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What Every Real Estate Investor Needs to Know about Land And The Cost of Development

by Karen Margrave on July 6, 2014 · 6 comments

  
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Lately I have been contacted by several different BP members, wanting advice on the development costs for a parcel of land they own, or are considering buying.

They want to know how much it will cost to build a house on a particular lot. That number is always dependent on the lot costs and which stage of development the lot is at.

Is it a finished lot or undeveloped, etc.?

It seems so simple, you see a vacant parcel of land, there’s other homes around it, and you want to buy it and build on it. How can that be difficult?

It’s impossible for me or anyone else to tell you (without seeing your property) what it is going to cost to develop a specific parcel of land. I can, however, give you some starting points to help you begin to evaluate whether or not it makes sense.

Location, Location, Location!

  • Where is the parcel located?
  •  Is it an infill lot where utilities are at the street, or in the country, where you will need to bring in services
  • What are the sizes of the homes and lots in the neighborhood?
  • What do homes in the area comp out for?
  • Is there a demand?
  • Are there views, close to shopping, beaches, lakes, recreation, amusements, etc.?

Related: Never Fail At The Location Game EVER Again.

Topography

  • Is the parcel relatively flat, downhill slope, uphill slope, etc.?
  • Is there anything on the lot that will need to be removed? (buildings, trees, junk, etc.)
  • Will the design of the house required extensive excavation? (lower level garages, etc.)
  • Will retaining walls be required?

Parcel

  • What are the dimensions of the lot?
  • What is the current and future zoning of the parcel?
  • What will be required by the local planning agencies in regard to set backs (landscaping, driveways, sidewalks, side yards, etc.?
  • What are the height limitations?

Once you have all that information, you can evaluate what the costs to develop the lot will be, and next what the costs of building a house on it are.

You can have two lots, side by side, but because of variations in topography the cost to develop can be dramatically different. The devil is in the details!

For a person with no experience in building from the ground up, there is far more to it than most people realize. If you have a lot that is on a hillside and needs extensive grading or use of caissons the costs add up quickly.

If the neighborhood doesn’t have comps to support a high dollar home, it’s not worth it, on the other hand, if it’s a multi-million dollar neighborhood, or has breathtaking views, it may be a bargain!

Related: The Truth About Real Estate Investing Partnerships

If you are inexperienced, you might want to consider finding an experienced builder/developer to partner with on your first few projects. I hope this has answered some of your questions, though it’s not meant to be a comprehensive list!  Next up, the cost to build a house!

Would any experienced developers add anything to this list? 

Be sure to leave your comments below!

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{ 6 comments… read them below or add one }

Eric July 6, 2014 at 6:46 am

Great timely article. I am in the beginning stages of investigating subdividing my own lot. I had heard it is expensive, and a lot of red tape, but will soon find out.

Reply

David Krulac July 6, 2014 at 7:10 am

Zoning and regulations are big issues. Streams, wetlands, flood plains, water supply, septic testing (if no public sewer access), historic and endangered species issues, driveway accesses. The subdivision process costs thousands and can take a lot of time. The quickest subdivision we did took 6 months, the longest 5 years. Engineering, legal fees, and holding costs can eat you alive, this is not for the faint of heart.

Reply

Giovanni July 6, 2014 at 7:39 am

Great post Karen, to yours and David’s lists I would add find out what the land development fees are in the jurisdiction and how long to get a permit.

Reply

Karen Margrave July 6, 2014 at 9:00 am

If you click on to some of the “related links” just above the comments section, you will see I and others have answered more questions related to land development. There’s so much that goes into it, but these articles are all a good starting point to help investors decide whether or not they want to move to the next step, or if they should get help from someone with experience, etc.

Every area of the country, each state, etc. has their own hoops to jump through. Here in Califonrnia we probably have more than anywhere, but Federal regulations do come into play sometimes.

Reply

Joe Fairless July 6, 2014 at 10:14 pm

Thank you Karen for posting this article. And for everyone else who gave their insight on things to think about. I’m so grateful for the BiggerPockets community.

Reply

Douglas Larson July 6, 2014 at 11:21 pm

Great intro to understanding land . . .
Looking forward to your next article on “the cost to build a house.”

Thanks for taking the time!

Reply

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