What to Think About Before Investing in Land Parcels

Jason Belangoy
Jason Belangoy
Published on February 6, 2018
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Vacant land, while often overlooked, is still a solid investment.  However, there are many things to consider before making your purchase.  Here are the considerations that have to be evaluated first before making a move towards investing in land parcels.

What are the Zoning Regulations on that Land Property?  Land is often placed under a zoning classification (residential, mixed-use, commercial, industrial, agricultural, etc).  With a call to the local zoning office, you can get a pretty good idea for what types of property are allowed on that particular land parcel.  This is important, because it will help you decide whether the land parcel fits your needs or the needs of those whom you intend to market the land to.

Are There Any Usage Restrictions Associated with the Land Parcel?  Performing due diligence on this point is very critical.  Sometimes there are limitations on what can be done on or with a property, according to city, town, or even Homeowner’s Association.  Finding what those restrictions and limitations are should be part of your homework before fully investing in land that you might not be able to entirely make use of as you envision.  Examples of restrictions include a certain distance from agricultural land, wild lands, military property, or even waste dumps.  Still other restrictions or limitations include the height or number of stories allowed per building.  Many other types of restrictions and limitations exist as well, so remember to engage in the full scrutiny of that particular parcel of land you have your eye on.  Related to this, of course, is the topic of Covenants, Conditions, and Restrictions — or CCRs — which have been drafted and enforced by homeowner associations, for the purpose of having a regulated environment in the subdivision, whether in use, appearance, or even maintenance of a property.  There’s also the case of large landowners subdividing their land into lots and smaller parcels to sell them off with design restrictions so that the area can have a cohesive look.  In other words, when investing in land, make sure you know what is associated with that parcel, so that you fully understand what you can and cannot do with that land parcel.

Is the Parcel of Land Within or Near Wetlands?  There are numerous federal and state regulations preventing land development that would adversely affect wetlands.  Hence, before purchasing a piece of land, seek government agents who can determine whether there are wetlands in the vicinity.  And always seek more than one opinion.  Remember, too, that sometimes wetlands appear seasonally, so you’ll have to make sure your consultants address this possibility.  The US Fish and Wildlife Service likewise has a Wetlands Mapper to give you an idea.  But always have several expert wetlands consultants to provide a more comprehensive assessment.  The Web Soil Survey (WSS) is a possible resource as well.  It provides data and information on soil, thanks to the National Cooperative Soil Survey.  The US Department of Agriculture (USDA), through the Natural Resources Conservation Service (NRCS), handles the WSS to provide access to soil maps and data of more than 95% of the US’s counties on soil survey information.

Similarly, It’s Important to Have a Geotechnical Soils Report.  Some local jurisdictions require geotechnical soils reports before issuing building permits.  The geotechnical soils report summarizes what the conditions are of the land to assist in guiding structural engineers with their efforts at designing building foundations.  Geotechnical soils reports are especially requested when land conditions include expansive soils, low strength soils, steep slopes, or any other possible hazardous soil conditions.  It’s far better to be sure about the soil of the land parcel you shall invest in before constructing anything on it.

What’s the Topography Like?  Topography is vital, especially when it comes to building and developing plans.  Besides hiring experts to provide you a topography of the land, you can also try an app from the United States Geological Survey (USGS) that helps you see topography of the area or even the history of topography maps of the area at this link here.  It might not be entirely accurate, so you should always still hire an expert to assist you with your due diligence research in this regard.

Consider Hiring a Civil Engineer to Conduct a Grading Plan.  A grading plan provides a simulated schematic of how the existing topography can be re-adjusted for construction of a future building or driveway.  This investment is a good idea, especially if you plan to develop the land parcel or market to potential developers.

What Are the Tax Obligations Associated with that Parcel of Land?  Before investing in land, it is always advisable to discover what the taxes will be like for that parcel of land, in addition to learning about the status of outstanding property tax payments, if any.  Having a history of the recent tax payments on the property will prove very helpful — especially since having the big picture about the annual tax amount can give you clues to what your ongoing holding costs might be.  Interestingly, there have been instances where a parcel has a super high tax bill relative to the land’s actual property value.  Consult a tax expert to determine if the percentages are reasonable.  Some real estate investors and developers define a “reasonable annual tax” to fall in the range of 1% – 4% of a property’s full market value.  Anything else higher wouldn’t be feasible.

Are There Any Public Utilities Available for That Land Parcel?  If So, What Are They?  If you want to invest in land with the intent of building on top of it, then you’ll need to learn what public utilities are available for it.  For instance, are there water, sewage, gasoline, electric, even phone infrastructures available?  If the land’s “buildability” is in question, then that could certainly affect its value, usability, and marketability.  If you prefer being connected to municipal water, then contact the local water company.  Make note that installing a water meter has its added costs.  Let’s take the other scenario of a land parcel that has no access to a municipal water supply (city water, that is).  That would mean increased costs to drilling a well to have access to a clean water source.  And, would that be safe?  Or would it create a sink hole possibility?  How about what to consider regarding power and electricity?  Recall that access could be overhead or underground.  Before you take the plunge to invest in land, discuss with the local power company — San Diego’s happens to be SDG&E — about the process of having electricity brought to a new home.  Should power lines be nearby, the power company nonetheless needs to survey the land site to enable the connection.  And should you prefer solar power, you still might have to contact the local power company — e.g. SDG&E — to connect to the grid if you want some return benefits.  Ultimately, if existing utilities infrastructure is quite a ways from your land parcel, then know that trenching lines long distances will understandably come with higher costs, thereby increasing your expenses.

If There’s No Ready Access to a Nearby Sewage System, What Do the Soil Percolation Tests Indicate?  Say you want to invest in land that’s rural, and no nearby municipal sewage system is on hand.  You’ll need to hire experts then to devise a septic layout design and still other experts to administer percolation tests to the soil to determine if a septic system is feasible.  Percolation tests evaluate the rate at which water drains through soil to ascertain if the soil is fit enough for a septic system to be installed, especially if you are thinking of using the land for residential or commercial uses.  Also contact the county health department for advice on what is required for a septic system to be installed (or better yet, how to connect to the local sewer system).

Beware of the Land Being in a Flood, Landslide, Avalanche, Sink Hole, Volcanic Eruption, Earthquake, or Fault Line Zone.  Before investing in land, always research what the land is prone to have occur in its space.  This is important because there could be a high insurance bill associated with any of these types of risks that are likely to occur on the land.  For instance, waterfront property might at first glance seem appealing, but it could be quite expensive to insure if it is in a flood zone.  So always understand the ramifications of the parcel of land you intend to purchase.  FEMA has a useful flood zone map to give you ideas of how things are, in relation to that parcel of land you are thinking of — see FEMA’s flood zone map link here.  But you still need to find out further details to supplement your research, especially with regard to the other types of possible natural disasters earlier listed.

Can Roads Access the Land?  If the parcel of land can’t be accessed by roads, then that minimizes chances of residential or commercial use of the land.  This is particularly relevant if any road construction will actually cut into or have to take place in another landowner’s property.  It is, after all, not unheard of for certain parcels of land to be landlocked — in which case you would have to obtain a legal, recorded easement from the neighboring landowner to allow you access via their property.  Keep in mind that this isn’t something that is freely given, so expect a fee or payment of some sort for this easement to be possible.  Because of this, you might want to think twice before purchasing a landlocked parcel with no road access.

In a Related Vein, Make Sure the Land is Clear and Free of Liens, Easements, and Other Encumbrances.  When you know the property is clear, that means there’s fewer chances of worry from encumbrances via liens, taxes, or easements.  Always consult a title company before you start to invest in land.  That way you can more easily determine whether the property is clear or not.  Part of the process likely will involve obtaining a title report, which has, essentially, the dictionary definition that it is “the written analysis of the status of title to real property, including a property description, names of titleholders and how the title is held (joint tenancy, etc), tax rate, encumbrances (mortgages, liens, deeds of trusts, recorded judgments), and real property taxes due.  A title report made when the report is ordered is called a ‘preliminary title report,’ or a ‘prelim,’ and at the time of recording, an up-to-date report is issued which is the final title report.  The history of the title is called an ‘abstract.’  A title report is prepared by a title company, an abstractor attorney, or an escrow company, depending on local practice.  Normally a title report’s accuracy is insured by title insurance, which will require the insurance company to either correct any error or pay damages resulting from a ‘cloud on title,’ encumbrance, or title flaw in the title which was not reported.”

Determine Whether a Land Parcel’s Shape or Size is Reasonable.  Some land parcels have unusual shapes or even have unusual sizes (especially the small ones).  This is another case that you’ll have to think twice about investing in land that falls in this category.  If surrounding landowners did not purchase that particular parcel, there might be a reason why — sink hole zone, for instance, or something similar.  Just be wary about situations like these where land parcels have been divvied up into uncommon shapes or sizes.

What if the Property Happened to Be a Landfill?  Sometimes, unbeknownst to authorities, the parcel of land is a landfill with lots of rubbish, refuse, litter, and waste.  You would not want to invest in land that you will then have to spend more funds on just to clean up.  Perhaps hiring a professional drone driver can assist you with aerial reconnaissance of the land parcel to ensure there are no waste materials on it.

Be Aware of Eminent Domain Possibilities.  Eminent domain is when the government (or its agent) can expropriate property for use as it sees fit.  Usually this takes place during times of war — as in World War II when several hotel resorts were converted into recovery sites for servicemembers.  Still, it is not unheard of for property to be taken up by the government under eminent domain, as in the case of a land parcel being the chosen nesting grounds for an endangered species.  There’s little likelihood for eminent domain to be an eventuality, but it’s still worth noting.  And, of course, some form of compensation may be possible with the federal government should eminent domain come to pass.

Are There Any Other Offers on the Land?  Land tends to stay on the market longer than already-built residential or commercial real estate property.  But it is still advisable to know if there are any other offers on the land you have your eye on.  Once you take the step towards investing in land, it can be a potentially lucrative venture, especially if you are thinking of becoming a landlord or if you plan to sell or lease to future developers.

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What to Think About Before Investing in Land Parcels
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