{"id":139,"date":"2019-08-08T14:52:28","date_gmt":"2019-08-08T18:52:28","guid":{"rendered":"https:\/\/propertyonion.com\/education\/?p=139"},"modified":"2019-10-12T08:32:18","modified_gmt":"2019-10-12T12:32:18","slug":"investors-due-diligence-land-deals","status":"publish","type":"post","link":"https:\/\/propertyonion.com\/education\/investors-due-diligence-land-deals\/","title":{"rendered":"Due Diligence of Land Deals to Avoid Pitfalls of Investing"},"content":{"rendered":"\n<p>In the world of real estate, due diligence of land deals is essential, particularly for investors who are focused on turning a profit in a relatively short time frame. While many real estate investors focus on properties with existing structures, there is a segment of investors who focus primarily on land acquisitions.<\/p>\n\n<p>In fact, land can make for a wonderful real estate investment, particularly for the long term. You can essentially avoid the hassle and expense of property management for an existing structure. There\u2019s generally less liability, and there\u2019s no worry about dealing with tenants, insuring the house, or making repairs when things inevitably break or require replacement. In many communities, landowners don\u2019t even need to concern themselves with mowing the grass; it\u2019s a task that\u2019s performed by city contractors. What\u2019s more, land is often available at a much lower price point, which makes an undeveloped lot a rather attractive option for inexperienced investors with less working capital.<\/p>\n\n<p>But some erroneously assume that due diligence of land deals are a simple matter of \u201cwhat you see is what you get.\u201d While this may be true for many properties, you could encounter some very costly problems that may transform a seemingly profitable investment opportunity into a money pit. The bottom line is this: thorough due diligence is absolutely essential, whether you\u2019re looking to invest in a roomy six-bedroom luxury home or a vacant lot. Let\u2019s examine a case study on why due diligence is so vital for this type of real estate.<\/p>\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_81 ez-toc-wrap-left counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">In this Article:<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/propertyonion.com\/education\/investors-due-diligence-land-deals\/#Due_Diligence_Vacant_Lots_and_a_Very_Unexpected_Tax_Bill\" >Due Diligence, Vacant Lots and a Very Unexpected Tax Bill<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/propertyonion.com\/education\/investors-due-diligence-land-deals\/#Due_Diligence_of_land_deals_With_Auctions\" >Due Diligence of land deals With Auctions<\/a><\/li><\/ul><\/nav><\/div>\n<h2><span class=\"ez-toc-section\" id=\"Due_Diligence_Vacant_Lots_and_a_Very_Unexpected_Tax_Bill\"><\/span>Due Diligence, Vacant Lots and a Very Unexpected Tax Bill<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n<p>In June 2017, the Cape Coral City Council voted to move forward with the long-delayed Cape Coral Utilities Extension Project, which involves the installation of city water and sewer pipes in the northern regions of the gulf coast city, situated just north of Fort Myers, FL. Approximately 8,900 parcels are affected by the project, which is expected to be complete by August 2019, according to an article in the News-Press.<\/p>\n\n<p>While a casual observer may assume that the installation of utility lines would be a positive event, residents and property owners\u2014real estate investors included\u2014have\n \nexpressed dismay and even outrage over the project. The reason: each property owner will be required to foot the bill for their new water and sewer lines\u2014and it\u2019s not optional or cheap. The News-Press reported that an owner of a typical 10,000 square foot lot will pay approximately $20,800 if the property owner opts to pay the bill in a single lump sum. If the property owner pays the fee over time, interest will be applied, potentially inflating the sum by many thousands of dollars.<\/p>\n\n<p>This has prompted many landowners to list their lots for sale. While a property with a home can essentially absorb the $20,000+ fee thanks to gradual rises in home values, it will take much longer for an empty lot to see an equivalent rise in value. What\u2019s more, investors are faced with the prospect of paying tens of thousands of dollars out of pocket, or face added interest.<\/p>\n\n<p>The impact of this utility project is amplified for investors with multiple lots. In fact, it\u2019s driving many landowners to sell. That\u2019s what Dan and Ginny Henley decided to do with their eight lots; otherwise, they were facing tax bills totaling nearly $175,000. The retired couple purchased the lots as investment properties about a decade ago, when the local real estate market crashed and land values bottomed out. As such, the $20,000+ per lot tax assessment far surpasses what they originally paid for each property. So like many more casual investors, they\u2019ve decided that now is the time to sell.<\/p>\n\n<p>But it\u2019s fair to assume that not every property owner is going to be forthcoming about the impending tax hit. In fact, if the property owner lives out of state\u2014and many do\u2014 there\u2019s a chance they may not even be aware of what\u2019s coming down the pipeline.<\/p>\n\n<p>No matter how you cut it, a $20,000+ tax assessment would be a nasty surprise for a real estate investor who failed to perform due diligence prior to buying a lot. In fact, it\u2019s a scenario that could lock you into holding the property for an extended period of time in order to allow the land to gain sufficient value so it offsets the expenditure. This is a perfect example of why due diligence is so important, even if you\u2019re acquiring a vacant plot of land.<\/p>\n\n<h2><span class=\"ez-toc-section\" id=\"Due_Diligence_of_land_deals_With_Auctions\"><\/span>Due Diligence of land deals With Auctions<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n<p>City or county-hosted auctions are a common source of affordably-priced properties. While most auctions involve an actual structure such as a house, there are some cases where you have an auction for undeveloped land. Less experienced real estate investors may assume that an empty plot of land is unlikely to represent a risky or downright costly investment property, but this simply isn\u2019t the case. Due diligence is just as important for a vacant lot as it is for a developed lot.<\/p>\n\n<p>Here are just a few issues that could transform a seemingly great piece of land into a really bad investment.<\/p>\n\n<ul><li>Others may have a claim to the land. You\u2019ll need to determine whether there are any lien holders who may hold a claim to the property. While you won\u2019t need to worry about a lien arising from a defaulted home mortgage, there are lots of other potential lien holders. Tax liens are quite common and it\u2019s this debt that can land the property in a city or county real estate auction. But secondary lien holders are also possible. Perhaps the land deed was used as collateral to secure a private loan that was never repaid. Maybe the property owner has failed to pay income taxes, so the government may place a lien against the property. These are just a couple scenarios that may lead to multiple liens that diminish or even eliminate a property\u2019s value.<\/li>\n<li>The land may be in a bad location. Simply looking at map or viewing the property on Google Earth won\u2019t cut it; you need to perform research and ideally, visit the lot in person. It\u2019s possible the lot and surrounding area is the site of serious seasonal flooding, which could pose a major problem for construction and ultimately, salability. Or perhaps there\u2019s a new bar opening across the street. This could make the lot not-so-attractive to buyers seeking a quiet, family-friendly neighborhood. If it\u2019s a coastal plot of land, you could have serious erosion that only recently started to occur, meaning the land is quite literally being reclaimed by the sea. These are issues that can seriously impact a property\u2019s value in a negative manner, but you may not realize these problems exist if you simply glance at a map.<\/li>\n<li>The land may already have residents. While it\u2019s rather unlikely you\u2019ll arrive at a vacant lot to find squatters, humans aren\u2019t the only residents that you\u2019ll need to consider. You could have a dozen burrowing owl burrows on the property, which means the land can\u2019t be developed until they decide to relocate. That\u2019s bad news since this protected species will often maintain the same burrow for many years. Similar issues can arise as a result of gopher tortoise burrows. But you may not know about this type of issue unless you visited the property in person.<\/li>\n<\/ul>\n\n<p>With land, there\u2019s little room for error in terms of financials. This is particularly true if you plan to maintain the property as undeveloped land. Let\u2019s say there\u2019s a secondary lien holder for a sum of $8,000. You would likely have to hold a vacant lot for an extended period of time before you could absorb that $8,000 sum and turn a decent profit. But if you were to build a house on the land, it would be far easier to absorb that $8,000 hit while still making a good profit. So when you consider it from this perspective, due diligence of land deals is actually more important if you\u2019re going to acquire undeveloped land. With the right research and thorough due diligence, you\u2019ll be in a great position to maximize that take-home sum when all is said and done.<\/p>\n\n\n\n<p><\/p>\n","protected":false},"excerpt":{"rendered":"<p>In the world of real estate, due diligence of land deals is essential, particularly for investors who are focused on turning a profit in a relatively short time frame. While many real estate investors focus&hellip;<\/p>\n","protected":false},"author":3,"featured_media":142,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5],"tags":[58,25,57],"class_list":["post-139","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-real-estate-investing-articles","tag-due-diligence","tag-land","tag-research"],"_links":{"self":[{"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/posts\/139","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/comments?post=139"}],"version-history":[{"count":4,"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/posts\/139\/revisions"}],"predecessor-version":[{"id":259,"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/posts\/139\/revisions\/259"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/media\/142"}],"wp:attachment":[{"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/media?parent=139"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/categories?post=139"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/tags?post=139"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}