Purchasing & Developing Land - Part 2 - The Process of Purchasing Land

In the first installment of this series, we looked at the advantages of raw land as an investment as well as the ways an investor might go about locating such parcels. Once a suitable piece of vacant land becomes available, a prospective buyer must then determine what price is worth the acquisition. Subsequently, the process of conveyance must proceed. In this posting, we will follow the acts of contract negotiation and legal settlement when undeveloped land changes ownership. Obviously, there are certain elements of home sales that do not apply to the exchange of raw land, at least not yet.

Contacting the Seller

The first question a buyer must answer is whether the lot is listed for sale or not. Being unlisted is not necessarily a sign that owners will not sell. However, it does make a difference in how you approach them. For a property that is listed with a real estate broker, the prospective purchaser should retain an experienced buyer's real estate broker to facilitate negotiations with the seller's broker. If the owners are trying to sell by means of their own resources -- a sign or classified advertisement, say -- it is still wise to keep a buyer's agent on hand. On the other hand, if there is no evidence of intent to sell, the agent can help you contact and negotiate with the owner.

In cases where the property is unlisted and unadvertised, an interested party can research the lot at the local municipal building or county courthouse, usually finding the owner's name through the tax assessor. Other information on the land is there, too: square footage/acreage, legal address, assessed value and the last sales price, to name a few. This is good data to have on hand in anticipation of any negotiations the owner is willing to entertain.

Negotiating a Purchase Price

Again, the tax assessor's office can give you a ballpark figure around which offers and counter-offers can hover. Another measure of value -- land values, not home values -- is information derived from a raw land appraisal. While it might seem counter-intuitive, appraising vacant land is more daunting than doing so for improved land. A land appraiser must calculate valuation as much on the buyer's intentions for the land as on the characteristics of the property itself. As a result, this valuation often exceeds assessor estimates.

Factors that affect sales price were noted in the previous installment: the presence of easements; distance to utility connections; and environmental circumstances, for example. There might be legal covenants and restrictions covering land use that would make it a less attractive place for a buyer to build a house. After all, the purchaser must project all the costs of getting the property from vacant to improved condition before agreeing to a price. All of these variables can influence the final price paid as well as future home values.

Closing on Raw Land

In some ways, settlement on raw land looks much like a home closing: title is examined for outstanding liens and financing; lienholders are paid off; final walk-through (walk-on?) is performed; funds are transferred; documents are signed and title is passed. Buyers should make sure the most accurate and up-to-date survey is incorporated into the title insurance policy. Missing from a land closing are repair escrows, hazard insurance escrows and home inspection reports, among other structure-related necessities. Still, homebuilders will have to deal with such matters at re-sale time.

In the next posting, we will look at financing the raw land purchase and the best ways to secure funds.