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. Here’s how it’s done.
On any parcel of land, there is a price level called “fair market value”. 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 buyer’s 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, “If fair market value determines my selling price, how do I make a profit?” You can insure your profit by either buying land BELOW “fair market value” or by improving the land and thereby creating a “value-added” 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, it’s 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 – Raw land should either be located on a public road, or on a private “right-of-way”. If neither of these exists, it may be “landlocked”. If located on a public road, access should not be a problem. If it is necessary to cross over the land of others to get to the property, there should be a formal, or “deeded” right-of-way agreement in place – duly recorded at the local courthouse.
Since you are buying land to resell later, keep in mind the attitude of potential buyers later. Buyers tend to prefer easy access into a property, i.e. from a public road. 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 12’, and that it cannot be improved. That could mean using a muddy, pot-holed path for the way into the property. A right-of-way that is 45’ in width, and happens to be already paved to the property, might not be a hindrance at all. The quality of the right-of-way does affect the price, so check this out before you buy.
FEE SIMPLE TITLE – When you purchase a vehicle, you receive a “title” to the vehicle. When you purchase real estate, you receive a “deed”. The highest and best title you can receive is a “fee simple” General Warranty Deed. 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. Once a contract has been signed, ask your attorney to “search” the title for any defects, and provide you with an owner’s title insurance policy. 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? If your answer is “No!” you can assume the next buyer will probably feel the same. 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 “dream property”, no matter what the price level. 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. Furthermore, when compared to the potential rewards, they should not keep you awake at night.
