Land Development Process In 6 Steps | FortuneBuilders

The raw land development process is often viewed as a complex investing strategy—one that only “experts” should consider taking on. While investing in undeveloped land is a complex strategy,  beginners shouldn’t necessarily avoid it. In fact, I would argue that new investors can successfully invest in raw land if they mind due diligence and prepare for more work than what usually accompanies traditional exit strategies. If for nothing else, developing raw land comes with more steps.

There is no shortage of opportunity in the real estate industry as an investor. The real estate industry offers scores of options investors can pursue from investing in residential, multifamily, and commercial properties. One of the more under-utilized investment opportunities is raw land investing, and there is no reason to ignore it anymore.

What Is Raw Land Development?

Raw land development is the process of purchasing a parcel of land with the intent of either developing and building on it or holding onto it for long-term appreciation. Raw land investing has an array of configurations but will essentially provide a multitude of advantages from other types of investments; whether it be from selling the property, renting it out for passive income, or simply earning appreciation while performing little to no work.

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The Raw Land Development Process: How To Develop Land In 6 Steps

The fact of the matter remains: undeveloped real estate has the ability to deliver the same consistent cash flow as any other type of investment opportunity.

Fortunately for investors, raw land is a limited resource, making it extremely valuable. If you purchase land in an area headed towards development and growth, there’s a chance your land can become worth even more.

Investors looking to develop raw land should mind their due diligence and thoroughly educate themselves on the market where they plan to invest. The best way to do so is to pay attention to market trends.

If you can track the market’s cyclical movement, you will better understand when to buy. You must first examine the recent developments in your selected market. If there has been a recent surge in development projects in the area, buyers will likely be looking for land. It is also wise to look at the growth in surrounding markets.

Now that you have an overview of raw land as an investment, we’re going to go through the raw land development process step by step:

1. Economic Feasibility

The first step of raw land investing is to determine its economic feasibility. Like any real estate investment, it’s critical to determine your desired return on the property before getting started. This is important because it will lessen the market’s uncertainty and provide a model of your investment’s costs versus profit aspect. Although the numbers will be an estimate, understanding your project’s feasibility, including the estimated costs, revenue, and overall return, will help investors succeed.

2. Acquisition

Once you understand the costs you’re likely to encounter—including what you should receive in return—you can better determine the offer price. Investors need to have contractors submit actual bids for the project at this stage of the process. This will not only provide estimated costs for the project, including the numbers of what you’re expected to spend, but also a max offer price.

3. Zoning

Stage three of raw land investing deals primarily with the design of the land. In essence, this pertains to what type of property should be constructed on the parcel, including looking into local zoning codes.

Depending on the type of property you’re looking to construct, or how you intend to present the property to buyers, zoning will play an important role in how you proceed. Zoning codes will essentially determine what types of properties—whether single-family, multifamily, condominium, or commercial—can be built on the lot. As an investor, this could ultimately hinder your investment approach. When getting started in raw land investing, it’s vitally important to understand the area’s zoning laws.

4. Financing

Like all real estate investments, how you intend to use the property will dictate the type of financing you obtain. The one aspect investors should care the most about is the loan-to-cost ratio (LTC). In essence, the LTC is the amount of money the lender will provide for the project, which will generally depend on the type of construction and use of the property. Although most lenders will only provide a percentage of the overall costs (generally between 80-85 percent), owner-occupied homes are eligible to get standard bank financing.

5. Construction

The second-to-last stage of the raw land development process is construction. In most cases, this will consist of horizontal development—like grading for roads, curbs, and utilities—and eventually building the property from the ground up. One element investors also need to be aware of is the construction financing aspect of the project. Generally speaking, contractors will be paid in increments of duties performed, including phases of the project. In many cases, construction lenders will hold approximately 10 percent of the construction loan until the project is completed.

[ Check out our guide about how to get started with constructing new build real estate on your land development to learn more. ]

6. Marketing

The final step to the land development process is marketing. This is where stage one is of critical importance. Researching the neighborhood, the market price, and demand for rentals will pay off when determining your marketing strategy. Investors should also have a marketing plan in place to attract buyers to the property. This may include working with a realtor, online listings, the MLS, advertising in newspapers, and even social media.

Top 5 Benefits Of Developing Land

The attraction to the land development process is easy to see: this undeveloped asset not only costs less to purchase than a developed lot but also is generally less expensive to own over time. There is more to like, however: it offers appreciation potential whether or not the vacant area is improved upon. While there are many risks and rewards in real estate investing, raw land is one of the more secure investments to make.

This is what experts at Precondo have to say about raw land: “Investing in raw land allows people to develop it according to their needs and wants. The cost of raw land is lower than that of developed land, which entails greater profits for investors. Investors can purchase raw land and then sell them as plots. It offers them more opportunities and profits and helps them build a great portfolio”. To gain a better understanding of the investor appeal, here are the five main advantages of raw land development:

  • Raw land investments are typically less competitive than residential real estate

  • Sellers of raw land investments can be more likely to finance

  • Purchase price and holding costs are lower with raw land

  • The appreciation potential can remain high even with less than stellar market conditions

  • There are countless development opportunities for raw land

  • 1. Less Competition

    Unlike regular real estate investments, which are currently experiencing higher-than-normal competition in most markets, raw land has virtually no competition to deal with. In most cases, investors are looking for established properties, such as residential or commercial properties, that provide an immediate income source. Unless optimized to do so, undeveloped land will generally not earn income regularly.

    2. Opportunity For Seller Financing

    Raw land investments award owners more opportunities to use seller financing. Since traditional lenders (i.e., big banks) are often more hesitant to loan money for vacant land, you—as the landowner—get to act as the bank. If someone is in the market for raw land and can’t acquire a loan, you can lend them capital but charge them higher interest rates. This is a win-win situation for every party involved.

    3. Inexpensive

    In comparison to acquiring a developed property, buying raw land is relatively inexpensive to acquire and own. It has minimal carrying costs, including lower property taxes and insurance, but maintenance costs are modest. In fact, performing maintenance on undeveloped land isn’t required, as a vacant lot can be purchased and held on to until appreciation rates reach a level where it can be sold for a profit. Also, undeveloped landowners are generally highly motivated to sell because they are typically absentee owners with little-to-no emotional connection to the property. That said, the right property can provide an immense upside for investors with a strategy in mind for the land.

    4. Appreciation Potential

    Arguably the biggest benefit of investing in raw land is its appreciation potential. Even in times of economic uncertainty, raw land is a hard asset. Since land is such a scarce resource, it will always be valuable, even if market conditions are rough. Raw land will always be needed, regardless of whether or not it holds economic value. On the other hand, if the economy is thriving, there is a higher probability that your land’s value will appreciate. As land continues to be developed, vacant property becomes harder to come by. Consequently, the vacant land leftover becomes more of a commodity, especially in a popular area.

    5. Development Possibilities

    As an investor, the allure of raw land investing is in the opportunity it holds. Aside from earning long-term appreciation, the land can be developed into further possibilities, like a single-family home, multifamily property, or condominium. Although zoning and building codes may limit an investor’s opportunities depending on the location, raw land offers investors the ability to choose and develop their own investment path from scratch.

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    How To Develop Land: 5 Pro Tips

    Raw land development is not for the faint of heart. The process can require extensive time and research, especially when compared to traditional residential investment. However, as I mentioned above, the right preparation will make a raw land investment well worth it. Read through the following tips on developing raw land before you get started:

    5 Important Factors In Raw Land Development

    When it comes to raw land development, investors essentially combine multiple investment strategies into one: purchasing land, building new construction, and renting or selling the final product. This deal type’s complexity will demand a significant amount of planning from investors before they ever even purchase the property. Do not let this intimidate you, as there are ways to systemize the process and make it easier to navigate. Investing hoping to prepare should research the following factors, so they know exactly what to look for (and evaluate) when developing raw land:

    [ Ready to take the next step in your real estate education? Learn how to get started in real estate investing by attending our FREE online real estate class. ]

    10 Things To Consider Before Developing Land

    The extra steps required of investors to successfully develop land extends beyond finding and purchasing it. There are several factors that investors will need to consider every time they evaluate a piece of land. While it may seem intimidating now, these elements will become second nature over time. Until then — review the following things to consider before developing raw land:

    Summary

    If you are looking for a profitable real estate investment strategy, it may be time to study the raw land development process. Investing in land is a great low-cost way to expand your real estate portfolio. Follow the steps outlined above if you hope to achieve success with raw land development. Remember to rely heavily on research as you venture into this investment strategy. Always consider how the area could change and develop your investment accordingly. Separate yourself from the competition today and add a raw land investment to your portfolio.

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