I live in Southern California in a metro/bedroom community, so a lot of raw land does not surround me. However, you don’t have to drive too far east to see a great deal of raw land. I often wonder who owns land like that, how are they creating income from it and what their end game is. My mindset about property is that it should either shelter or be used to generate revenue, so let’s take a look at the possibilities.
Ways to Generate Income from Raw Land
There are two commonly known ways income can be created with raw land: land development or selling it to a developer. However, there is a third little known strategy– flipping the contract, which is like wholesaling but more advanced because it also requires that the party controlling the contract does much of the due diligence (zoning, environmental studies and such). There are important steps to follow with each of these strategies for investing in land. Here, we’ll cover land development.
How to Develop Land as an Investor
If you would like to be a land developer, there is a lot to learn. Before purchasing any land, you should do your due diligence and know your end game, which could be, for example, building a tract of 20 homes. What does the due diligence look like?
4 Phases of a Land Development Project
There are commonly four phases (if you don’t consider acquisition) to a land development project, and due diligence is the main focus of part one, concepts and two, pre-development.
Land Development: The Concept Phase
This part of the process takes a big vision balanced with detailed planning. One of the most significant factors when it comes to the concept phase is viability, which not only relates to profitability but also approval by the municipality. You must do your due diligence to ensure your vision for the project is realistic. Often, you’re on the right track if you can prove the project will improve the community, increase revenue (tax dollars), and fall within the scope of the master plan for the area. The Concept stage is usually your green light, red light phase where you decide if the reward of the land development project outweighs the risk, or not. This phase does require out of pocket expenses without the assurance of approval. The problem is, the project can’t get approved without it.
Land Development: The Pre-Development Phase
This part of the process takes an eye for detail and a good team. At this time, local and state laws must be taken into consideration, addressing zoning and project usage issues. There are also requirements regarding engineering and environmental regulations which will differ by area. Financing for the land development project will be sought during this phase and preliminary timelines will also be created, as they are needed for the financing package.
Land Development: The Construction Phase
This part of the process is usually handled by the general contractor using the finalized timelines created in the pre-development phase. Another major factor in the construction phase is the sequencing of the project. Sequencing affects all aspects of the project from the ordering of materials to inspections. Poor organization in this phase can result in not only production issues but can also dramatically impact the bottom line.
Land Development: The Marketing Phase
This is the marketing/sales part of the project. It will differ dramatically based on the kind of development project you’re working on. For example, with a housing development, the goal is to have the model homes completed and staged as quickly as possible. This will allow the sales team to start selling units for each phase as construction continues. Whereas the development of a warehouse will depend on the design and specs for the leasing process. Either way, a marketing and sales team needs to work together to ensure success.
My insight into this process comes from my youngest son. He is a commercial agent who deals with developers in the Inland Empire (CA). A developer will provide a concept, and he then finds and secures land suitable for the project. The developers he deals with have a focus on industrial uses such as manufacturing, transfer centers and fulfillment warehouses but, no matter the kind of development, this process is the same. It comes down to an understanding of the best and highest use for the raw land and being able to execute the vision.
Diana Hill – firstname.lastname@example.org