Introduction
Purchasing raw land can be an extremely lucrative investment strategy for real estate investors who approach it strategically. Land often appreciates faster than the structures built on it over time, making it a potentially high-upside asset.
However, successfully acquiring vacant land has unique complexities and requires more extensive due diligence compared to buying a developed residential or commercial property. You take on more risk buying something sight-unseen. And creative financing is often needed.
This comprehensive guide will walk you through the essential steps for buying vacant land to expand or launch your real estate investment portfolio. We’ll cover:
- The advantages land investments can offer
- How to locate promising parcels
- Key factors to research in your due diligence
- Necessary preparations before purchase
- Creative financing options to secure your acquisition
- How to make a competitive offer and negotiate expertly
- Profit-maximizing strategies after acquiring your land
A vacant land purchase can become a crown jewel of your real estate holdings if executed prudently. Let’s explore how to set your investment up for success.
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The Benefits of Buying Land
Before we dive into the acquisition process itself, let’s first examine why vacant land appeals to many real estate investors and the potential advantages it can offer compared to developed properties:
Higher Appreciation Potential
As the saying goes, they aren’t making more land. It’s a finite resource, especially land suitable for development. As population and development grows over time, demand for land increases along with it. But supply stays fixed. These market dynamics of increasing demand and static supply push land values up.
Additionally, land tends to appreciate faster than the structures built on top of it. This means purchasing the right land at a low cost basis today can yield considerable capital appreciation down the road. Patience is required, but the long-term upside exists.
Lower Entry Costs
Acquiring vacant land has significantly lower upfront costs compared to buying multifamily apartment buildings or commercial properties. Undeveloped land sells for less per square foot. And there are no existing structures that require expensive maintenance, repairs, or upgrades.
The lower entry costs allow investors to purchase land parcels outright with cash or smaller down payments. Limited improvements also keep other initial expenses lower. This makes land investments appealing for newer investors with limited capital.
Reduced Holding Costs
Once the land is purchased, ongoing holding costs like property taxes and insurance are relatively minimal, especially compared to developed real estate. You avoid regular maintenance and repair expenses without buildings.
Lower holding costs allow you to keep expenses in check while holding the land for appreciation or waiting for the ideal development opportunity.
Development Flexibility
Owning raw, vacant land gives you maximum flexibility on what to develop on it in the future. You can weigh different options, like building a residential subdivision, multi-family apartments, retail stores, office buildings, industrial facilities, mixed-use projects, or countless other possibilities, based on what zoning allows and what the market needs.
Having a blank slate allows creative development approaches as markets shift over the years.
Timing Flexibility
Unlike flipping houses or wholesaling properties, land investing does not require quick turnarounds. With vacant land, you aren’t pressured to immediately develop upon acquisition or forced to sell quickly. You can hold the parcel for 5, 10, or 15+ years until the timing is right.
This gives you full control over the project timeline. Patient, long-term land holdings can pay off tremendously if acquired early in growing markets.
Property Tax Advantages
In many areas, undeveloped vacant land receives preferential property tax treatment compared to developed commercial projects or apartment buildings. Some counties offer reduced taxes through agricultural exemptions and other programs to incentivize keeping land undeveloped.
The lower ongoing property tax expenses enhance the appeal of owning raw land, especially if you plan to keep it vacant in the near-term.
In summary, vacant land offers enough unique advantages that it deserves strong consideration within a diversified real estate investment portfolio. While buying land has added risks and complexities, it also provides opportunities for higher returns, greater flexibility, and generational wealth creation if executed prudently over the long-term.
Now let’s walk through the step-by-step process for acquiring your ideal parcel.
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Step 1: Define Your Investment Goals and Budget
The first stage when preparing to buy land is clarifying why you want to purchase vacant land and what you hope to ultimately achieve from the investment.
Some investors purchase land with plans for immediate development, like building homes or an apartment complex. Others take a long-term buy-and-hold strategy to benefit from raw land appreciation over decades.
Defining your investment goals and timeline informs other decisions through the entire acquisition process, including the parcel attributes you target, where you buy, how you structure financing, and more.
For example, land meant for near-term housing development may need to be relatively flat and situated near existing homebuilders. But land for long-term agricultural holdings can be hillier and more remote.
On the financial side, set a realistic maximum purchase budget based on your available capital and what you can qualify for borrowing. Factor in additional costs beyond just the purchase price, like survey fees, legal fees, permit and impact fees, initial grading or site work, and so on.
Having clear written investment goals and budget limitations provides focus and direction as you search for the right land opportunity.
Step 2: Locate Ideal Land Parcels for Purchase
Once you’ve defined what you’re looking for in your land investment, it’s time to begin identifying potentially attractive vacant land parcels available for purchase that align with your objectives and budget range.
Some strategies for uncovering promising land opportunities include:
Work With a Land Specialist Real Estate Broker
Connecting with a real estate broker or agent who specializes in vacant land transactions can provide invaluable expertise. They have access to off-market land listings that aren’t widely advertised. A specialty land broker can also offer insights on zoning classifications, development feasibility, and market trends and help negotiate your purchase.
Search Online Land Listing Sites
Major real estate portals like Zillow, Realtor.com, and LandWatch make it easy to search for vacant land parcels that meet your criteria across the country. Use available filters like minimum/maximum acreage, price range, location, and land use type to customize your property search.
Look for County Tax Auction Parcels
Most counties will auction off vacant land parcels where the owners failed to pay property taxes. These government-owned properties can sometimes fly under the radar and present diamonds in the rough at attractive prices if you research thoroughly.
However, it takes extra due diligence to assess feasibility and overcome potential title issues. Tax sales are best suited for experienced land investors.
Drive Target Investment Areas Scouting for Sale Signs
Simply scouting target rural areas, small towns, or outer suburbs for vacant land parcels with for sale signs can uncover hidden opportunities not widely marketed online yet. Stop to gather information and talk with owners directly about potential deals.
Contact Local Farmers and Large Acreage Owners
Reach out to owners of very large agricultural land tracts who may be open to selling sections of their holdings. Farmers looking to downsize their owned land can present win-win opportunities if they are ready to sell parcels.
Utilizing a mix of these approaches helps you cast a wide net to uncover promising land investment properties for your portfolio.
Step 3: Analyze Parcels and Perform Due Diligence
Once you’ve identified one or more vacant land parcels that fit your investment criteria on the surface, the next critical step is conducting thorough due diligence to verify the property is truly viable for your intended purpose.
Do not skip this step! Extensive upfront research is vital when buying vacant land. Here are some key items to investigate:
Zoning Classification and Allowable Land Uses
Verify that the land’s current zoning classification aligns with your investment plans. For example, land zoned for agricultural use may need to be rezoned to allow residential development. If rezoning is required, analyze the feasibility before moving forward.
Also check for any known or proposed zoning changes in process that could alter the allowable land uses in the future. For example, if commercial rezoning efforts are underway, it could impact your residential development plans.
Topography and Environmental Factors
Carefully consider the physical landscape and environmental features of the land. Is the topography very steep or relatively flat? Are wetlands present that could impede construction? What are the drainage and soil conditions?
Understanding these physical traits helps determine how suitable the land is for building and development, which greatly impacts costs. Severe topography or swampy soils make construction exponentially more difficult and expensive.
Walk the land yourself to observe, and be wary of only relying on aerial views.
Easements, Covenants, and Access Rights
Determine if any easements, covenants, or other party access rights could limit your use of the land. For example, a gas pipeline easement may restrict what can be built over it. Homeowners’ association covenants may dictate allowable land uses or construction styles. Shared driveways could cause access headaches.
Flood Zone Status
Use FEMA flood maps to check what flood zone the vacant land resides in. Anything within the 100-year floodplain raises concerns. Special flood insurance requirements or building restrictions in flood zones can add substantial costs.
Be very cautious about land with flood zone risks.
Availability and Access to Utilities
Evaluate the accessibility of public water, sewer, electric, natural gas, and telecom utilities to the lot lines or street frontage. Having to run long utility connections hundreds of feet or more can be extremely costly. Lack of utilities may also entirely prevent your planned usage.
Surrounding Properties and Area Influences
Physically drive by the vacant parcel at different times and observe neighboring properties. Gauge overall area vitality, including economic conditions, property maintenance, and future development plans. These surrounding influences will impact the land’s desirability and value.
Conducting thorough due diligence upfront significantly reduces the chances of unpleasant surprises arising later after you acquire the vacant land. It provides critical data to inform valuation and helps you more accurately estimate potential development costs.
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Step 4: Have the Land Surveyed Before Buying
Before completing the purchase, invest the money to have professional land surveyors formally survey the boundaries and key attributes of the property.
An official land survey will verify the parcel size, identify any encroachments from neighbors, check for conflicting boundary markers, find unmarked easements, and map underground utility locations.
Having an accurate survey conducted upfront protects you from boundary disputes, misinformation, liability risks, and undisclosed issues arising later. Skimping on a survey could end up costing you exponentially more down the road. A few hundred dollars now prevents massive headaches later.
Step 5: Explore Financing Options for Your Purchase
With an attractive land parcel identified and due diligence complete, the next step is exploring potential financing options to secure your investment purchase:
Conventional Land Loans From Banks
Some local community banks and credit unions offer land loans or vacant lot mortgages to real estate investors, though options are more limited than owner-occupant home loans. Banks typically require at least 20-50% as a down payment and shorter 5-10 year repayment terms.
Owner Financing From the Seller
Seller financing is fairly common with land transactions. The property owner finances a portion of the purchase price that you repay in installments at an agreed interest rate over a defined time period. This helps investors with less capital access deals. Make sure the terms are formalized in the contract.
Loans From Private Lending Companies
Specialized private lending companies cater to real estate investors seeking funding for purchases and construction projects. They provide alternative financing options when traditional bank borrowing isn’t feasible. Be sure to compare interest rates and terms.
Pay Cash Upfront
If you have adequate capital reserves, paying 100% cash upfront avoids financing costs and monthly payments. You take full ownership immediately. However, evaluate whether tying up so much capital is prudent.
Seek quotes from multiple lenders to find the most advantageous financing terms and interest rates for your needs and investment capitalization. Weigh your options carefully.
Step 6: Make an Offer and Negotiate Price
Once you’ve identified an ideal raw land parcel that checks all your boxes and arranged financing, it’s time to make an offer and negotiate purchase terms with the seller. Here are some key tips for the offer process:
Submit an Offer Below the List Price
Don’t be afraid to offer below the parcel’s listing price, even on vacant land. Most sellers expect buyers to open negotiations with a lower offer price to leave room for back and forth. Offer low but with reason, and be prepared to meet in the middle or sweeten terms.
Propose Contingencies to Protect Your Investment
Build contingencies into your initial offer that allow you to back out and cancel the purchase if concerning issues are uncovered. For example, if undisclosed easements are found during the title review,. Or if permitting and inspection reveal unexpected costs.
Outline a Clear Closing Timeline
Establish a proposed closing timeline within your offer that aligns with your financing approach. For example, private lender financing can close in as little as 7-14 days, while bank financing often requires 30-60+ days. State how quickly you can close once under contract.
Use Caution With Contract Assignment Clauses
Some investors make offers contingent on being able to assign or flip the purchase contract to another buyer. While this can limit risk, it may draw resistance from sellers. Limit your liability if you agree to assign.
Hiring an experienced real estate attorney to represent you during negotiations and drafting is wise and well worth the expense when buying land. But don’t jeopardize the deal over small concessions either. Know when to compromise to get the parcel you want.
Step 7: Secure Title Insurance and Close the Deal
As you near the closing date, purchase title insurance to protect your ownership rights against claims or discrepancies. Title research should also examine for any concerning liens or judgements recorded against the vacant property that could impede closing.
During the closing itself, carefully review all final legal documents, purchase contracts, transfer deeds, transfer taxes, fees, and other closing costs. The buyer typically pays for the title insurance policy and legal fees, while the seller covers transfer taxes and broker commissions, if applicable.
Once all documents are recorded with the county and funds exchange hands, congratulations! You now own your vacant land investment!
Step 8: Choose the Best Strategy to Profit from Your Land
With ownership of your vacant parcel secured, the next step is deciding on the best go-forward strategy to maximize returns and profits from your land investment. Here are some common options:
Construct and Sell Residential Lots
One avenue is subdividing and developing the land into individual residential lots with all necessary infrastructure and utilities. Obtain the required approvals and prepare the lots, then sell the completed parcels to home builders or end buyers.
Hold Long-Term for Appreciation
If purchased in a strong growth corridor, a viable strategy is to keep the land as-is for 5, 10, or 20+ years. Allow rising development and land scarcity to drive up values. Target high-demand markets near urban centers.
Lease Land for Farming, Hunting, or Storage
Generating periodic income by leasing the vacant land out can make sense for near-term returns. Seek farmers for agricultural uses, hunters who want private access, equipment storage rentals, or occasional event venues.
Rezone and Develop Commercial Projects
Analyze the potential to rezone vacant land for more valuable commercial usage based on area demand, like developing a shopping plaza, medical office building, or industrial warehouses. Change allowable uses to maximize profit.
Construct and Manage Apartment Communities
For larger parcels, build multifamily apartment complexes on the land to generate ongoing rental income from leasing units. Requires significant financing but can produce steady, long-term profits.
Weigh different options and run the numbers to determine the use that optimizes returns based on your investment timeline. Leverage expert assistance as needed.
To Recap
While vacant land investments have unique complexities, they can produce excellent returns for real estate investors who approach them strategically. Defining clear goals, thoroughly researching prospective parcels, verifying legal conditions, securing proper financing, and negotiating astutely are the keys to buying land profitably.
Although vacant land acquisitions have more steps than buying developed real estate, the long-term upside potential exists to create substantial wealth over time. We hope this comprehensive guide provided a helpful overview of the step-by-step guide to acquiring land for real estate investing
Frequently Asked Questions
What is the typical process for buying raw, vacant land?
The standard process includes defining goals and needs, locating viable land parcels, conducting due diligence, having land surveyed, arranging purchase financing, negotiating offer terms, closing on the purchase, and ultimately developing the land or selling it for a profit. Buying vacant land has more moving parts than buying a developed property.
How challenging is it to obtain financing to purchase land?
Financing land purchases can be more difficult than financing newly constructed homes, especially for investors. Lenders view vacant land as inherently more risky. Expect requirements like 50% or more as a down payment, shorter repayment terms of 5-10 years, and potentially higher interest rates from banks. Private lenders specializing in land loans often provide the best financing options.
Can you make money by buying and selling vacant land?
Yes, “land flipping” can be extremely profitable if you buy property below market value, make light improvements like grading, and then resell quickly to another developer or end user. Subdividing raw land into individual, ready-to-build lots is another potentially lucrative strategy. Maximizing profit comes down to buying smart and adding value.
What is the least expensive way to buy vacant land as a real estate investor?
The lowest cost route is to pay all cash upfront if you have sufficient capital reserves. This avoids financing costs like interest payments, origination fees, and monthly carrying costs. If you are unable to pay in cash, the next best thing is to negotiate seller financing, where the property owner helps finance the purchase for you.
How much land should a beginner real estate investor purchase for their first investment?
For first time land investors, a parcel in the range of 10 to 50 acres is recommended. This provides enough space for smaller development projects or portions you can parcel off and sell individually. It allows new investors to gain experience with less complexity and risk than buying hundreds of acres.
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