Subdividing Land: A Primer for Real Estate Investors on Process, Legality & Costs
Real estate investors by their very nature are a bit creative. We are always looking for ways to create and add value, be it in fixing up a run down house or beefing up the rents in an apartment complex. One creative technique that many investors may not even be aware of, however, is the subdividing of land. Subdividing land can be an excellent way to make some good money because it is basically like creating “new” land — new land that you can then sell, build on, rent, or whatever your creative mind can come up with.
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While potentially very profitable, subdividing land is not always very easy. It can also be very expensive, with a lot of upfront costs. Despite these issues, every investor should have some idea of what a subdivision is and how it works so it can become a part of their toolbox of ideas and solutions. Therefore, in this post, I want to discuss what a subdivision is, why it could be profitable for you as a real estate investor, what the process is to complete a subdivision, and finally what some of the costs are that you will likely incur.
Before I do all of that, however, let me say that my experience with subdividing land is in Tennessee, so this post will have a Tennessee slant to it. Investors need to understand that while many places may follow a similar processes and have similar rules, there can and will be many differences. So you need to understand what the rules are in your local jurisdiction.
What Is Subdividing Land?
Generally, a subdivision is the separation of one piece of property into two or more pieces of property. It could be an acre into two half-acre lots. It could be 100 acres into 100 lots. It could be 10 acres into two 5-acre lots. It could be an urban “infill” development where a previously subdivided lot is further subdivided into even smaller lots. Basically, one “subdivides” land when they break it up into smaller parcels. Dividing land can be done very easily. Just getting a legal description and recording a deed at the local courthouse will do the trick. However, doing so may not be a legal subdivision. The folks at the courthouse will not stop you from recording your deed. But the folks at the building department will stop you from getting a building permit.
Most jurisdictions, especially cities and urbanized counties, will have some form of subdivision regulations in place that set standards and rules for the subdivision of land. These rules can be called many things including subdivision regulations, land development codes, unified development codes and so on. These standards and rules have to be followed in order for a subdivision to be legal and in order for you or a future buyer to be able to get a building permit.
Why would you want to subdivide land? The main reason for us real estate investors is that we can make money by doing so. Subdividing land creates new parcels or lots. These lots are ready for new development. With these new lots, someone can build a retail home, a rental property, apartments, a shopping center, a warehouse or whatever. Imagine buying a piece of land, subdividing it, and then doubling your money or more. The bottom line is subdividing land can be very profitable if you find the right piece of property and know what you are doing. Where those properties are will depend on local circumstances. Wise investors learn these circumstances and are always on the lookout for potential sites that can be subdivided.
Legally Subdividing Land
As I said before, this will depend on your local jurisdiction and the rules they impose. But it will also depend on the complexity of the subdivision you are creating. For example, if you are doing a relatively simple subdivision — say, taking a two-acre lot and splitting it into two one-acre lots and you have adequate road frontage and you do not need to construct or install any utilities — then most likely you only will need to have a plat drawn, approved, and then recorded at the courthouse.
What is a plat, you ask? A plat is a fancy word for a map. It is most often drawn by a surveyor or engineer and depicts the subdivision (lots) you are trying to create. It is also the legal document that gets recorded at the courthouse. Every jurisdiction has very specific requirements about what has to be depicted on a plat. So again, be sure you know your local rules.
What if your subdivision is not so simple? What if you are taking 10 acres and creating 20 lots or constructing new streets and installing utilities? What then? The first step is usually some type of preliminary plat stage. With this step, the local governing body or planning commission will review your design and then either grant you the approval to go forward or require changes and resubmission.
Once your preliminary plat is approved, the second step is often an engineering review of your proposed subdivision’s construction plans. This includes a review of drainage patterns, street design, and utility construction by the jurisdiction’s engineering departments. This step requires very detailed plans that have to be designed and drawn by a licensed engineer. This is not something the average real estate investor can do, but will hire out to a local engineering firm.
Once the construction plans are approved, you then grade the land, construct the roads, install the utilities, and have all of that approved by the powers that be. Once everything is built and in place, the final step is to submit a final plat, depicting your lots and everything you have constructed for approval. Once the final plat is approved, it is recorded at the courthouse. Once your plat is recorded, you can finally begin selling those lots or start construction on any houses or buildings.
What Does It Cost?
At a minimum, to legally subdivide land you will need to get a survey done and a plat drawn. Then there will be application and recording fees. A very simple subdivision could possibly be done for under $2,000, but in my experience those types of subdivisions are rare. Most subdivisions will require some type of utility installation, and many will also require some type of road construction for access to the new lots.
All of this must be done and paid for before you sell any lots and get your money back. In addition, there could very well be impact fees (school impact fees are a good example) charged by the local jurisdiction totaling tens of thousands of dollars PER LOT, depending on where you are working. So professional fees, construction costs, and impact fees can all add up very quickly and must be paid out before you get paid back. Some local banks do offer loans for the subdivision development process, but many may still be scared from the real estate crash of a few years ago.
As you can see, subdividing land is quite a process that is often not very quick or easy. Approval can take anywhere from a few weeks for a relatively simple subdivision to years for rather complex ones in jurisdictions with a lot of development rules. However, despite the costs and time involved, subdivision can be quite profitable, and thus it is often worth the money and time.
Take some time to look around where you operate and find some recent subdivisions. Study what was created and how. Get to know the rules for your jurisdiction. With this knowledge, you will then be ready if a subdivision opportunity presents itself.
Do you have any experience with subdividing land?
Let me know your question and comments below!