Turn plain dirt into pay dirt

March 5, 2001

The risks of investing in raw land are substantial. But choose wisely, and you may reap impressive profits.

 

Turn plain dirt into pay dirt

Jump to:Choose article section... Do it yourself, or call in a pro? How syndicators can help Look before you leap

The risks of investing in raw land are substantial. But choose wisely, and you may reap impressive profits.

By Leslie Kane
Senior Editor

"There was only so much of it and no more, and they wasn't making any more," said humorist Will Rogers, talking about land. Therein lies your opportunity.

"Raw land is becoming scarce in many areas, making it a good hedge against inflation," says Carl Maier, a land agent with John L. Scott Real Estate in Clackamas, OR. "For example, since Intel, TriQuint Semiconductor, and other tech companies have located near Portland, farmland that used to sell by the acre now sells by the square foot. You can do well by buying property in the path of progress."

Don Phifer, a land broker with Phifer and Associates in Hurst, TX, agrees. "I worked with a group of investors who recently bought six acres for $58,800 per acre and sold them 18 months later for about $153,000 an acre. The property was zoned commercial and was at the site of a future major intersection."

Sunita Puri, a family practitioner and emergency physician from Decatur, AL, has done well, too. She noticed that development was spreading toward prairie land she'd seen while driving through the countryside near her hospital, so she grabbed 25 acres for $25,000. She sold the land four years later for about $44,000. Two years ago, she bought 20 acres in another Alabama location for $20,000. They're now worth about $30,000.

Such profit potential is just one of raw land's attractions. It can also be less volatile than the stock market, and can help to diversify your portfolio. You may like the security of owning a physical asset as well. Furthermore, though the Tax Reform Act of 1986 quashed land's appeal as a tax shelter, that's less of an issue now that capital gains are taxed at a lower rate than ordinary income.

Get-rich-quick stories aren't typical, though. "It's like the lottery; you hear about the big winners, but the chances of being one of them are slim," says Alan J. Pomerantz, an attorney with Weil, Gotshal & Manges in New York City and a member of the New York University Real Estate Institute Advisory Board.

In fact, it's probably more likely that Britney Spears will be a great-grandmother by the time your investment pays off big, which is why buying raw land generally makes sense only for long-term investors. It also best suits those willing to take above-average risk, since all sorts of factors and fluke events could kayo your profit. Maier cites this example: "In some states, if someone digs up an Indian artifact on your property and the land is found to be a Native American burial ground, you won't be able to develop the site, or you'll encounter a major delay."

Do it yourself, or call in a pro?

If such drawbacks don't deter you, your first step should be to decide whether to find and research land on your own, hire a professional to do the job, or invest through a syndicator. Syndicators pool investors' money to speculate on large tracts of land, and often work with developers who need funding for projects. Usually, the syndicator identifies the land and negotiates the deal.

The do-it-yourself route can make sense if—like Alabama physician Puri—you're willing to devote considerable time and effort to the task. "Land investing is my hobby," Puri says. "I drive around looking at acreage, talk to local residents and officials, and get information about progress and development in those areas."

Don't underestimate the job. Robert L. Kantor, an ophthalmologist in Sarasota, FL, says, "I'm a busy surgeon, and because of lack of knowledge, I'm not sure I could do it correctly even if I had the time." Most of Kantor's eight land deals turned out well, but a couple were disasters.

"You have to be up on the real estate market and the growth potential for the area," Kantor says. "You also have to be a sharp businessman and watch out for people looking to make money off you because you're a doctor."

To plug into the local land market, you need to network with Realtors, follow real estate and political developments in local newspapers, keep abreast of companies moving in and out of the area, and learn about town planning-board decisions. Many real estate professionals hear about upcoming developments through industry events or by serving on local government committees.

"The average person doesn't have a clue whether any piece of land will turn out to be well located," says Richard Bellmer of Deerfield Financial Advisors in Indianapolis. "By the time you notice trends, so has everyone else, and the property has already become more expensive."

Still determined to go it alone? If so, contact a real estate agency that specializes in land, to find out about potential investment property. Ask colleagues for recommendations, or check with the Realtors Land Institute in Chicago ( www.rliland.com, 800-441-5263), an organization that focuses on land brokerage and awards the Accredited Land Consultant designation. A real estate agency can provide an appraisal, but it's smart to get one from an appraiser who has no stake in selling the property.

The appraisal should spell out the types of structures you can build on the land; zoning restrictions; services (water, sewer, electricity) available to the property; potential environmental problems, such as an underground stream that might be polluted; any historic designation that could limit development; and other entitlements.

You also need to pin down political issues that could affect your investment. "Your municipal officials may feel the area's in danger of being overdeveloped," says Maier. "If that's their position, they could refuse to issue any variance needed to develop the land." To avoid a stonewall, talk to the town planning board before making your purchase.

How syndicators can help

If all this sounds like too much work, you may want to invest through a syndicator. Another advantage of going this route: "You can take part in large deals that you wouldn't be able to afford by yourself," says Phifer. "The syndicator hires the engineers, surveyors, and other professionals needed to make the investment go forward. An experienced syndicator should know about the political factors that will affect your investment, and should be able to deal with problems and difficulties that arise."

Finding a syndicator isn't difficult; in fact, one may well find you, since syndicators often hunt for potential investors through attorneys and financial advisers, and doctors are considered hot prospects. To find a syndicator yourself, ask your attorney or accountant for recommendations. Look at substantial building projects or developments in your area, contact the developer, and ask whether a syndicator was involved.

Many syndicating companies operate like large, private real estate investment trusts. "You invest an amount with the syndicators, sometimes with minimums from $5,000 to $25,000," says Rick O. Helbing, a financial adviser in Sarasota, FL, who has put together such deals. "The syndicator uses the money to buy land and build hotels, hospitals, or other commercial or residential structures. In one recent arrangement, several physicians were among many investors who put in about $50,000 each. The developers built a hospital on the land and sold it. The average participant held his investment for less than three years and earned about 40 percent annualized return."

"Working with a syndicator vs buying on your own is like the difference between investing in mutual funds and individual stocks," says Pomerantz, who represents companies developing the Times Square area of New York City. Investors with a syndicator are relatively passive, but they can still enjoy enviable returns. "Our equity investors often get annual returns of 30 to 50 percent," says Pomerantz. "Sometimes, they double their money in a year."

Look before you leap

Investing through a syndicator doesn't free you of all the work. You still have to check out the syndicator and the developer, to make sure everything's kosher. Have an attorney and financial adviser with no stake in the potential deal look into the syndicator's background, track record, investment goals, and fee structure. Much of that information is in the syndicator's offering document.

"Some syndicators are out there just buying dirt because they've got investors' money to spend," says Phifer. One warning sign is high front-end costs, ranging from 10 to 15 percent of your investment. "That's ludicrous," says Phifer. "Look for a syndicator who doesn't get paid until the deal returns the participants' original investment. Only then should the syndicator start splitting profits."

It's also wise to ask the syndicator for references and information about prior deals. Check the deals with any contacts you have in the real estate community. "Commercial Realtors will probably be able to tell you the good, the bad, and the ugly about a particular syndicator," says Phifer.

Whether or not you invest through a syndicator, you'll need to scrutinize other financial aspects of the prospective deal as well. "Evaluating a land investment is more difficult than valuing a stock," Helbing says. "You need to calculate cash flow, tax deductions, return on equity, the likelihood of achieving a syndicator's or developer's projected return, and many other variables."

Have your financial adviser run the numbers on any deal's costs and projected profits. Don't get starry-eyed about a syndicator's "expected return," as published in the offering. "The fact that the syndicator expects or wants that return doesn't mean it will happen," says Helbing.

It's even tougher to evaluate a deal that's far from home, although such opportunities may be tempting. The nation's fastest-growing states, in terms of population, are Nevada, Arizona, Idaho, Utah, Colorado, and Georgia. Land values in parts of those states are soaring.

However, buying distant land is extra risky. "Never invest in property you can't see," says ophthalmologist Robert Kantor. "There are important factors you can learn only by being there." Kantor had an option on a parcel of lush yet dry-looking land in an area of Florida called Hidden River. On his first visit, the property seemed appealing, but Kantor checked back after the first significant rainfall. The "hidden" river had surfaced, and he killed the deal.

"And don't be too trusting," Kantor says. "I bought one office building that turned out to have 1,300 square feet less of usable space than the sellers claimed. I trusted the sellers, who were also my friends. I didn't know enough to pin them down and ask whether the building size was "rentable space" rather than total square footage. The sellers included the outside stairwell and outside open corridor in the square footage." Kantor also ran into some accounting problems involving depreciation deductions taken on the property.

Additionally, Kantor bought prairie land that turned out to have no street access. Fortunately, he unloaded it years later, at a break-even price, to a local business that also bought an adjacent parcel with street access.

"My experiences with land investments haven't been good, but according to my attorney friends and my investment counselors, they're better than those of most of my colleagues," Kantor says.

 

Leslie Kane. Turn plain dirt into pay dirt. Medical Economics 2001;5:87.