Subdividing Land: A Primer for Real Estate Investors on Process, Legality & Costs

by | BiggerPockets.com

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.

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.

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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.

Related: How to Reposition an Apartment Complex and Add $2,000,000 in Value in 12 Months

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.

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Why Subdivide?

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.

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Related: 3 Upgrades That Add Little to No Value to Your Investment Property

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.

Summary

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!

About Author

Kevin Perk

Kevin Perk is co-founder of Kevron Properties, LLC with his wife Terron and has been involved in real estate investing for 10 years. Kevin invests in and manages rental properties in Memphis, TN and is a past president and vice-president of the local REIA group, the Memphis Investors Group.

8 Comments

  1. roland teichelmann

    My mother died in Dec. 2014. Her will says that my sister and I equally inherit her 1/4 of a 130 acre farm. Therefore my share of the farm is 1/8 of the 130 acres. The will has not been probated. My aunt (Lorene) has 1/4 of the farm and she has 1 child (Wayne). My cousin has 1/4 of the farm (A.W.). Two other cousins (brother and sister) have 1/4 (Kaye and Allen). Wayne has been farming his mom’s farm and this farm for many years. However, he gets 3/4 of the profits and everyone else shares 1/4. It seems that he is the only one that profits and everyone else pays the property taxes. I thought that if I could get my 1/8 clear then I could develop it or at least pass a clear title to my son. Any suggestions or advice?

  2. Kevin Perk

    Ronald,

    Families can be so much fun! 🙂

    I would look around to determine if there is a market to develop the land you have. Are there other developments near you? Are you in a high growth area? If so, start to learn about your local development process by taking to your local planning department or by talking to some private planing consultants or surveyors/ Once you determine if there is a market for new development, then you can begin to look at what it will take to develop your land.

    Good luck and thanks for commenting,

    Kevin

  3. Russ Goodman

    Roland it is more involved than you think at this point. it sounds like joint tenants with the right of survivorship (JTWROS). Though At times like a tenants in common. Check into how your mother and aunt held title with any other siblings they had that may be involved. That would be the first step.

    once you are sure how title is held, then you can figure out how to gain control of your portion. It could be by straight buyout, or as something as strong as a partition action.

    Good luck and keep us informed.

  4. david neese

    I am starting to see issues where people subdivided land into too small of parcels to build a 3 bedroom home. This is rural land where septic tanks are required. Eventually I will buy one of these subdivisions and have to re-subdivide the whole thing from around 15 lots to 10 lots to make them build-able for 3 br homes. I used to wonder why rural homes always had an acre or more land and it turns out it was for septic requirements.

  5. Justin R.

    Just as a point of reference, sub-dividing an urban lot (say, a 7000sqft lot into two 3500sqft lots) will run at least $50k. Happy to share my experience with anyone who’d like to do this, or hear any tips from folks who have been doing this for a while!

    • javier hinojo

      Justin,
      I just got a property 3 side by side lots (one is corner)under contract. this is 165W and 118 depth for all 3 lots. It’s urban zoning. I can split in 5 lots with all the back sets. No new road needed. I have all my set backs, min size width, and size.
      basically each lot needs to be 3500 sqft. 35W with 25 rear yard, 15 total side yard, 15 front yard, except for the corner lot i need 15 in the front,15 side, 25 back, and 6 for the other side. I got all spit up nicely. they all meet my set backs and size lot. Now I can build 20W/75D houses(2) 29wx40D (2) and one 22Wx55D. These homes will be craftsman style. selling price is 200-210 sq ft. i will do 2500-2600 size homes. I got the land for 375k. cost to build here will be at 95-105 depends on my finishes. I got the funds for the land i’ll have to get the other 1million on a loan to build.
      Did it cost you 50k with the site work? Im in NC i know the cost here is way less than CA. I figured 15-20k per lot for site work. This is my first try at new construction and building. I have been doing only flips. If i don’t do any more flips this years i would have done 14. So I’m good with my rehabs. I don’t know much about new construction. I also need to make sure the area can support 5 $500,000-$550,000 homes at once. there are plenty of new homes being built all over there. I just see builders doing 1-2 and lots of pre sales. I could do 2 per year i just don’t want my cash stuck there for 2 years. Im trying to figure out the best strategy. Build 2 sell them pay off the bank and get my money back for the land purchase. then finance the rest of the builds without really using much of my 375k cash that i get back. I don’t want a 3 year project. Thanks in advance.

      • javier hinojo

        I can keep 20Wx78D (2 houses)
        and change the other 3 to 23x55D, 22Wx55D,22Wx55D. that would get me a better lay out. I’ll do 2 story if possible. I know i can get my architect to design just about anything i want. I don’t know how a 29Wx40D house would look.

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