How to determine whether land is “build-able?”

Question

I’m looking into buying a duplex on 3 acres directly connected to a new development that is almost completed. The way the terrain works, I could be able to split the nothernmost unused 1.5-2 acres of land and sell it to a developer. The home is currently listed for $400k, but has been on the market for 70 days without a price drop going into the down season, so I could probably pick it up for less. Comps in the area suggest the duplex on ~1 acre of land should go for $340-360k. It’s pretty turn-key.

The issue I am running into is whether or not the land is entirely capable of being built on and supporting a home. A portion of the land, maybe ~0.75 acres, shows up as wetlands on the wetlands inventory mapper, but the agent listing the place claims it’s barely a soft spot and should be build-able (not that he has any bias). Part of the difficulty in getting a solid answer on this question is it’s winter in Minnesota and the land is frozen and covered in snow.

How do I go about figuring whether the land is capable of supporting a home or whether there is an option to mitigate the issue? I figured I could call a builder but run the chance of being undercut since the deal is on the MLS and I don’t have it under contract. The other issue I’ve been reading about is that developers can have issues getting bank financing on raw land, and this would certainly be raw land. They wouldn’t have to go far to hook up water and sewer and so forth, but that wouldn’t matter much to a bank.

What steps do I need to take to figure out if this is worth my time? Should I call an actual builder and see if they are interested, or should I go another route to get the necessary approvals for the land? I’m pretty new to this, so I think my best bet is to split and just sell rather than trying to turn them into proper paper lots.

John Woodrich · Answer

@Mitchell Rusten you will need an engineer to conduct a soil test.  If it is build able it may need land improvements to improve drainage, etc.  As mentioned, you will want to see what the cost of similar land is in that area.  There would also be costs involved in splitting the lots and your mortgage company isn't going to let you sell the land and keep the cash.  If the property makes sense for you without selling the land it may be worth pursuing.  If you think the land value is pretty high you could pay to get some testing completed but the seller is unlikely to share in any of the cost so that is your risk.

Financing new construction is a little different and it wouldn't be an issue for a reputable developer.  If there is a new development connected I would be surprised if the developer hasn't already considered that lot.

Nik Moushon · Answer

First, if your comps are comping in at that then you probably arent going to get it for much cheaper. You are basically buying 2 ac of land for $40k. What you need to do is find out what the comps are for raw land and apply that to the extra 2 ac. i.e. if you find a 1 ac parcel of raw land for $20k then its safe to say they have valued their property correctly but if you find a 1 ac parcel for $5k then you know its a bit over priced.

Another thing that will effect the price is the zoning. Is this parcel in the same or different zone that the developer's land? What does the zoning allow to be built? Just because there is a duplex there now doesnt mean you could build one there again today. Zoning is KEY to raw land deal...any land deal really. This wetlands area falls under zoning.

Second, DO NOT listen to that realtor about the wetlands....they don't know what they are talking about. Wetlands can kill a land deal faster than pretty much anything else. I dont know of a jurisdiction that will let you build in a wetlands area. Just because theres "barely a soft spot" and "should be buildable" doesnt mean you will legally be allowed to. Now you can build NEAR wetlands but there are going to be a lot of restrictions and set back requirements. For example you cant build anything with-in 100' of the edge of the wetland. This will vary from city to city so you will have to figure this out. You will also have to have a survey done to find the exact location of the wetlands. After that is done then you will be able to find out how much buildable land is left over. This will be an out of pocket cost to you before you buy the land. You might be able to wiggle it in as part of the purchase deal (as a contingency) but odds are the seller wont do it...but you could ask or put it in with your offer. Really where this wetland is located on the parcel and the zoning req. for the wetlands is whats going to determine if the is worth going after.

Then if everything works out you get to do a short plat to divided up the land, which will require a survey as well, and this could take 6 months or more to get through the city. Do you have the money to pay for all of this on top of the DP for the property? As well as the additional holding costs?

Amber Gonion · Answer

Finding out if a piece of land is able to be built on is expensive.  We are building currently and the amount of money just to find out if we can build is incredible.  I can tell you firsthand you need the regular phase 1 testing, wetlands permits (everything is in a wetland district), city approvals, surveys, soil testing, etc.  It takes months and tens of thousands depending on the situation.  Your options are to build yourself, sell to builder that will get the proper tests, or sell the land without tests, permits etc at a discounted rate.    I may lean towards selling the lot without test, you don't want to shell out all of the money and then not be able to find a buyer.

John Woodrich · Answer

@Mitchell Rusten I found the property you are talking about and am going to message you privately to keep your deal a secret.

Mitchell Rusten · Answer

@Nik Moushon

Thank you. This is very helpful. I will get in contact with the city now.

Nik Moushon · Answer

@Mitchell Rusten, though you have figured out the density of your zoning, which is good, you seriously need to figure out where the wetlands are at EXACTLY. The city will require this for you to be able to subdivide the lots. The city wants to see where it is located on every lot, what the setbacks are going to be and if that gives you enough buildable area to meet the minimum zoning requirements. If the wetlands are at the front of the property by the road you will have to have the buildings set all the way in the back, which isnt always a bad thing, but then that means you have to put in  a driveway to get to the back of the lot that crosses over your wetlands area....which would require A LOT of work to be done to properly mitigate and protect the wetlands. Thats if the city even lets you do that. You'll need to call the planning department and figure out what the city is going to want to do regarding the wetlands.

A lot of cities do a pre-development meeting with people to help them determine if something they want to do to a piece of property is doable or not and what they are going to want to see. See if your city does this. If you are worried someone might buy this while you are doing your wetlands research just put in an offer with a contingency of preliminary approval from the city that they will allow you to subdivide this property.

Mitchell Rusten · Answer

@Nik Moushon

Hi Nik, thanks for replying,

I have worked with the city planner and the lot is properly zoned R2 residential for a density of 1.15-4 lots/acre. I have it in writing from the planner that as far as city code is concerned, it’s build-able.

Comps are where it gets a little interesting. In the development I mentioned, the smallest homes are 3/2, 2000 sqft on 0.2 acres and selling for a minimum of $430k. Across the street from the development, a plot of land that’s 2.07 acres sold for $240k to a retail buyer who built a single home on it last year. These properties are near Lake Minnetonka, which a lot of people from the Minneapolis metro area want to get to as it’s a half hour drive from downtown Minneapolis. Both my property of interest and that land comp are about 0.3 miles from the lake, which makes it a fairly desirable location.

Interesting part about the developer of larger ~50 home development that’s down to its last few lots is that they are a big national developer. They don’t have local eyes on the market for something like this, so I wouldn’t be surprised if it hasn’t hit their radar.

I’m confident if the deals make sense, one of my partners will want to finance it. I just need to have a clear expectation of what the process will be like before I bring it to them, because I hate to tell them one thing and have it end up being another. Those relationships are much more valuable than any one deal.

Who would be the best person to talk to as far as the wetlands issue is concerned?

If you have any more questions or additional input, please be sure to share.

How to determine whether land is “build-able?”

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