Investing in vacant land for commercial real estate can be a lucrative decision, but it also requires careful consideration and thorough research. Whether you're a seasoned real estate investor or a first-time buyer, before making a purchase, there are specific steps that you should complete to ensure that you are making a wise investment. To help you do that, our brokers are sharing this Buying Vacant Land Checklist to help you minimize risks and make informed decisions when investing in vacant land for commercial purposes.
Why Might Buying Vacant Land for Commercial Real Estate Be Beneficial?
When it comes to commercial real estate investing, purchasing vacant land can offer several advantages.
Allows for customization and flexibility in building use
Pickett Sprouse broker Emilee Collins, CCIM, notes that one of the most significant benefits of buying vacant land is that it allows a business to "start from scratch and tailor a site to its specific needs." This is beneficial for businesses that have unique needs and may just be starting out and for existing businesses looking for a place to expand.
Increased revenue potential and higher returns on investment
Pickett Sprouse broker Brad Gregory points out that buying vacant land for commercial property purposes can rapidly increase the value of the land and give you a higher return on your investment. Brad offers the example of a recent client. "The land they were looking at was just raw farmland, but they needed somewhere that they could develop so that it was suitable for building townhomes. You're talking about a piece of land quadrupling in value."
Can serve as an asset diversification strategy
This strategy is known as "buy and hold" and can allow you to spread your investment risk. Brad notes though that in the current economy and with interest rates as high as they are, the only ones that are doing this at this time are those that can pay in cash. "You might have somebody that has a 1031 exchange or something like that, and because they can't find anything else that might buy and hold. Otherwise, that strategy is fairly risky unless you're in a rapidly growing area."
How can you minimize risk when determining whether the land you are considering is a good investment? That's where the 'Buying Vacant Land Checklist' comes in handy.
Buying Vacant Land Checklist
Here's our due diligence checklist for buying land for commercial real estate uses.
Research area where land is located
Researching the area where the land you're interested in is located includes understanding the potential for growth. Farmland in Durham or near Chapel Hill or Hillsborough may have a very different outlook than farmland in Granville or Caswell counties.
The flip side of this is understanding where there may be too much growth. According to Brad, "If there is already a lot of growth going on, like in Harnett County or around Wilmington, and there are a lot of builders that already have lots approved, they're probably not buying land. They're not doing anything else until they sell the current inventory. They're waiting for it to be absorbed, and then they'll move on to the next parcel."
Brad adds that it's also important to understand what city or town leaders' plans are for the area and what their ideal use for the land is. "If they want to see more manufacturing plants or affordable housing, buying land with the hopes of developing it into luxury apartments or townhomes probably isn't going to work. You're just going to be fighting an uphill battle."
Understanding what is and isn't allowed on the site through zoning is crucial when considering whether to purchase land. Emilee gives these questions that should be asked:
- What municipality is it in?
- What is allowed?
- What are the setbacks?
- What are the height restrictions?
- Are you near interstates or other roadways where there are easements?
Emilee says, "It just goes back to, 'What are you allowed to do on the site?' If you're not allowed to do what you're hoping to do, you would need to get it rezoned."
The next item that you need to determine is what utilities are available for the property. According to Brad, "Access to utilities is the biggest determination of the value of the property." These include the following:
- Waste disposal
Emilee notes that "If the infrastructure is not available, then you have to go to private well and septic systems or pay to have the infrastructure brought in underground."
Once you know what utilities are available, having a site survey performed is important if you want to build on the land. According to Rega Engineering, a site survey is a type of land survey that "identifies any design, construction, or environmental limitations at a potential construction site. It involves a comprehensive examination of the site's topography, soil type, drainage, vegetation, climate, existing structures and utilities, and surrounding land use."
Having a surveyor identify the topography and features of the land is crucial for site planning and design of the commercial property. This includes determining the best location for buildings, access roads, parking areas, utilities, and whether there are any wetland restrictions.
Emilee says, "As part of the surveying process, you'll have all your boundaries marked, easements marked, as well as any water lines."
Brad adds that if you're going to have to install a septic system, it's essential to have the soil evaluated to determine its ability to absorb water. One of the ways this can be done is through a percolation test or perc test. A perc test involves digging a hole in the ground, filling it with water, and then measuring the rate at which the water drains into the soil. Another way is to use an auger to pull soil samples in order to understand the nature of those soils and what their predicted absorption is. Both tests provide information that is then used to determine the suitability of the soil for installing a septic system.
Brad offers an example. "I had 80 acres of beautiful land that sold, and only eight acres perced." That means that only eight out of 80 acres were capable of absorbing water from a septic system and able to be developed.
The next step in a land purchase is having an engineer develop a site plan. Emilee explains that a site plan is a scale drawing or diagram that is used to understand proposed plans for a commercial or residential project. It's created by architects and developers usually through specialized site plan software and shows the entire property meticulously designed and planned. The purpose of a site plan is to show a clear and comprehensive view of the development.
"Having an engineer develop a site plan will help you understand what will fit on the property itself. It will help you to determine whether the land will work for what you need to put on it in the way of building parking, stormwater mitigation, ingress and egress, all those things."
Know what has already been approved for the land
Knowing what, if anything, has already been approved for the land is something that Brad cannot stress enough. He says that usually the answer to the question of "what has been approved?" is "nothing," but occasionally, the answer is what he describes as "a gold mine."
Brad had a recent situation where he was representing a buyer looking at raw land. A previous interested buyer for the land had already received approval from the appropriate local governments for approximately 70 townhomes on the site. That deal fell through, and the seller didn't say anything about the approved plans for the site to Brad or his client. The plans came up somewhat accidentally, and Brad was able to access what he estimates would have taken about six months of work worth approximately $200,000. Neither he nor his buyer would have known about the plans if they hadn't asked.
Two other items to add to your land buying checklist involve setting a realistic budget and legal considerations.
Setting a realistic budget
When setting a realistic budget for buying vacant land for commercial property, Brad says it's important to know the costs associated with some of the potential significant expenses. This includes the impact they may have on the potential use and subsequent value of the land. Examples he gives are site plan, bringing in sewer, if a pump station has to be installed, surveys and engineers, and whether a public road has to be widened and/or a turn lane created.
A real estate attorney can help address any legal considerations involved with assessing and purchasing the land. They play a crucial role in understanding zoning laws, ensuring the property has legal access, evaluating rights of way and easements, interpreting any encroachments on the property, and helping close the deal. They can also ensure that the property taxes have been paid and determine whether the property has any outstanding liens or claims.
Bottom Line on our Buying Vacant Land Checklist
The bottom line on our buying vacant land checklist is that this process requires diligent research, careful planning, and professional advice. By following this general checklist, you can ensure that the land you buy is a solid investment and meets your needs.