The Do’s and Don’ts of Buying Vacant Land

Imagine as you scan the classified real estate listings you see a listing that seems to read like an answer to your prayers. Forty acres with a year round creek, part wooded, part pasture, marketable timber and low down payment and low monthly payments.   Its seems like you found the buy of the century. You decide to take a look and it turns out to be more perfect than the description in the advertisement.  The trees are huge and you follow the creek to a beautiful green meadow.  The agent sees your enthusiasm and asks if you would like to put down some earnest money and make an offer to purchase.   At this point you know the property is what you want and you figure if you don’t make an offer someone else will surely come along and buy it. You are prepared to shell out a big portion of you saving s for the down payment. But wait….. before you make that purchase keep in mind the old motto, “let the buyer beware.”  Let’s look at several pitfalls or problems that could occur when buying a piece of real estate, particularly vacant land.

Does the property have access?

It cannot be emphasized enough how important access rights are.   Be sure beyond a shadow of a doubt that the land has permanent, legal and transferable access and is specified in the deed. There once was couple that bought a lovely piece of property and who built their dream house based on the neighbor’s assurance that he had no objection to them using his road to access their property.  Well at some point the couple had a minor disagreement with the unhappy neighbor  who promptly blocked the road and denied access. They tried to access their property though a bordering piece of government land but eventually the agency got wind or what they were doing told them to cease and desist or risk trespassing charges. The unfortunate couple who invested everything in the house did not have money left for an expensive legal battle and ended up abandoning the place which cost the m the total amount of theirs savings! You can see it is imperative that you make sure that no one can stop you from getting to your property.  If it’s possible to purchase access in the form of an easement from a neighbor or government agency, make sure it is transferrable and not revocable.  This is especially important if you later decide to sell.

What about water and septic concerns?

Water supply and soil drainage are two more critical concerns. That  creek on your dream property is lovely  and offers a picture perfect view  but you should also take the time to learn if the water on your site is part of a watershed or part of a protected water way. You may discover that you do not have the legal right to use a drop of it without breaking the law. In some cases if the water way is protected you may have to keep livestock or septic tanks several hundred feet from the creek or worse prevent you from putting any type of septic tank on the property.   It is best to refrain from buying a watershed property unless you ca n get a written statement from the city specifying your rights  and that you are certain you can comply with every detail  of a regulated watershed agreement.

What are the soil conditions?

The installation of a septic tank will be necessary at some point if you do not have a local sewer service to hook up to.  Before you buy, you should make a several “perk ‘tests before buying the property to determine if the soil conditions on your site are conducive to adequate water drainage. If the site does not “perk” your permit for a legal septic tank will not be approved.  I know of one case where the owner put up the building first only to find out his property did not perk and the town would not approve the installation of his septic system. He could not use the building for the purpose he originally intended and it remained an overpriced storage building because plumbing could not be installed.  There have also been cases of properties with soil that drains too fast as with properties located in sandy regions. 

What about the mineral rights?

Most people don’t consider mineral rights to be of much importance. When one thinks of mineral rights they think of gold or crude oil.  But there was one instance for example of one man that bought what he thought was an ideal property of building a house and planting an orchard. He invested a fortune in his land to grow the trees and after a few years began to produce a crop that finally gave him an income. The man knew he didn’t have minerals rights but the real estate agent assured him that it wasn’t important.  Several years went by and  he was coming home from town only to discover  bulldozers  were demolishing his house and one or more rows of his orchard already gone!. Apparently, coal had been found on his land and it seems that his deed stated plainly that the only compensation due him was for the cost of the materials of his house and barn. In this situation, the farmer had no legal recourse and could not recover the time and money he invested in his orchard.  Just because there has been no minerals  of value that has been found on your property when you buy it does not guarantee that one or more minerals could be discovered in the future or  that some new use won’t be discovered for an existing mineral that you thought was worthless.

Are utilities available?

 When buying a property with a remote location you should know that if you r property is a considerable distance from the nearest utility line, some companies may reserve the right to refuse service to an area that they determine is too costly to maintain.  Check with the local power company and make sure that service to your area can be purchased and what it will cost.  Depending on the access and where you are planning to build, more than one utility pole may need to be purchased, driving up the cost of site development significantly.  

Who owns the timber rights?

In most cases timber rights do not pose much of a problem. However if you are buying a lot of land, make sure that someone does not have timber contract on the place.  If there is, extreme caution should be used before buying.  You will want to know when the contract is set to expire.  Also you will want to know what condition the loggers are required to leave the property in after the harvest. If you don’t, you could come home to a terrible mess that could cost you a lot of money to fix.  After looking over the limber contract you may decide to lower your offing amount or reconsider buying the property all together.

 

 

 

 

Looking for Neighborhood Trends

   

Looking for Neighborhood Trends

When looking for properties that have the best possible long term investment and value potential there are several thing s one can look at to determine if there is demand and increasing value  in a neighborhood or market area.

Observing the Life Cycle of a Neighborhood

Recognition of the stage of a life cycle of neighborhood can help you determine a value trend for your investment property. The four stages of a life cycle of a neighborhood are the growth cycle- the time when there is the fastest growth in desirability and value. The stable period, prices and values remain stable and high in value for the longest period of time.  The neighborhood in decline will show a trend of sales of homes as selling” below market prices”.  The revitalization cycle which may or may not occur in a neighborhood, but if it does, the trend will be an increase in remodeling, rebuilding and higher values.  I know of one area where the neighborhood remained in decline for several years after a major company that employed most of the town moved from the area.  After a time, a developer noticed the area was close to a state park and built some small condos right outside the town that included greenbelt walking trails and promoted the neighborhood as a recreational area.  Other builders followed suit with more condos, tennis courts, pools and small “cabin” style homes.  The area once again enjoys a new cycle of growth an increase in demand and value.  

Observing Social Trends

Community living as a new social trend is on the rise. Community living embraces a shared sense of community, shared responsibility of neighborhood and security.   Many developers are now planning their developments with this concept in mind.  Instead of building on larger single lots that are generally isolated or located farther from neighborhood services, developments are now planned with the community support of local services within walking distance of the units they build.  The lots tend to be smaller which not only keep development cost low but also to increase open and common use areas that are desirable features in community living.  Also the trend for smaller lots is relative to the fact that many homeowners want to spend less time doing yard work!  If you see an increase trend in the sales of community living style properties in an area, this property type may be a good investment choice. These properties include condominiums, cooperatives, retirement villages, gated communities and resort complexes. Look at Trends in Lifestyle 

People  that either work from home or operate a small home business is another lifestyle trend on the rise.  More and more homes will be built with offices in the future and is considered a desirable feature by 58 % of the people recently surveyed by the National Association of Home Builders.  Properties that have this feature will likely be more desirable and in demand than properties that don’t.

Observing Other Trends

Looking at population trends for an area can be helpful when choosing a desirable area for investment.  If there is an increase of people moving into an area there will be more demand for properties and values will increase.

If the population has increased over two or more consecutive years than this area will likely have good potential for investment. Other social trends such as the increase or decrease in average family size can indicate the best size house for investment potential.  Does the area have a college or close to a college town with a lot of single students or residents?  Is the area a place where people are migrating from or to?  This type of information can show you the property size and type that will likely be in the most demand in a market area and increase your best chance of real estate investing success.

Finding the Right Property to Buy

                                                   

Even though the recent recession has led to an unavoidable decline in the real estate market, we can always plan for the next recovery which always succeeds a down turn.

Long term statistics reveal the total value of all property in the United States are now increasing overall, which is nice to know, but doesn’t help us much because not all properties are increasing at the same rate. Some properties are staying the same or even decreasing in value.  So when attempting to find the right property to invest in, the trick is to look for the properties that are increasing in value and preferably increasing at a faster rate than the average home in the neighborhood.

To increase your chances of finding such a property, let’s look at some features that tend to add desire and demand.  Learning how to recognize properties with features that are desirable will help you choose the properties are likely to increase in value.

Buy in the Path of Progress

As a town or city’s population starts to grow, it is not too difficult to see where the areas of progress are.  Generally, areas of development tend to move outward from the main core of a city or town.  If you go out into your neighborhood what do you see? Is there land being cleared for new subdivisions? Are the roads being widened? Are there new shopping centers going up? This is the path of progress. Land in this area and the area immediately beyond is growing in value faster than land in other areas not developed or already over-developed. There are other ways to find the path of progress in an area.  Check the local newspaper for clues- When builders develop in an area they place fancy, colorful ads to entice perspective buyers.  Locseveral of these areas on a map will also help you find the path of progress.

Notice where companies are building their factories or manufacturing plants.  Although many factories seem to be located out in the “middle of nowhere”, these companies are also are interested in bargains and tend to build where land is inexpensive.  But inexpensive does not mean worthless. Factory workers need places to eat, relax after work and shop on the way to and from their job and it’s not long before the land in these areas sprout up restaurants, cocktail lounges and a variety of retail shops. 

Vacant land is not the only type of property to look for in the path of progress. There are many other property types such as houses, condominiums, apartments, office buildings and various commercial buildings that can also be good investment s and the kind of property you choose depends just as much on your investment objectives as the area you invest in.

Buy on or near the Water

There is something alluring and captivating about real estate located on water.  People love to be near it, swim in it, boat in it or even just look at it. If you are looking in an area that has water,  buy as close to it as you can and you can expect a better than average return.  Many cities are now spending money to revitalize river ways and canals, so opportunities to invest in these areas are increasing. To avoid the risk of property damage caused by flooding, make sure your property is located in a 100 to 500 year flood plain elevation. Have the levels checked before you buy.

Buy on a Hillside or Hill top

People love to live on Hill sides and hill tops.  It might be because they like the view or maybe they just like to be “king of the hill”.  Whatever the reason, people are willing to pay more for hillside property than flat land or bottom land. The price of hillside or hilltop lots average as much as 50% more than the other types in the same development.  Be aware of any steep areas of the site that may be prone to erosion before you build as the washing away of dirt under a foundation can cause problems that are difficult and costly to treat.

The old maxim, the three most important things in real estate is, location, location, location really does apply when finding and choosing the right property.  Although it is not the only thing to consider, finding real estate with one or more of these features could mean greatly increasing your chances of making a very profitable investment decision.

The Value of A Neighborhood

The value of a neighborhood  can affect the  affect the value of a property – pulling it to the standard or prevailing value for that neighborhood. It is always location specific and can be affected by good and bad location factors.

 Can properties be worth more than the highest sale in the area?  Yes, the quality may be newer or superior  to those properties that were originally established. Or there may be other homes in the area that haven’t sold yet.  If there are no sales similar to the quality or size of the home it would have to be compared to other competing neighborhoods with similar neighborhood influences.  Good influences would be a good school district and or close to schools, local shopping and employment. Bad influences would be nearby location to power plants, landfills, areas adjacent to large airports, etc.  Neighborhoods located near power plants experienced reduced property values of 4-  7% from those neighborhoods that were not.  Homes near landfills were valued at 6-10 % below homes than those that were not.

 Many appraisers  believe  that the house is a function of the land  and building value ratios are used to support the highest value that the lot can support . Ratios are developed and used when developing the highest and best use for a new site.

Is there such a thing as an under- improvement for the neighborhood?

Yes ,  happily this is a better situation.  The least expensive home can enjoy the benefits of the higher priced homes amenities.  Potential buyers will tend to purchase  a smaller home in the neighborhood they like as opposed to a larger, nicer home in an area they don’t.  Also, under- improvements can be added to and its value will improve based on the nature and quality of the improvements.

What is an over- improvement?

The Dictionary or of Appraisal , Third Edition states ” an improvement that does not represent the most  profitable use for the site on which it is placed because it is too large or too costly and cannot develop the highest possible land value, may be temporary or permanent”. 

After looking at the building to land ratios, active and sold prices as well as location factors, an appraiser will determine if a property is an over- improvement for a particular area.  In most cases , there are competing neighborhoods that can support  larger homes, however if your home is a $300,000 home and the majority of the homes are $100,000, it is likely the property will suffer some loss .

How does the condition of the physical neighborhood affect the property value?

 Conditions of the streets, sidewalks drainage ways and street signs, affect the demand, marketability  and  value of the subject. Whether the property is a condo, PUD or detached home, streets that are in poor condition can indicate that the municipality is unable to generate enough income to do the repairs.  If the roads are private, who maintains them?  Do the roads all weather surface and can the mail carriers, school buses and garbage trucks have access and use the roads?

Other  factors such as, the general appearances of homes, number of vacant homes, how well they are maintained  can be considered  either having a positive or negative  influence.  Is there  availability and access to local parks and public areas? Do these local amenities maintained or run down? Lack luster landscaping also tends to detract from values of homes in their vicinity while landscaping that shows “pride of ownership” tend to have a positive effect on the other homes in the neighborhood.

Reduce Risk and Increase Investing Success

Reducing risk or exposure when investing can save you from future financial headaches and keep you from becoming that owner who is suddenly motivated to sell. Looking at the mortgage or note instrument used in connection with the real estate investment can help you determine if your purchase is a good buy. Ratios are good indicators that can help you determine if your purchase decision is a stop or a go.

You have found a property that looks like it might be a possible good investment. The home is in fairly good condition and is located in a neighborhood that is stable to increasing. You have discovered that after speaking to the owner, the first loan is $30,000 and the second loan is $10,000. The owner is asking $70,000 but your rough estimate (after doing your homework) is closer to $60,000 with the home in its present condition.

The Total Loans-to-Value Ratio

The total loans to value ratio is derived by dividing the total amount of loans by the estimated value of the property. The loan to value ratio for our property is $40,000/$60,000 = 67%. The percentage of loans relative to the estimated value of the property should always be less than 75%. Even if you are purchasing in a fast moving market, the percentage should not exceed 85%. By not exceeding the 85% rule you give yourself a cushion and better chance of reducing your risk.

The Equity-to-Debt Ratio 

Dividing the equity in the property by the total amount of debt yields this important ratio. The equity in our property is $60,000- $40,000 = $20,000. The Equity to Debt Ratio is $20,000/$40,000 = 50%. The general consensus is, the higher the ratio, the more secure the financial position. Mortgages with an equity to debt ratio lower than 25% percentage means you will likely have to hold the property for a longer term to wait for your equity to increase to recapture a profit.

 The Discount-to-Debt Ratio

In our example, the seller is further willing to discount his second mortgage of $10,000 to $7,000 if he can receive cash. The discount to debt ratio is used to measure mortgage risk and is found by dividing the amount discounted by the equity or $3,000/$20,000 = 15%. This percentage represents the cost necessary to bring the underlying loan, in this case, the second mortgage current if it should ever go into default. Mortgages are not always discounted but when they are, a ratio of more than 15%, indicates that your loan is in a good position and is “covered” at least on paper anyway.

If all three ratios meet your criteria – low debt, high equity and mortgage risk covered, then you may want to proceed. But before you do, make sure your real estate has the right location. Ask yourself, would I like to own this property? Would I live here? If not, why? Are there any features you absolutely do not like? Too close to a busy road? Low lying area- possibly flood prone? Too close to commercial plant or constant noise? Don’t select properties that are good deals but may be hard to sell or you may have to discount your asking price heavily because of adverse location factors which in some cases may be incurable.

When to walk away from a property

You are examining potential properties for investment. You have analyzed all the numbers and determine it would be a good investment on paper. But when you have the inspection done on the property you find everything is not what it appears.
If these repair items come up in the home inspection report be wary-The cost of correcting these conditions may be too costly and turn your financial plan into a black hole.

Termites
The home inspection reports says there is an infestation of termites.
Termites can do a lot of damage that is not always seen. Termite treatments are costly. Even if the seller pays for the treatment, the damage to the structure of property could be permanent.

Water damage from Plumbing or Roofs
Next to termites this is the second most costly damage to correct. Chronic long term damage from leaks causes dry rot in floors wall and ceiling and can even extend to rot in within structure walls. What will this cost and is it allowed for in the budget? Unless you know for sure what the cost of the damage is likely to be, it’s better to walk away it could be more extensive and costly that you can safely estimate.

Structural Defects
If the inspector finds unusually large cracks in the foundation, walls, floors or ceilings, this could be a sign of serious structural defects. The causes could have something to do with the how the home sits on the site and may be affected by grade or topography of the property. Unfavorable site factors may or may not be correctable.

Evidence of other foundation problems like evidence of site flooding which cause foundation blocks to sink into the ground causing them to shift possibly causing permanent settlement issues.

Or, if there has been previous damage due to an earthquake or tornado. This is the most extensive damage and the most costly to fix. In some causes it may not be feasible or worth the investment.

If you think you can determine the cost of repairs and reduce the purchase price to compensate for the repairs, it might be worth it. But if you suspect any hidden damage to the home than walk away from the property and find another one.

Converting Your Property to Produce Income

           Should you consider planning on converting your home to generate additional income? In slow times, the additional income can help to cover your mortgage or household expenses. 

 The first thing to consider before converting is- Is it legally permissable? Check with local zoning boards first to see if approval is needed to convert a portion of your home to an “accessory dwelling unit” or apartment.  

Ignoring local zoning rules can be costly and the penalties of putting in an illegal apartment can negate the future possible income.  If your home is in a community with a property owners association, you should also check with them as some private subdivisions may have restrictions even if the city or county does not.

Is it practical and feasible to convert the property to an apartment unit? Homes that have a hillside walk out basement tend to  be more practical to convert then a second story which may need additional plumbing and electric for an upstairs kitchen and the cost of a making a separate entrance.

Would be landlords should also ask themselves if they are willing to give up some of their privacy, as some units may share common walls or areas such as stairways or hallways. Tennant will likely use a common driveway and some additional site work may be necessary for adequate parking.

Owners should be aware of what units similar in size and utility are leasing for and if there is an adequate demand in their area.  If the rental market is slow, you may need to reduce your price at first to attract long term renters.  Realtors that offer property management are very knowledgeable about their local market and may be able to help you determine what features are desired by tenants and what your unit should rent for.

 

 

Sources:

Hot Springs Appraisal Services,  May 2010

Realtors Magazine, February 2010