Three Reasons You Should Not Buy Land

Buying land will

• break your back
• break your budget
• break your heart

My colleague, Hugh, told me that this article was too negative. I suppose he's right, but I wanted to make two points so strongly that they would lodge, indelibly, in the minds of those nice folk who come up here to the foothills to build their own Little Cabin in the Woods.

Here are the two points:

1. Do not buy land without the guidance of an expert, localrealtorwith a lot of experience in developing country property. Yes, yes, I know this sounds self-serving, but I mean it sincerely: do not buy land without local expertise.

2. Do not buy undeveloped land unless you have a feasible business plan for development. Even in historically reliable California real estate, you can get hurt. There are three main elements to your development plan.

• clear goals
• a logical time frame
• enough money to accomplish the plan

There are two types of undeveloped land: usable and un-usable.

Un-usable land is worthlessexcept for defensive purposes; to provide a buffer between usable land and the rest of the world. By the way, you still pay taxes on un-usable land, so owning un-usable land is worse than worthless. You are pouring money into a hole, and you will never get it back.

So, what makes a piece of raw land usable? You will need:

• access to proven, reliable, potable water in adequate amounts
• septic or sewer systems that do not cost a bloody fortune
• a location within your driving comfort zone
• easy road and driveway access approved by the county and the fire department
• affordable electric hookup (bringing power just a quarter mile can cost you more than $25,000!)
• a good building sitethat will not drive you insane or into bankrupcty because of adverse topography or geology.

Bringing a parcel of raw land up to the point of usability can easily set you back:

• $12,000 for a 300 foot well
• $12,000 for a modest pressure dose septic system
• $15,000 for a driveway
• $25,000 for electric service
• $10,000 for grading and site prep

and don't forget to set aside several thousand dollars for permits just to install these features.

Add that up: with mid-priced necessities like those just itemized, developing the parcel will cost you about $75,000 . . . maybe a bit less, but possibly a lot more. What if the 300 foot well comes up dry as a bone? What if the fire department decides that the approach to your preferred home site is unacceptable unless you add two switchbacks, a turn around at the top and, oh yes, pave the whole thing!

We haven't even touched on the aesthetic aspects of the property. Does it have a view, good trees, acceptable sun exposure, a bubbling little creek, quietude, the chirping of birds, rock outcroppings, whatever it is that floats your boat? How much are those subjective and emotional elements worth?

I'm going to give you three examples of developing raw land.

1. The first notion (I hear this all the time) is based on buying a cheap (this is a relative term) piece of land, trucking in a $100,000 manufactured home, and voila, little cabin in the woods! You already know that the development of the raw land may cost as much as the manufactured house itself. Add this up:

• five acres with a happy little view for $50,000
• $100,000 for nice manufactured home
• at least $75,000 for site development
• a two car attached to your home for about $20,000

Wait a cotton picking minute! That's $245,000 minimum for a manufactured home not counting landscaping, irrigation, and, of course, the horse.

2. Here's a second scenario. Buy a hilltop parcel with a view of the snow-capped Sierras for $125,000 and build a 3000 square foot dream house. Sell it. For all your hard work and risk, make a modest profit of $200,000. Let's add this up

• the house will cost about $300,000 to build ("recession cheap" at $100 per square foot)
• land and development at $200,000

Your project comes in at $500,000. For simplicity, let's estimate miscellaneous annoyances such as taxes, real estate commissions, closing, loan, and holding costs at $50,000. To make your $200,000 profit you will need to sell for at least $750,000. Now look around at all the other houses that have sold in a two mile radius. How many of those have sold for 3/4 of a million dollars? If you find a significant number of high dollar sales, go for it. No 3/4 of a million dollar sales? You are upside down, house poor, up the you-know-what creek without a paddle, before you even get started.

3. Third development idea. Build a 4000 square foot dream house on a $200,000 completely finished parcel surrounded by new homes already selling for $1,000,000 and more. Sell that baby! Now add up your base costs:

• construction at $400,000
• land at $200,000
• miscellaneous annoyances at $50,000.

You are into the project for $650,000 (gulp!), but the gross projected profit is as much as $350,000! Oh baby, that is a lot of profit! Do you think Uncle Sam is going to want some? See your tax guy before you even get started. Ask him to explain something called "capital gains."