THINGS YOU SHOULD KNOW ABOUT LAND INVESTMENT
Land Can Be Deceptively Complicated
On the surface, it seems like such a
simple creature – but there can be A LOT of potential problems lurking beneath
the surface of any piece of land. I wouldn’t necessarily say all these issues
are common, but the fact is – any one of these things could potentially
be a deal killer if not addressed properly. When you take it all into
consideration, it adds up to a sizable list of things that ought to be
investigated as part of your due diligence process.
Don’t get me wrong, land is a
rock-solid investment. It’s just a matter of knowing what
to watch out for, and under what circumstances you should re-adjust your offer
price (or walk away from the deal altogether).
1.
What is the Zoning on the Property?
First and foremost, it is vitally
important to understand what a property can be used for, and what the highest
and best use of the property is. With a simple phone call to
your local planning & zoning department, most offices can give you the
answer to this question in a matter of seconds. Once you know the zoning
classification (e.g. – residential, mixed-use, commercial, industrial,
agricultural, etc.), ask them to give you some examples of what type of
property would be allowed under each of these particular zoning
classifications. They may even give you some ideas that
you hadn’t previously thought of. Once you understand the most ideal
use of the property – you can quickly determine whether it will fit your needs
(or the needs of those you intend to market the property to).
2.
What is the Topography of the Property?
Especially when I’m buying vacant
land out-of-state, my first line of business is to understand the topography of
the property. There are many, many places around the world
that have very unpredictable elevations, cliffs, mountains,
valleys, ravines and more. In many cases, the topography of the land can have a
huge impact on the build-ability of a property. For the same reasons you can’t
build a house on 90 degree cliff, you should be doing some preliminary research
to find out where your property is located, and what the lay of the land is.
One of the best ways to do this is
by using Google Earth (which is free). You can
download the software, search for your property (using the address or
coordinates) and zoom in using your mouse buttons and the control and shift
keys on your keyboard. This will also allow you to tilt the earth on its side
so you can see precisely where all the hills and valleys are in your area. This
software has given me a crucial perspective on hundreds of occasions.
3.
What is the Annual Tax Obligation?
If you intend to hold onto a
property for any length of time, beware of a super high tax bill
relative to the actual value of the property itself. I haven’t run across this
issue very often, but for various reasons there are some properties that have
some ridiculously high taxes in proportion to the property’s actual
value (for example, if a $10,000 property has an annual tax bill of $2,000,
THIS IS TOO HIGH). In my experience, I’ve found that a reasonable annual tax
bill usually falls in the range of 1% – 4% of the property’s full market value.
4.
What Public Utilities are Available? (Water, Sewer, Electric, Gas, Phone)
If a property doesn’t have
access to one or more of these staples of reasonable living, the property (for
all intents and purposes) may not be considered build-able. After all, who
would want to build a house where they can’t flush the toilet or get access to
clean water? If a property isn’t build-able, you will lose a massive
portion of the property’s usability, marketability and value. Since most people
buy land with the intent building on it, you will definitely want to be
aware of anything that could become an obstacle to that objective.
5.
What are the Required Building Setbacks?
First, you need to understand the
exact dimensions of the parcel of land you are evaluating. Next, call the
local zoning department and ask them what the designated building setbacks are
for the property in question (building setback requirements are very common,
and are imposed as a way of giving order and consistency to the buildings in
any given area). When you take these setbacks and regulations into account
(relative to the size of this parcel of land), is there still enough room to
build something worthwhile – or does it render the property useless? I’ve come
across several properties that were designed (albeit, unintentionally) to be too
small and after factoring in the setbacks – you can’t build anything
on them at all, leaving them virtually worthless!
6.
Does the Property Have Any Usage Restrictions?
Most of the vacant land you’ll
encounter will have SOME kind of zoning requirements and/or
usage restrictions in place (there’s a reason you’ll never see a 100 acre
pig farm next to a 100 story skyscraper, or a massive shopping mall
next to a landfill… it just doesn’t make sense).
Every municipality in Kenya has
a plan (even if it’s a vague one) for how
they want different sections of their land to be used, regardless of who
owns it. As such, you should always expect your property to come
with some reasonable limitations on what it can be used for.
If the property is part of
a Home Owner’s Association (HOA) it will most likely have even
more stringent restrictions in place to help maintain the “quality” and
formality of their neighborhood. The idea is to keep any bizarre
behavior OUT of the neighborhood (e.g. – cars in the front yard, lawns nobody
takes care of, houses that look out-of-place or aren’t built to code).
Usage restrictions aren’t
necessarily a bad thing – they almost always make sense on some
level. They’re designed to help maintain order and support the value
of each property in the subdivision. On the same coin… if you aren’t aware
of these restrictions before you purchase, they can also create
some conflict with the plans you had in mind for the property. This isn’t
common for most land investors (because most people have no intention of using
their property for purposes that don’t jive with their surroundings), but
even so – you should always make sure you understand what the rules are
BEFORE you buy a parcel of vacant land. This will help you avoid owning a
property that requires maintenance you don’t want to do, or that can’t be
used for your intended purpose.
7.
Is the Property Located in a Flood Zone?
In some parts of the country,
parcels of land are vacant because they are literally under water. In
other areas, there are many properties located within close proximity to
bodies of water that is prone to flooding. In either case, if a
property is at risk of flooding – you’ll want to know about this before you
buy, because properties in a flood zone can be extremely expensive to
insure. Land that is located near a state of federal body of water can be extremely
valuable, but this close proximity to the water can also create a flurry of
issues… so be sure you understand the ramifications of your particular
location.
8.
Does the Soil Percolate (aka – “Perk”) or have Access to a Nearby
Sewer System?
If you’re planning to build a
“dwelling” of any kind on your parcel of land, there is one issue that
may seem insignificant at first glance, but it has the potential
to make or break a land deal. It’s called a “Perc Test” – and if you’re
dropping some serious coin on land in a rural area, this is an issue
you’ll want to be sure about before you sink your money into it.
A Perc Test (also known as “Perk
Test”, and more formally known as a “Percolation Test“), is a soil
evaluation that tests the rate at which water drains through soil.
If a property doesn’t have easy access to the local sewer system, a
perc test is required to determine whether a septic system
(the alternative to a sewer) can be installed on the property.
If a property doesn’t pass
this test, you could have a very difficult time building any type of
dwelling on the property, so unless you’re able to tap into the
municipal sewer system (which will negate this issue altogether), be sure to
give the county health department a call and ask them what is required to
install a septic system (or connect to the local sewer) in your area. For
a detailed overview of how a perc test works and how to verify the status
of this issue, check out contact me on +254 708 459 336.
9.
Is the Property Landlocked (Are there any Easements or Access Roads to the
Property)?
It’s an odd phenomenon, but believe
it or not – there are thousands of properties all over the country that
have no road access. They are surrounded on all sides by other private
property – which (according to some) deems the land virtually useless. In a
sense, these properties might as well be on the moon – because
nobody can legally access the property.
This issue can be overcome if you
can establish a legal, recorded easement to the property. This can be done if
one of the neighbors is willing to allow you access through their property
– to yours. In many cases, a neighbor shouldn’t be expected to do this for
free, you’ll have to give them a reason to help you (usually in the
form of money). Again, this isn’t an impossible issue to overcome, but it is definitely
something you’ll want to be aware of before you purchase.
10.
What is the Size and Shape of the Parcel?
I’ve seen a number of
properties that are virtually useless due to their size and shape.
I remember on one occasion, I came across a parcel of land that was 5 feet
wide and 900 feet long. I’ve also seen properties that were 10
feet by 10 feet. If you see a parcel of land with an odd shape, use your
common sense. If you can’t think of a legitimate use for a property with its
given dimensions – you’ll probably want to think twice before buying it.
11.
Does the Property Have Access to a Municipal Water Supply? If Not,
Can You Drill a Well or Have Water Trucked In (and if so, at what cost)?
There are a lot of properties in
the world that don’t have access to a municipal water supply (i.e.
– city water). This isn’t necessarily a problem, but it does mean you’ll
have to drill a well in order to access a clean water source beneath the
surface. There are a few ways to determine whether or not you’ll be able to do
this but in most cases, if there are other buildings in the near vicinity
(e.g. – homes or other dwellings built next door), this is usually a good
indication that you won’t have any problems accessing water either.
If you’re looking at a vacant lot in
the middle of the desert or near the top of a mountain with nothing around for
miles, you will probably want to verify with a professional that water will
be accessible if/when you need it (and if your only option is to have it
hauled in by truck, you’ll want to get an idea for how much this will cost on
an ongoing basis).
12.
Is there a Moratorium on Building?
I’ve actually never encountered this
in my time as a land investor, but there are some municipalities that will
impose a temporary “moratorium” on building from time to time. For various
reasons, a town will determine that they want to hit the “pause” button on all
new development, which means that for the time being, you (or anyone
else) will not be able to build anything in that area. Again – you can call the
local planning & zoning department to see if this is an issue in your area.
13.
What About Junk, Tires, Rubble, Gas, Oil, or Other Contaminants on the
Property?
On a few
occasions, I’ve discovered that what I thought was a piece of
vacant land, was actually a makeshift landfill. If you’re going to buy a
piece of land, make sure that all you’re getting is LAND (and if anything else
is coming along with the deal, make sure it’s something you actually want).
These kinds of messes can be very
expensive to clean up, companies likeOptiven ltd offer some very convenient and
cost-effective ways to verify what the property looks
like BEFORE you buy.
14.
What Were the Previous Uses of the Property?
Most counties have environmental
laws that pertain to commercially zoned property (i.e. –
properties zoned “Residential” generally aren’t held to these standards).
If you’re considering a vacant lot zoned for commercial development, make sure
you’re not inheriting any environmental contamination with the property.
For most commercial properties, the
best way to do this is by ordering a “Phase I Environmental Report” (many banks
will automatically require this, because it affects their collateral). This
report will identify if there are any “Recognized Environmental Concerns”
(RECs) on the property that you need to worry about. If you neglect to do any
environmental due diligence, the liability for any existing environmental
contamination on the property could ultimately fall on your shoulders –
making it very difficult and expensive to sell the property in the future.
For the most part, properties
located in an undeveloped area are generally not going to have these problems,
but if you’re looking at commercially zoned property that was previously
occupied by anybody or anything, I’d recommend (at the very
least) ordering a “Records Search & Risk Assessment” (RSRA) or an
“Environmental Transaction Screen” (ETS) from a local environmental
professional. These usually cost some fee and will do a high level review of
the property to determine the likelihood of any potential environmental
contamination.
15.
What Do the Surrounding Properties Look Like?
The properties next door can have
some MAJOR implications for the value and “sale-ability” of a parcel of land
(e.g. – Think about it, would you rather live next to Mt Kenya National
Park or a Landfill?). For understandable reasons, most people
care a great deal about who and what they live next to, so be
sure to get a good idea for what the surrounding properties look like
(hint: this is another potential area where a service like Optiven Ltd can help).
Is this a desirable area? Is it the
type of place where you (or anyone else) would want to live? If the surrounding
properties have any obvious issues that are beyond your control, you’ll want to
think very carefully about what this means for the property’s value and whether
or not you want to own it.
These are the questions I ask myself
before I buy any piece of vacant land. This isn’t intended to be
an all-inclusive list of EVERY possible issue you could ever
encounter, but I’d say it covers about 95% of the potential concerns you ought
to be aware of. Most of these issues come up very infrequently, but they
are very important things to consider nonetheless. Remember, you don’t need
to be afraid of buying vacant land. You just need to be informed.
Don’t Be The “Greater Fool”
The trick with vacant land is to
understand why it’s vacant in the first place. I’ve run across
quite a few vacant lots that seemed attractive at first glance, but eventually
I discovered that the reason nobody was using them was because you CAN’T use
them. If one (or more) of the issues above are prohibiting someone from putting
a property to good use, believe me – you don’t want to find out after
you already own it.
When some people look at the
prospect of owning land, they get wrapped up in the dream of property
ownership. The idea of owning a large tract of property can seem very
appealing, even if it is of no practical use to them. This kind of trap
is especially easy for people to fall into with land, because it’s a low
maintenance property and doesn’t seem complicated (even though there are a lot
of factors to consider).
MANY people buy into the dream of
property ownership – even if the investment makes absolutely no sense from a
financial standpoint.
Unfortunately, many parcels of land
are sold to “the greater fool”. When people don’t do their homework and think
things through, they can get hurt.
Don’t be the greater fool. Always be sure you have done a reasonable amount of
research and
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