Profits in Predevelopment Land – Part II
Acquisition: The right move at the right time
Sophisticated land investors know the ultimate profit is made when the property is purchased. That’s why our company believes land should be acquired three to five years before development. Further, we believe the cost of the property should be 25 percent to 30 percent of the price developers are currently paying for comparable land that is ready for development. These criteria assume that developers will pay no more for land in the future than they are paying today, and that continued demand will not exceed supply. Also, they also assume the property has access to utilities, and that no profits are dependent upon changing zoning.
This conservative approach enables our company to minimize risks by adhering to a formula that creates investor returns. Risk is primarily a function of the unknown. So tremendous energies should be expended to identify and understand all possible risk factors. By thoroughly studying a property before acquiring it, the investment outcome is more predictable, and the potential risk, if any, is more manageable. Regarding property acquisitions, follow this simple rule: when in doubt, don’t.
The purchase process
If all the analysis factors are favorable, then consider price and terms. But low price alone doesn’t make a property suitable for investment. You should negotiate not only the price and terms but also the factors critical to a proper acquisition. You may analyze hundreds of properties and negotiate no many of them before you find a property that meets all of your requirements. However, if any point of the contract has not been negotiated to your complete satisfaction, don’t consummate the acquisition. Instead, move on to the next prospective property. When you begin to compromise your standards, you create future problems for yourself.
Land management: A crucial factor
Even before you acquire a property, you need to design a management program with goals and objectives and a timetable for accomplishing them. Successful land management requires hands-on participation, enabling you to take advantage of opportunities or to counter negative situations. By following an aggressive plan, you can speed up the development timetable and reduce the holding period. Often, developers are willing to pay premium prices for land that has been readied for development . So an aggressive and creative land-management program can lead to superior returns.
Management activities vary with each property, but they often include the following points:
1. Plan for zoning and rezoning- You shouldn’t buy property that must be rezoned to make your “numbers” work. But if the value can be enhanced, or if resales are less difficult to achieve by rezoning , then you should begin the process. Review your plans with city staffs and attempt to win their support. Visit with the zoning commission, neighborhood groups, governmental bodies, and city council members, as well as with those making the final zoning decisions.
Share your market information with local government officials. They are in the business of forecasting future growth from the city’s standpoint, and your data may help them to determine future utility, road, and school needs. If your proposal is detrimental to the city, don’t even consider the project. Being a good citizen and enhancing the city’s developments are the roles of a long-term player in any market.
2. Donations may increase value – In some cases donating properties can be a valuable investment in community relations, and it may increase the value of your land, too. For example, by donating land for future roads, our company persuaded a government agency to build roads sooner than planned because of the reduced road cost to the city. Investigate the benefits of donating road rights-of-way or property for a future park, school, police department, or fire station.
3. Remember site layout and property beautification – Study site layout designs for alternative ways to resell the land. A good plan can help to determine the most profitable way to liquidate a property. It’s a valuable in the resale process.
Property beautification can be critical, too. When two tracts are equal in terms of price, location, zoning, and so forth, the developer will inevitable buy the more attractive property just because it looked nice. Also, the attractive property will attract more attention and cause the developers to look at it first. In other cases tree lines may block a view of the property. Visibility is enhanced with care clearing.
4. There are more points to consider – Obtain short-term income from the property by creating golf driving ranges, baseball diamonds, shooting ranges, and so forth. Such measures will help to reduce the property’s holding and maintain its attractiveness.
Work to minimize or contest rising taxes and insurance costs. Also, keep developers and brokers aware of the property. When they are ready to begin a new project, they’ll remember your parcel.
Property disposition, profit realization
If you constantly monitor the economy, current market conditions and trends, and the progress of your management program, you will know when to hold the property and when to sell it. When the timing resale is right, use your research and prepare property resale information. Such data should describe the property’s characteristics and include a development plan and a pro-forma analysis with appropriate exhibits. These materials show potential buyers that profits can be made by developing the property.
The rewards
When predevelopment land is correctly researched, carefully selected, and dynamically managed, it can be a stable and prudent investment. Its profit potential is greater than any risk. But, as you can see, investing in predevelopment land requires the resources of an experienced, creative, and aggressive management team. With strict adherence to your formulas and plans, you can achieve substantial returns – regardless of market cycles – year after year.
Dan Tomlin Jr. is the managing partner of Tomlin Investments, a North Texas based real estate development firm. He served a six-year appointment on the board of the Real Estate center at the Wharton School of Business.
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