There are two types of raw land: usable and un-usable. Un-usable land is worthless except for defensive purposes; to provide a buffer between usable land and the rest of the world. By the way, in most states you still pay taxes on un-usable land, so owning unusable land is worse than worthless.
What makes a piece of raw land usable? You will need:
- access to proven, reliable, potable water in adequate amounts
- septic or sewer systems that do not cost a bloody fortune
- a location within your driving comfort zone
- easy road and driveway access approved by the county and the fire department
- affordable electric hookup (bringing power just a quarter mile can cost you more than $25,000!)
- a good building site that will not drive you insane or into bankruptcy because of adverse topography or geology.
Bringing a parcel of raw land up to the point of usability can easily set you back
- $12,000 for a 300 foot well
- $12,000 for a modest pressure dose septic system
- $15,000 for a driveway
- $25,000 for electric service
- $10,000 for grading and site prep
- and don’t forget to set aside several thousand dollars for county fees just to install these features.
Add that up: with mid-priced necessities like those just itemized, developing the parcel will cost you about $75,000 . . . maybe a bit less, but possibly a lot more. What if the 300 foot well comes up dry as a bone? What if the fire department decides that the approach to your preferred home site unacceptable unless you add two switchbacks, a turn around at the top and, oh yes, pave the whole thing!
We haven’t even touched on the aesthetic aspects of the property. Does it have a view, good trees, acceptable sun exposure, a bubbling little creek, quietude, the chirping of birds, rock outcroppings, whatever it is that floats your boat? How much are those subjective and emotional elements worth?
I’m going to give you three examples of developing raw land.
1. The first scenario (I hear this notion all the time) is based on buying a cheap (this is a relative term, ha ha) piece of land, trucking in a $100,000 manufactured or modular home, and voila, little cabin in the woods! You already know that the development of the raw land may cost as much as the manufactured house itself. Add this up:
- five acres with a happy little view for $150,000
- $100,000 for nice manufactured home
- at least $75,000 for site development
- a two car attached to your home for about $20,000
Wait a cotton picking minute! That’s $345,000 minimum for a manufactured home not counting landscaping, irrigation, and, of course, the horse.
2. Here’s a second scenario. Buy a hilltop parcel with a view of the snow-capped Sierras for $250,000 and build a 3000 square foot dream house. Sell it. For all your hard work and risk, make a modest profit of $200,000. Let’s add this up:
- the house will cost about $450,000 to build (cheap at $150 per square foot)
- land and development at $245,000
Your project comes in at $695,000. For simplicity, let’s estimate miscellaneous annoyances such as taxes, real estate commissions, closing, loan, and holding costs at $100,000. To make your $200,000 profit you will need to sell for at least $1,000,000. Now look around at all the other houses that have sold in a two mile radius. How many of those have sold for more a million dollars. If you find a significant number of million dollar sales? Go for it. No million dollar sales? You are upside down, house poor, up the you-know-what creek without a paddle.
3. Third development idea. Build a 4000 square foot dream house on a $300,000 completely finished parcel surrounded by new homes already selling for $1,500,000 and more. Sell it. Make money.
Now add up your base costs:
- construction at $600,000
- land at $300,000
- miscellaneous at $100,000
You are into the project for $1,000,000 (gulp!), but the projected profit is as much as $500,000! Oh baby, that is a lot of profit! Do you think Uncle Sam is going to want some? See your tax guy before you even get started.
I give you these development scenari to make two important points. First, do not buy undeveloped land unless you have a feasible business plan for development. Even in historically reliable California real estate, you can get hurt buying land without:
- clear goals
- a logical time frame
- a workable plan
- enough capital to accomplish that plan
My second point may sound self-serving, but I mean it sincerely: do not buy land without the services of a knowledgeable real estate professional with experience and expertise in land purchase. Give me a call if you want to chat about buying land or if I can help you with any of your real estate needs.
Call Bob Jenkins