So you’re planning to purchase land as an investment. Be sure to follow the “golden” rule – “Buy high – sell low!” No, no – wait! I was just kidding. It’s actually “Buy low – sell high!”
So what exactly does that mean. Do you find the land you like best, and then “low ball” your offer in hopes of gaining acceptance? After all, the rule says “buy low”.
Actually, the most common mistake when investing in land is contained in the phrase “the land you like best”. By purchasing the property you think is best, and buying it “low”, you may still be paying more than its true market value. One bet to making the right choice is to buy the property no one else seems to want. I’ll explain below.
The key to maximizing your profit on land begins with a knowledge of the local market. That’s right – the local market. Years of experience has shown that it is wise to buy where you live – not in another region or state just because you heard it was a steal.
Let’s say you want to purchase 25-50 acres of raw land. Before making any offers, research all sales of land between 25-50 acres over the past 3-5 years. Yes, that’s work, and you may have to make several trips to the tax office of Register of Deeds in order to secure complete and accurate information. With luck, your area may provide all the tax and deed information online.
Create a table with the following fields:
- current owner name
- total sale price
- price per acre
- date of sale
You can simplify the process slightly by allowing the table to figure the price per acre for you automatically by inserting a formula in that entry point, i.e. total selling price divided by acreage = price per acre.
Depending on your area, you may come up with 5-10 sales per year or 20-50 per year. The more actual sales, the easier it is to determine an accurate average price per acre. You may want to add another field to your table with a grade of 1-5, with 5 being property with the most attractive features/amenities, and 1 being property with the least desirable features/amenities.
Remember, this research is for actual sales, already closed, over the past 3-5 years. Next, sort your table using only the field containing “average price per acre”. Now, review the per acre average for only the lowest “quartile” of all properties – the 25% with the lowest per acre prices. This becomes your targeted future selling price.
Now, continue your research by creating another table with properties for sale now – both “by owner” and by all brokers in the area. Sort in the same way by asking price per acre, and look at the lowest 25% by price per acre – the lowest “quartile” of prices.
From this group, research only those in the lowest 25% of asking prices per acre. From them, choose the 3 with the lowest price per acre, and then learn all you can about them. For example – 1) location, 2) road frontage, 3) topography, 4) accessibility, 5) adverse factors, and 6) marketability.
From the final three properties – those with the absolute lowest prices, choose the one you believe is most likely to produce a buyer at the lowest average price per acre in the “properties SOLD” category. Finally, make an offer of 50-60% less than the asking price, adding the leverage of an all-cash offer with no contingencies, a substantial earnest money deposit, and a 14-day closing. Put a 72-hour limit on consideration of your offer – meaning that it expires in 72 hours if not acted upon. If a seller can accept such a low offer, it often takes 72 hours of consideration, discussion with a spouse, and finally capitulation to the reality that, although lower than expected, the property will finally be sold.
Then – wait… patiently. Make it clear that your offer is sincere (although low), and is a one-time offer, not subject to negotiation or counter-offer. If the answer is no, move on to the 2nd, and then the 3rd property on your “buy list”.
As an investor, your reason for making a purchase should never be based on “what you like best”. You are buying to make a profit, and this method is virtually guaranteed to make that happen. In order to buy low, you must look for the property no one else seems to want, yet which has the seeds for simple improvement.
Your real reward, however, will be based on the improvements you make to the property before beginning to advertise and market the property. For example, I purchased a 5.74 acre property which
was already surveyed, platted, and recorded as a three homesite subdivision, and included septic permits in place for three homes. The price? $25,000.
This property was “raw” land other than the survey and septic permits, yet it had a superb view of the mountains, which was hidden by a thick stand of trees. The improvements made consisted of three things:
- grading a driveway to the best homesite, and carefully planting a beautiful carpet of green grass down the driveway
- clearing some trees to open a “window” view of the mountains
- clearing about a ¼ acre level homesite (total cost of all improvements – about $2,400)
By simply making the beauty of the property visible to potential buyers, the property sold in less than 60 days for $55,000.
How did I know $25,000 was an excellent price to offer? The tax value alone was $63,200. I knew that homesites in an adjacent subdivision had sold for about $185,000 for a one-acre lot. The offer of $25,000 amounted to 39.5% of tax value in a market where most properties sell for tax value or greater.
Very simply put – the “art of the deal” is achieved by purchasing property that others do not want, at a price reflective of that level of interest, and then adding the same degree of desirability as other similar properties through highly visible and relatively minor, and often purely cosmetic, improvements.
The formula for profit is making the purchase at a price well below the lowest previously sold property prices for similar properties, on a property with the potential to sell at today’s lowest “asking” prices, with a minimal amount of improvement.
If you want icing on your cake, also consider owner financing – making it even easier for the buyer to say “Yes!” Take 10%-20% down, at 7.99%, and amortize the balance over 15-20 years to keep the
payments unexpectedly low, and add a 3-5 balloon payment of the remaining balance. With such attractive terms, it’s easy for the buyer to make a decision. After all, the buyer doesn’t have to face an inquisitive banker, pay appraisal and loan origination fees, etc. All he has to do is like the property.
Just in case you haven’t noticed, our country, our economy, and our daily lives are still in flux. The TV ads are still hawking gold and silver, and the banks are still paying the outrageously high interest rates of 1/10 of 1% . The stock market is up, but still subject to sudden, unexpected wild rides.
Not only has land always been one of the best, most stable, appreciating assets available to us here in the U.S., but now is “never a better time” to invest. Low prices are out there, and now you have one more formula to test for yourself how lucrative land investing can be.
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