How to Minimize Risk when Investing in Raw Undeveloped Land
Are you risk averse? Tired of the risk in stocks being greater than the rewards? Most risks can be eliminated when you invest in raw land. Here are five risks that can be easily managed or eliminated:
1. Risk of loss due to overpricing
2. Risk of boundary line disputes
3. Risk of poor access
4. Risk of poor title
5. Risk of bad location
OVERPRICING - When buying stock, your greatest fear is that the price will go below what you paid. With land, you make your profit when you buy, not when you sell. HereÃÂÃÂs how itÃÂÃÂs done.
On any parcel of land, there is a price level called ÃÂÃÂfair market valueÃÂÃÂ. That is the price at which you should be able to sell your property. This price level is based on recent actual sale prices for similar properties. To become knowledgeable on prices, you can either do the research yourself or hire a buyerÃÂÃÂs agent to do it for you. I suggest learning to do it yourself. The information you need is either on the Internet or at your local property tax/deeds office.
The question becomes, ÃÂÃÂIf fair market value determines my selling price, how do I make a profit?ÃÂÃÂ You can insure your profit by either buying land BELOW ÃÂÃÂfair market valueÃÂÃÂ or by improving the land and thereby creating a ÃÂÃÂvalue-addedÃÂÃÂ property. Improve its appeal to buyers and its value can increase dramatically. The best approach is to utilize both methods. Most importantly,only buy properties priced below fair market value.
BOUNDARY LINE DISPUTES - When buying large parcels of land located in rural areas, you are likely to find that they have not been surveyed in decades. Thus, the deed you receive may describe your land inaccurately. Once you own the land, itÃÂÃÂs too late to correct the problem. The sad result is that your neighboring landowner may lay claim to part of what you thought you purchased.
This risk is easily avoided. Never buy a land parcel without first having it surveyed by a licensed surveyor. One landowner I know purchased 313 acres without a survey at what appeared to be a very good price. Several years later, when he decided to sell, I suggested he get it surveyed first. The result? There were only 205 acres - not 313 as he had purchased. Since he also did not have an attorney search the title when he bought the land, he had no way to recoup his loss.
POOR ACCESS ÃÂÃÂ Raw land should either be located on a public road, or on a private ÃÂÃÂright-of-wayÃÂÃÂ.ÃÂÃÂ If neither of these exists, it may be ÃÂÃÂlandlockedÃÂÃÂ.ÃÂÃÂ If located on a public road, access should not be a problem.ÃÂÃÂ If it is necessary to cross over the land of others to get to the property, there should be a formal, or ÃÂÃÂdeededÃÂÃÂ right-of-way agreement in place ÃÂÃÂ duly recorded at the local courthouse.
Since you are buying land to resell later, keep in mind the attitude of potential buyers later.ÃÂÃÂ Buyers tend to prefer easy access into a property, i.e. from a public road.ÃÂÃÂ Land that is located on a right-of-way may be more difficult to sell later, depending on the quality of the right-of-way.
For example, a recorded right-of-way may state that the width is only 12ÃÂÃÂ, and that it cannot be improved.ÃÂÃÂ That could mean using a muddy, pot-holed path for the way into the property.ÃÂÃÂ A right-of-way that is 45ÃÂÃÂ in width, and happens to be already paved to the property, might not be a hindrance at all.ÃÂÃÂ The quality of the right-of-way does affect the price, so check this out before you buy.
FEE SIMPLE TITLE ÃÂÃÂ When you purchase a vehicle, you receive a ÃÂÃÂtitleÃÂÃÂ to the vehicle.ÃÂÃÂ When you purchase real estate, you receive a ÃÂÃÂdeedÃÂÃÂ.ÃÂÃÂ The highest and best title you can receive is a ÃÂÃÂfee simpleÃÂÃÂ General Warranty Deed.ÃÂÃÂ As a general rule, you should never accept anything less, i.e. a Special Warranty deed, Quitclaim Deed, etc.
Because your transaction would usually begin with the signing of a contract to purchase the property, there should be language in the contract calling for a General Warranty deed.ÃÂÃÂ Once a contract has been signed, ask your attorney to ÃÂÃÂsearchÃÂÃÂ the title for any defects, and provide you with an ownerÃÂÃÂs title insurance policy.ÃÂÃÂ Title insurance insures that you are in fact receiving the appropriate title to the property.
LOCATION, LOCATION, LOCATION - When buying real estate as an investment, give serious consideration to what the next buyer would like or dislike about the property.
For example, if were the next buyer in line, would you purchase 50 or 100 acres located next to a landfill or a rock quarry?ÃÂÃÂ If your answer is ÃÂÃÂNo!ÃÂÃÂ you can assume the next buyer will probably feel the same.ÃÂÃÂ ÃÂÃÂ If your property is in a rural area, with views of the mountains, and a rushing stream through the middle, it is highly likely that anyone interested in making a purchase would fall in love with the property.
Just remember that to a legitimate buyer, the property must represent his or her idea of a ÃÂÃÂdream propertyÃÂÃÂ, no matter what the price level.ÃÂÃÂ The real lesson here is to buy property in a location that will clearly be desirable to the next buyer in line.
In summary, the risks you face when owning investment grade land are quite manageable.ÃÂÃÂ Furthermore, when compared to the potential rewards, they should not keep you awake at night.