Do Your Due Diligence Before Digging Up Dirt: Investing in Vacant Land 101

Written on February 16, 2021 by Dave Van Horn

We’ve all been there at one point or another: Passing by a vacant parcel of land for months, maybe even years. Each time, saying to ourselves, “Man, I’d absolutely love to build on that property someday. It’s so underutilized.” You imagine a house, a multifamily community, retail center, office space… anything.

On the surface—no pun intended—land is simple and straightforward. It just sits there, requiring so little upkeep and commanding small tax bills and minimal holding costs. But the challenge is uncovering why that property is vacant. The reasons could be many and, unfortunately, they aren’t always easy to figure out. And that's only one of the reasons why you should be wary with vacant land. Yes, for the right investor, an empty parcel can be a goldmine.

But is that investor you? Let's find out.

Pros to investing in vacant land

1. Opportunity to create the highest and best use

One of the biggest benefits of buying vacant land is the freedom to create the property you want. Of course, you first must determine what the best use of the property would be in your particular area—but you can get creative.

Keep in mind that many zoning restrictions are already set, so you would have to either adhere to them or go through the proper channels to have them changed.

2. Direct ownership

Vacant land buyers typically pay with cash, giving them full and direct ownership. Owning the land outright can bring peace of mind, especially since it’s a tangible asset that doesn’t wear out. Plus, you would avoid things like mortgage interest and loan origination fees typically charged by the bank.

3. Less maintenance

Vacant land is much easier to manage remotely than rental properties are. Many of the maintenance concerns of a rental, such as plumbing, electrical, and common areas, don’t apply to vacant land. There’s typically less vandalism, too.

4. More affordable than developed land

Vacant land is usually cheaper to own as a long-term investment, especially since property taxes and fees are often lower than for developed land.

Also, vacant landowners tend to be motivated sellers. You can negotiate a lower price or even land seller financing. The affordability can be a game-changer.

Cons to investing in vacant land

1. More difficult to finance

It’s more challenging to find traditional financing for purchasing vacant land. So if you build, but the property doesn’t sell right away, your money is tied up in the deal while you wait. In that situation, it would be a long-term, illiquid investment.

2. Fewer tax advantages

Although you can still depreciate certain improvements, such as roads or a new sewer system, vacant land leaves you without any structures to depreciate.

You also wouldn’t have a mortgage tied to a structure, so you wouldn’t be eligible for a mortgage interest deduction.

3. No immediate cash flow

Although you don't have a mortgage, you likely will have other expenses, such as property taxes, improvement costs, and sometimes even association fees.

Without rental income, you may need to get creative in order to cover the expenses. For example, you could sell parcels of the land or the rights to it—such as mineral rights or gaming rights—or you could find another use for the land in the meantime.

One winter when I was in college, I worked at a Christmas tree farm, where the owner was using the trees to pay for his property taxes until he was ready to develop or subdivide the land later on for residential homes.

4. Permits and approvals required

Whether the property is zoned for residential, commercial, or another use determines what you can do. The timeline for getting your project approved by the township can also vary.

Another big question: How many lots can you develop? That dictates how much you can make through subdividing.

When I was in construction, I worked with developers who would include permit approval contingencies in their contracts, especially for larger land projects. If they couldn't acquire permits, they wouldn’t buy the land.

5. Physical issues with the property itself

Sometimes the property itself can have issues. Avoid flat lots, for example, due to water runoff issues. Likewise, with mountain property, steeply graded land is hard to develop. And make sure you're clear on the situation with septic, sewer, water, and road access.

6. Impact of market conditions

Let’s say you didn’t build on the land, but you did improve it somehow post-purchase—such as subdividing, roads, or sewer. Or perhaps the area appreciated. You may still have a great deal on your hands.

If you purchase in a down market (i.e., buyer’s market) with the intention to build or improve the property and then sell, the big question is: Can you afford to hold the property while waiting for the market to turn around?

Dig into the details before digging into the land

So now we get to the big pre-purchase question: Why is this land vacant? If you're looking at vacant land and want to get your due diligence underway, give these three strategies a go.

1. Talk to everyone

Get in touch with the local planning department, your future neighbors, and local market experts. Chances are these guys and gals know this property like the back of their hands.

If you’re jazzed about this land, it’s likely at some point that once, someone else was too. If they got semi-serious and thus did any due diligence, would have had information-gathering conversations with local planning and building officials, brokers, and neighbors. Why did they stop the purchase? Try to uncover untold stories about this land that you wouldn’t hear anywhere else.

2. Ask for resources from the current owner

The current owner might have considered building on this land in the past and may have resources that would provide a better understanding of what’s below the surface. They might have site surveys, utility plans, and soil reports. Assuming the information is up-to-date and relevant, it can help you plan for what would have been hefty unexpected costs.

A site survey could reveal the exact locations of setbacks and easements–letting you see how and where a building could fit on the existing site. A utility plan could reveal some large utility lines running directly through the parcel that might need to be rerouted. A soils report will give you a sense for how robust your foundation will have to be when you start building.

Site-specific reports and studies should be part of any development budget. If they are already completed by the owner or others, and available to review, you’ve just saved yourself time, money, and information gathering steps at the start of your project.

3. Ask, “What if?”

Why is this land vacant in the first place?

There may be a good reason. Perhaps restrictive setbacks render the land unbuildable, the parcel is located in a high flood zone, or the soil needs extensive remediation. All of these scenarios could tip the scale toward "don’t build here."

Other times, one or two can keep the vast majority of potential acquirers away. Ask, "What if?" to see if these situations might suit you. For example: "What if the neighbor will let me redefine an obtrusive easement—making both properties more valuable?" Or, "What if I can seek a variance on a rear setback giving me just enough space to make the project work?"

You don’t know until you ask.

Land can be a double-edged sword. On one hand, it's low maintenance and relatively straightforward. However, it can be scary and intimidating because of the unknowns.

While it seems harmless and simple, the devil is in the details—and unfortunately, said details are often hidden underground. But as market conditions tighten and housing inventory is more scarce and more expensive, it might make sense to pivot toward different options, like vacant land. As they say, land is the one thing they’re not making any more of.

What have been your experiences with land, good and bad? Is it something you’re looking at doing in the coming year?

Let's chat in the comments section below!

Dave Van Horn