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The dirt on buying land
It's trickier than you think to invest in terra firma.
October 7, 2003: 4:29 PM EDT
By Lisa Gibbs, Money Magazine

NEW YORK (Money Magazine) - Fort Lauderdale accountant Richard Drath loved summertime hiking in the Colorado mountains so much that he decided to build his dream home there. He bought a lot on the side of a 14,000-foot-high mountain in Breckenridge in 2001.

Then something happened. Drath discovered he liked the art of the land deal -- and could even make money at it. Since the original purchase, he's bought five more lots and sold two. On his last trip, he found another two to consider.

"Land," Drath drolly notes -- "they're not making any more of it."

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Whether you're looking to strike it rich or simply put space between yourself and your neighbors, the idea of owning land stirs the imagination. Walking the edges of a two-acre country lot may be today's equivalent of heading west in a wagon 150 years ago. And with prices skyrocketing in recent years, property seems to be a safer place for your money than stocks or bonds.

So here's the dirt on buying dirt. It's surprisingly complicated, more so than buying a house. A piece of land may look unblemished but have all sorts of problems literally under the surface -- soil that won't handle sewage or can't support a foundation, for instance.

If you can't build on it, it's pretty much worthless. So how do you avoid getting stuck? We'll give you the tips you need to evaluate whether a property can be your little corner of America.

Be well grounded

As with a house, location is the most important issue. Proximity to schools, shopping and highways affects the resale value. So, not surprisingly, the farther you get from development, the cheaper the land.

Lots to think about
In the 1990s, the value of ready-to-build lots zoomed in many areas, outstripping gains in home prices. Data below from 1991 through 2001.
CityLand Value GrowthHome Price Growth
Boston18%11.2%
Detroit16.4%5.7%
Miami14%5.6%
Ft. Lauderdale13.5%5.6%
Baltimore12.9%7.1%
Minneapolis12.1%5.5%
Seattle11.8%5.9%
New York11.5%7.4%
Albuquerque11%4.5%
Kansas City10.1%5.2%
Sources: Hearthstone, Rosen Consulting

Property miles off the beaten path will cost more to build on, however, especially if you need to dig a well or install a septic tank. (Septic systems alone can range from $5,000 to $18,000.)

Builders may also charge more if they have to drive farther to deliver materials or have poor access to the work site.

Start your search by checking classified ads in the area that you're considering. Call real estate agents. Drive around and take pictures. Browse Realtor.com; its comprehensive land listings allow you to specify lot size.

One hint for investment hunters: Look where the paved road ends. Land that's outside city limits, but in the path of development, can appreciate dramatically when new infrastructure (road, city water and sewer) goes in.

Local land-use plans, available at city hall, will tell you where growth is moving so that you can get out ahead. They'll also spell out future uses of properties in your area, so you won't be surprised by that new industrial park proposed for next door.

Can you build or not?

Whether you're seeking a home or an investment, your single most important task is to determine what you can or cannot build on the land. The checklist below will help you.

ZONING How the land is zoned determines what rises on it. Farmers across the country are subdividing their excess farmland into homesites and hanging FOR SALE signs -- but if the land is still zoned for agricultural use, the law may allow just one home for every, say, 40 acres. A five-acre parcel, therefore, isn't worth much.

Back at city hall, find out what your zoning designation means, whether a zoning change is planned and how to obtain a building permit. Ask what kind of setbacks from the property boundaries are required. Check flood maps to see if the property is in a flood zone. And if your land borders water, environmental regulations may limit your ability to develop the land as you'd like.

UTILITIES Are there hookups for water and sewer, electricity and telephone? If not, find out when the city plans to extend access. If there's no sewer, you'll need to order soil tests from the county health department or a local engineering firm to determine whether the land can support a septic system.

SOIL QUALITY Depending on the region, you may need soil borings to determine how far down builders must go to excavate for your foundation -- too much moisture can add tens of thousands of dollars to building costs. Also, if you need to dig a well for water, find out how deep you'll likely have to go; well digging can get expensive.

TOPOGRAPHY Hills or steep slopes will affect what you can build and how much it will cost. That woodsy tract also means you'll spend big bucks on tree removal in order to build.

ROAD ACCESS If your land isn't accessible by a public road, there should be a deeded right-of-way that gives you the right to access your land. That means you and your neighbors will be responsible for road upkeep, adding more costs to the project. Find out if the road floods during heavy rain or snow.

Consult experts for advice on how to address these issues. A real estate broker will answer basic questions and guide you to the appropriate sources. Tom Paliuca, who last year bought 1.33 acres on a sparkling spring-fed river 70 miles north of Tampa, paid a local building consultant $400 to evaluate the property and a real estate lawyer $750 to check out laws on waterfront building and installing a dock. Money well spent, he says: "Like getting a second opinion."

Bottom line, make any sales contract contingent on your ability to obtain a building permit, and give yourself time to check restrictions and test as needed -- at least 60 days, but preferably 90.

Breaking ground

Knowing the answers to the questions above will also help you plan for your land-prep costs. The biggest mistake owners make, says Virginia home builder Wayne Foley, is buying a lot without considering their overall construction budget.

That includes what it'll take to get the land ready to build (tree clearing, utility hookups, permits) and the cost of the house itself. Even if you won't break ground right away, think about the kind of house you want and price it out with local builders.

Land costs should run no more than 25 percent of the overall construction budget, unless the lot is waterfront or in a highly desirable area.

But prep costs can be high: from $45,000 to $100,000 for a typical one-to two-acre northern Virginia lot, for instance.

So if you've paid $100,000 for the lot, and your total budget is $400,000, you may not have enough to build that $300,000 dream house after all the land prep. One way to ease your workload is to buy an improved lot directly from a developer. You'll pay more -- probably more than double the original price -- but there's less risk that you'll be stuck with unusable turf.

Safeguard your purchase by asking the developer for a warranty that the homesite is buildable. Ask also whether the developer will reimburse you if there are unusual circumstances or costs to make the land suitable for a foundation. As an added precaution, check the developer's history of lawsuits and bankruptcies.

Even with an improved lot, you need to scout for restrictions. Established subdivisions may require that homes be a certain minimum square footage or be built within a set time frame.

Finding the money

Now for financing. It's not as easy as financing a home. Many lenders view vacant land buys as risky; others require big down payments, as much as 50 percent.

Try local savings and loans and community banks whose loan officers are familiar with the area. Sellers often will agree to hold mortgages, though usually on less favorable terms than a bank.

Or borrow against the equity in your current home, since the interest is tax deductible up to certain limits.

Finally, you'll have post-purchase expenses. Liability insurance in most cases will be provided by your existing homeowners policy, but you may also need to fence the property to prevent unauthorized dumping or trespassing.

Yes, all this is a lot of work, but the payoff can be huge. Less than a year after buying his riverfront acre, Paliuca was offered $250,000 for it -- more than triple what he paid. (He didn't sell.)

Over time, land's price appreciation roughly tracks housing's, but in regions where developable property is relatively scarce, land prices can soar even faster than home prices. Of course, the reverse is also true: In a flat or declining housing market, land prices probably suffer more.

After rising so quickly in the 1990s, land values are due to stabilize, so don't assume that you'll double your money in a few years.

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Drath didn't start buying land to get rich, but after he bought his first Colorado lot, brokers called offering other properties, and he found he couldn't resist. His strategy: He finances 60 percent to 70 percent of the purchase price through local banks, pays for the work needed to obtain well and septic permits, and then puts the land up for resale -- at a much higher price.

"There are only 300 or 400 sites on the mountain," Drath says. "As they disappear, they'll go up in value -- and even if they don't go up, they're not going down."  Top of page




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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.