use of the land can be very cost-effective.
Helpful articles from my blog on where to look for properties and how to make unsolicited offers:
3. Analysis and Inspection
Site selection criteria can be used to both screen lot listings and then to confirm that we want to go through with the purchase. Some analysis and inspection should be done prior to making an offer, some we’ll do during escrow with closing contingent upon favorable results of the inspections. The chart below identifies typical lot evaluation criteria and suggests when they might be evaluated (list and schedule should be tailored to specific opportunities).
4. Structuring The Purchase Contract
Strategies used to buy a residential lot are similar to those included in a home purchase offer. The offering price, length of escrow and general closing conditions should take into consideration the seller’s requirements, competition from other buyers, and resources available to buy and improve the land for its intended use. When the situation provides flexibility to do so, we can look at structuring a winning purchase offer with features that are usually specific to lot contracts.
Buying With Entitlements. Most large-scale developers buy only “entitled land.” This means they must receive written approval of their planned use for the property from the applicable government authority (usually city or county) before escrow closes. For single family home lot purchases, required entitlements could be a lot survey, approved architectural plans, construction permits, soils analysis or perc test rating – whatever applies to the property and is feasible given the buyer’s plans and resources. Sometimes sellers will obtain basic entitlements prior to placing their land on the market and roll the cost of obtaining them into the sale price (usually with a slight mark-up). More entitlements in place at close of escrow means less risk for the buyer.
Purchasing An Option. If the seller is not in a hurry to close the sale and the buyer needs time to raise development money, secure entitlements or schedule construction, a buyer might offer to purchase an option. An option is simply the right to purchase the land in the future. The buyer will normally have access to the land during the option period to conduct pre-approved testing and inspections.
Installment or “Land” Contract. This type of purchase agreement can be useful if the seller has the flexibility and willingness to accept installment payments. There are two major considerations with this type of contract: 1) transfer of ownership doesn’t occur until the final payment has been made and 2) sellers usually won’t allow the buyer to begin improving the land until after transfer of ownership.
Joint Venture. Although I seldom recommend a joint venture (JV), they can be useful for “spec” home or subdivision development when both parties understand the risks. In a typical JV, the land owner provides the land and the developer provides the resources to makes the improvements. The finished property is then sold and the JV partners split the net proceeds per their agreement. The primary risk is that if the JV is unable to complete improvements and folds, the land owner is stuck with a parcel of land with a partially-built structure on it that diminishes the land’s market value.
I hope you found these tips for buying residential lots helpful. As with all my purchase tips, sellers should also consider how they can use the strategies and options discussed. If you have a question about buying land or need assistance with your next purchase or sale, drop me a line. Contact Us
John A. Souerbry & Associates (CalBRE 01370983)