Subdividing Land: What Real Estate Investors Should Know

Subdividing Land: What Real Estate Investors Should Know

5 min read
Kevin Perk

Kevin Perk is a full-time buy and hold and fix and flip real estate investor with over 15 years of experience. He and his wife Terron operate Kevron Properties, LLC, a boutique real estate investing company in Memphis, Tenn.

Experience
Kevin was a past president and is a current board member of the Memphis Investors Group. He’s also a blogger and writer who has authored hundreds of real estate investing articles on BiggerPockets and his own blog, SmarterLandlording.com, some of which have been featured on The Motley Fool and MONEY: Personal Finance News & Advice.

Kevin is also host of the SmarterLandlording podcast.

Originally from the Washington D.C. area, Kevin moved to Memphis to attend graduate school at The University of Memphis. After receiving his master’s degree in City and Regional Planning, Kevin climbed the planning career ladder to eventually become planning director of a county in the Memphis metro area. He “retired” from planning in 2003 to pursue real estate investing full-time.

Since “retiring,” Kevin’s main real estate investment strategy has been to buy and hold, otherwise known as landlording. Generally working in historic Midtown Memphis, Kevin is also known to fix and flip grand, historic homes when the right opportunity presents itself. He and his wife Terron (who is the principal broker at Perk Realty) have participated in dozens of real estate transactions in the Memphis metro area.

Kevin has the heart of a teacher and believes in helping others through education. An instructor of college-level geography for over 25 years, Kevin also regularly participates in seminars and panel discussions at such forums as the Memphis Investor’s Group and the Single-Family Rental Summit.

In addition, Kevin has been interviewed in publications such as the Memphis Commercial Appeal, the Memphis Daily News, and the Foreclosure News Report.

Education
Kevin earned a master’s in City and Regional Planning from The University of Memphis.

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By our very nature, real estate investors are creative. We’re always looking for ways to create and add value—whether we’re rehabbing a rundown house or beefing up apartment complex rents. One lesser-known creative technique to add value to a large property is subdividing land. Basically, this creates “new” land—that you can then sell, build on, or rent. These new lots increase the value of the land and can seriously improve your return on investment.

When you say the word subdivision to most people, it will most likely conjure up images of large tracts of suburban-style housing. Yes, huge housing developments are indeed one type of subdivision—but there are much simpler forms easily managed by even the most novice real estate investor… with some caveats.

First: While profitable, subdividing land is not always easy. It can also be expensive, with a lot of upfront costs. Despite these issues, every investor needs to understand what subdivision is and how it works so it can become a part of their real estate toolbox. Just make sure to check out your local jurisdiction’s rules and laws—every state and city is different.

Related5 Easy Steps to Value Land for Development (& Work in a Profit!)

What Is Subdividing Land?

Subdivision is rather simple. It involves taking one tract or piece of land and dividing it into two or more tracts of land.

A subdivision may involve tracts of land that range in size from hundreds of square feet to hundreds of acres. A subdivision may involve only one new tract—or hundreds. However, the United States lacks a standard legal “subdivision” definition. If you are thinking of subdividing land, you are going to have to look into your local rules.

For example, in Tennessee, any division of land over five acres is not considered a subdivision… unless you’re in Shelby County, where the standard drops to four acres. And if you’re installing roads or utilities, size doesn’t matter.

See how things can get tricky? Yes, dividing land can be done very easily—but a simple subdivision isn’t always legal. Generally, writing a legal description of the two tracts, recording a deed at the local courthouse, and submitting a certificate of title divides the land. But pay attention to your jurisdiction’s subdivision regulations and ordinances, as well as any deed restrictions that may affect your plans. Skip necessary steps, and the building department will give you the boot when you apply for a permit.

Why Subdivide?

People typically subdivide their land so they can sell off a portion. You may want to subdivide land for family, so they can live close by. Or perhaps you want more lots for a housing or commercial development.

Whatever the reason, subdivisions create new tracts of land. That is why people subdivide.

Related: Setting Up a New Construction Development Pro Forma – Put in Time Up Front to Save Time Later On

How to Subdivide Land (Legally)

Before dreaming of subdividing, check your local zoning. You’re looking for the minimum lot size. You can’t subdivide land zoned for one-acre-minimum lots into 10,000-square-foot lots. To do so necessitates a rezoning—a different game entirely.

Some properties don’t technically qualify for rezoning. That doesn’t necessarily mean the end of your ambitions! Apply for a zoning variance or waiver—after all, even the government occasionally makes exceptions.

Assuming you’re allowed to subdivide, the exact process depends on your local jurisdiction and your project’s complexity. For a relatively simple subdivision—say, splitting a two-acre lot into two one-acre lots—then most likely you only will need to have a plat drawn, approved, and recorded at the courthouse. You will likely also have to pay an application fee, which varies depending on local laws.

What Is Subdivision Platting?

What is a plat, you ask? Even for simple projects, you’ll need to hire professionals like a land surveyor, environmental consultant, architect, and civil engineer to make sure your project proceeds as planned. Remember, the more information you can provide, the more likely your proposed subdivision will be approved. And these pros will create a plat—a fancy word for a map or subdivision layout drawn by a surveyor or engineer. Your plat map will depict the subdivision (or lots) you want to create from your parcel of land. Every jurisdiction mandates what a plat map needs to show, such as streets or utilities—so, again, know your local rules.

What if your subdivision is not so simple? What about dividing 10 acres into 20 lots or constructing new streets and installing utilities?

Typically, you start with a preliminary plat. The local governing officials or planning board will review your design and either grant approval or ask for changes.

After approval, you’ll proceed to an engineering review of your proposed subdivision’s construction and infrastructure plans, covering everything from drainage patterns to sewers and street design and utility construction. This step requires detailed plans designed and drawn by a licensed engineer—no task for the average real estate investor.

You then grade the land, construct the roads, and install the utilities. After construction, you submit a final plat depicting your lots for approval and recording at the courthouse. After recording, you can finally start selling lots or constructing houses or buildings.

How Much Will Your Subdivision Project Cost?

At a minimum, you need a survey and a plat. Expect to pay application and recording fees, too. A very simple subdivision could possibly be done for under $2,000—but that’s rare. Most subdivisions require some type of utility installation, and many also require road construction. Think about it: How will the new tract get water? And how will you access the plot?

In addition, you may encounter impact fees, such as school impact fees. These can total tens of thousands of dollars per lot, depending on your jurisdiction. Unfortunately, you must pay for all of these costs before selling any lots and earning a return on your money.

Related: 5 Reasons I Do NOT Invest in Real Estate Using An LLC

Surprise Subdivision Headaches to Watch Out For

Smart real estate investors should familiarize themselves with common subdivision problems. Keep an eye out for these hiccups.

  • Raw land: Developing raw land typically falls under subdivision regulations. Hire a local surveyor or engineer who is familiar with the local regulations to guide you.
  • “Extra lot” properties: If you purchase property with an “extra lot” attached, don’t assume that “extra lot” is legal or immediately buildable. Check to make sure it was properly subdivided before constructing another property.
  • Older parts of town: Here, you may encounter old, noncomforming lots. Find out when those lots were created—if that date is before subdivision regulations were enacted, then your lot is likely grandfathered. If they were created after enactment and there is no plat recorded you may have an illegal subdivision.
  • Land swaps: Don’t think that a small land swap evades subdivision regulations. Swapping ownership of your 10-foot driveway for 100 square feet of your neighbor’s land for parking may be surprisingly complicated. Don’t just record deeds and think all is OK—check with your local codes office.
  • Public hearings. Neighbors don’t like your plans? If local laws require a public hearing for any zoning changes, they may interfere. This is why it’s so important to make sure any neighbors directly affected by your plans hear about your intentions from you. Community management is an important part of due diligence: Is there anyone who might be upset that you’re subdividing your land? Consider talking with them directly.

As you can see, subdividing land is rarely 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.

Do you have any experience with subdividing land?

Let me know your question and comments below!