Building a house on raw land can be considered a complex process, prompting people to think, ‘what are the steps to developing raw land to build a house’.
It is often believed that, due to the perceived complexity of the process, only ‘experts’ should take on the land developmental investment strategy.
The steps to developing raw land to build a house include: evaluating the economic feasibility of the project, determining the offering price, finding out the zoning details for the land, securing financing, starting the building process, and marketing the property or land.
As we mentioned above, it is believed that only experts should focus on developing land for building a house. However, with the right preparation and due diligence, there is no reason for beginners to not be successful in investing in and developing raw land.
Through extensive research, we have come up with the broad steps involved developing raw land to build a house, and will be detailing those steps.
Table of Contents
Explaining Raw Land Development:
The development of raw land involves buying a piece of land in order to either hold it for the long term, or to develop and build on it. There are numerous arrays with respect to raw land development.
However, we will be covering the unique benefits associated with this kind of investment. These advantages include gaining a profit by selling the land and property, earning rental income, or merely taking advantage of the appreciation in value.
Steps to Developing Raw Land to Build a House:
It cannot be denied that undeveloped land can deliver the kind of consistent and stable cash flow associated with many other investment types.
As an investor, it is good news that raw land is available in finite and very limited amounts, which makes it very valuable. In addition, if you manage to find land in an area that is expected to grow and develop in the future, the value of your land parcel can go up even more.
Buyers wanting to develop their raw land need to be well-informed about their targeted market, and perform their due diligence.
If you can accurately track the cyclical movement of the market, you will be able to determine the best time to make a purchase. It is important to identify and study the recent market developments. For instance, if the local development projects have increased in recent times, there is a high chance that buyers would want to purchase land in that area. In addition, you must also compare the growth occurring within surrounding markets.
At this point, we hope that you have a brief overview about investing in raw land. We are now ready to move on to the steps involved in developing raw land to build a house.
Step 1 – Evaluating the Economic Feasibility:
The very first step involved in this process is determining how economically feasible the raw land is. Start by coming up with a realistic expectation regarding the return on your investment – something that you would do with any kind of real-estate investment.
This step is crucial, since it will equip you with a model that from the profit v/s cost point-of-view, and also help you understand and factor-in the market uncertainties. Using the right methods and assumptions to come up with estimates for the overall revenue, costs, and returns, will prove to be immensely helpful.
Step 2 – Acquisition:
After you have a fair estimate of the costs, revenues, and returns, you are in a good position to decide an offer price. As an investor, you would need to reach out to a contractor who will place a bid on your behalf. Bidding will enable you to determine the estimated project costs, along with the maximum offer price and the amount that you are likely to spend in acquiring the land.
Step 3 – Zoning:
The third step in the land developmental process is related to the land design. This means, determining the kind of properties that you will be able to build on your land – something that will involve learning about the zoning codes for the area.
Zoning will play a crucial role in your overall objective, as it will determine the kind of projects that you will use your land for. In addition, zoning might also influence how your land and property is marketed to prospective buyers.
The zoning codes define the type of properties – such as commercial, condominium, multifamily, or single-family – that can be constructed on the particular land parcel. From an investor’s point of view, the zoning codes can, therefore, either encourage or inhibit the investment plans and approach. Hence, before stepping into the land development investment strategy, it is crucial to be aware about the zoning laws and codes.
Step 4 – Financing:
As is the case with any real-estate investment, your intended use for the property will determine the financing method that you go for. As an investor, you should be particularly attentive about the LTC (loan-to-cost ratio). Essentially, LTC will determine how much money a lender is willing to finance for your project which, in turn, will be determined by the property usage and construction type. Even though lenders generally provide a certain percentage of the total property cost (around 80 to 90 percent of the total cost), owner-occupied residences might be eligible for conventional bank financing.
Step 5 – Construction:
The penultimate step in this process involves the actual construction. Generally, this will comprise horizontal development – for instance, grading for utilities, curbs, and roads – before initiating the property construction from ground up. A particular aspect of the project that an investor needs to focus on is construction financing.
Generally, a contractor is paid in multiple increments according to the duties performed and the project phases. Often, construction lenders retain around 10-15% of the overall loan during the construction process – this percentage is released once the construction is complete.
Step 6 – Marketing:
Once the construction is complete, the next and final step is that of marketing your property. At this point, the economic feasibility evaluation that you conducted in step one, will be of critical importance. The better informed you are about the rental demands, market prices, and neighborhood, the more effective your marketing strategy would be.
In addition to a marketing strategy, you should also have a marketing plan intact, which you will implement to draw buyers towards your property. Formulating and implementing a marketing plan involves using advertising in social media and newspapers, the MLS, using online listings, and benefiting from the services of a realtor.
Pro Tips Regarding Land Development:
Developing raw land, although potentially lucrative, demands extensive research and time. This is particularly true when you compare this investment form to the more conventional residential investment type. Having said that, if you are willing to commit to the cause, there is no reason for you to not be successful in your land developmental initiative. Below are a few tips that will help increase your chances for success:
1) Understand holding costs and how they are calculated:
If you are shifting from one investment type to another, it is important to distinguish between the holding costs. Zoning and building permits can take time, which means that your purchased land will not be able to become a cash cow overnight. By accurately calculating the holding costs associated with raw land, you will be better able to handle and prepare for the transition periods, especially with respect to the loan repayments.
2) Do not take your finger off the market pulse:
As we mentioned earlier, there is always a best possible time to initiate the land developmental process –and a savvy investor will know when this time is. Becoming a savvy investor involves conducting thorough market research before purchasing raw land.
Even after you have made the purchase, you should still keep your foot on the gas, and closely monitor the prevailing market conditions. One thing to do is to keep an eye on other similar developmental projects in the surrounding area. By understanding the start and finish times and points for those projects, you will have a fair idea about how to proceed with your own.
3) Be clear about the possible risks:
Just like any other investment, land development is not without its risks. Unfortunately, there are several worst-case scenarios, and you need to be prepared for them. For instance, you could purchase a land, only to find out that it is part of a flood plain, and therefore cannot be built upon.
Once again, research is the best way to minimize the risks of such scenarios. By conducting accurate and thorough research, you will be aware of any potential drawbacks, and would be prepared to work your way around them.
4) Be aware of zoning problems:
Depending upon how you plan to use the land, you might have to get it rezoned. As you can guess, this will require considerable amounts of time and paperwork. To avoid this major hassle, you should have a clear plan regarding the land lot, before you actually go ahead and buy it.
This way, you will be able to determine whether it is worth opting for rezoning, or if it would be a better idea to simply target a different piece of land. Having said all this, it is important to remember that rezoned land can be tremendously lucrative, provided that you have accounted for this process prior to buying the land.
5) Benefit from professional assistance:
Unfortunately, it is impossible for you to be at multiple places at a time, or to be informed about everything related to your project. Hence, as far as land development goes, having a skilled and reliable group of professionals by your side is invaluable.
Examples of such professionals include project managers, contractors, and construction workers. Developing raw land is a major process, and requires a major, all-star team to see it through.
Factors to Consider in Raw Land Development:
As far as the development of raw land goes, an investor is essentially combining various investment strategies: purchasing the land, constructing upon it, and then selling or renting the resulting product. The complexity of this investment approach requires copious amounts of planning on part of the investor, even prior to the purchase of the land.
However, there is no reason to feel intimidated, as it is possible to systemize the entire process and, therefore, make it simpler. If you are wondering where to start the research process for your land development process, the below factors will help you out:
You will require permits for pretty much any kind of development, construction, or renovation. When developing your land, you must be aware about the permits required for your specific project, as well as the timelines and costs of obtaining those permits.
A lot of investors tend to underestimate how much time it takes to get a permit – make sure that you do not make this mistake, and meticulously account for the time factor while exploring your options for raw land and how you will finance it.
Regardless of the land of the location, it is likely to be situated in a particular designated zone – be it residential or commercial. As we mentioned, rezoning a piece of land is possible. However, if that is part of your plan, the estimated rezoning time should be added to your overall project timeline.
In addition, you must check if your land is located in a wildlife protected zone, on a flood plain, or in an area that has building restrictions.
3) Building Department:
You must consider specific building requirements before embarking on a construction project. These requirements are enforced by the locality or city in which the land is situated, and can impact your construction plans.
It is important to not take for granted that your contractors and builders will adhere to the building codes; you must also be familiar with those codes, so that you can see first-hand that the project is being planned and executed accordingly.
Water, along with sanitation, is perhaps the most crucial aspect to consider during raw land development. An investor needs to see if there are any existing sewage or water lines present on the property, and then proceed accordingly. While doing this, you must also research the local requirements – often, there are regulations in place regarding the operation and installation of property water lines.
Power, of course, is crucial – not just for the building that is to be constructed, but also for the entire construction process itself. If no power lines are currently present, you will need to reach out to utility companies in that area, and initiate the installation process.
In addition, you must also consider the internet, phone, and cable lines as, just like electrical power lines, these are also vital in the land development project.
Things to Consider Before Developing Raw Land:
While identifying and buying the right kind of land is crucial, those are not the only requirements to succeed in land development. While evaluating any parcel of land, there are a number of factors that investors will need to focus on.
Although these elements might appear intimidating right now, they will turn into your second nature with time and habit. Below are some of the factors that you need to consider before deciding to develop raw land:
It is important, especially early on in the project, to get your plans assessed by a skilled engineer. Even though certain investors might have some experience in this regard, your best bet is to seek the services of a qualified, specialist engineer.
An engineer will be able to factor in the many aspects of your developmental plan, and determine how feasible the plan is. These aspects include utility hookups, earthwork, and infrastructure. In certain cases, the lead engineer might even be able to identify ways to reduce the overall developmental costs.
Before buying or developing any piece of land, you must visit the site and perform a physical inspection. By walking through the land, you will be able to identify any aspects that might previously have gone unnoticed to you.
A walkthrough, for example, could reveal current power hookups, accessibility issues, unique landscaping, or any hidden amenities. Such discoveries could end up impacting the land viability, developmental process, and the purchase price.
Hence, it is important to physically visit the land and walk around it. This way, you will be able to come across any surprises – either bad or good – and will be able to proceed accordingly.
3) Spatial Awareness:
Spatial awareness plays a key role in successfully developing any raw land. When buying raw land, an investor must have a clear idea about how they can maximize the land’s profitability and use.
Of course, such clarity can only come about by learning about the optimal ways in which to use the plot – be it a commercial plot or a residential one. While mapping the development plans, focus on areas such as layout, transportation, and storm management – as these will enable you to optimize in terms of usage and livability.
4) Responsibilities and Roles:
With residential real-estate, a one-person team might prove sufficient. However, when it comes to raw land development, this is unlikely to be the case – even in ideal situations. Hence, throughout the entire development process, you can expect to work hand-in-glove with a number of different professionals.
Since the right team is so crucial to your project’s success, you must put in the time and effort required to find and recruit the perfect people, who are aligned with your business goals, project, and style of communication.
With capable and reliable people by your side, you will be able to effectively delegate responsibility, and make sure that your project concludes within the planned time and budget.
5) Focusing on the Outside:
As far as new developments go, it is best to, literally, begin from the outside and work your way inwards. This means that you should designate the structures and lots prior to focusing on the building specifics. This way, you will be able to mitigate the grading and earthwork requirements, and perhaps even benefit from the area’s natural layout.
6) Roads and Streets:
Although transportation and streets are crucial to the development project, they need not be addressed right at the start. The reason for this is that developers generally need to start by focusing on optimizing livability and land usage (particularly in residential projects).
As you proceed with the planning, you will automatically be able to identify the ideal locations for the streets and roads. For this reason, you should avoid this task at the beginning of the project.
In developmental projects, it is crucial that you do not ignore the unique features of your land. The topography will help you understand the distinct characteristics of the land, and, consequently, assist you in maximizing its usability. You can leverage any of the excellent resources out there that allow for the mapping of property developments.
These resources can also help you in working around the various geographic elements pertaining to any area. Before you decide to buy any land, use these resources to establish a firm understanding of the area’s topography.
Developing raw land is a particularly good idea for any investor who prefers complete creative independence during projects. A developmental project means that you get to start from zero, which means that you can just let those creative juices flow.
Although you might have to provide for constraints like land availability, budget, and timing, there is plenty of room to turn creative while making plans for a raw piece of land. It is important to try out new ideas or utilize innovative technologies while planning for a developmental project.
Remember that unique features can play a key role in attracting buyers, once you start marketing your finished product to the world.
9) Renting or Selling:
A traditional developer will, generally, acquire new land, use it to build property, and then sell it off as soon as the construction is done. Such a strategy enables investors to generate quick profits on their investment and helps them cover the construction costs.
A different strategy, however, could be to hold on to the land while renting out the constructed property. Such a strategy allows investors to benefit from a long-term, consistent income stream.
Even though recouping the initial investment through this approach might take a while, the investor might actually end up with a greater profit over the long term.
Reasons to Develop Raw Land:
1) Lower Competition:
Conventional real-estate investments tend to experience high degrees of competition. Raw land, on the other hand, has next-to-no competition.
Generally, investors want to purchase established commercial or residential properties, as such properties can offer immediate income sources. This is not the case with raw land (unless it has been optimized for regular income generation).
When compared to developed properties, buying and owning a raw land parcel costs significantly less. Not only is raw land associated with low carrying costs (such as insurance and property taxes), but it also has modest maintenance expenses.
As a matter of fact, you do not need to maintain vacant land – you can simply hold on to it until the value appreciates to a point where you can sell it off for a tidy profit.
In addition, owners of undeveloped lands are often eager to sell – this is because they are generally absentees on the land, and tend to have little (if any) emotional attachment to their properties. Having said that, if you have a solid strategy, a raw piece of land could offer tremendous upside.
3) Potential for Appreciation:
It is hard to argue the notion that the appreciation potential is perhaps the biggest benefit associated with raw land. Even under tough market conditions, the scarcity of raw land means that it will remain valuable (or rather, invaluable).
This is because raw land shall always be required. Meanwhile, if the economy is flourishing, you can expect greater appreciation in the value of your land.
4) Possibilities for Development:
The lure of raw land pieces resides in the unlimited opportunities that they offer. In addition to simply holding the property and deriving appreciation benefits, you can use your land for developmental purposes.
Once again, the possibilities are endless, ranging from a single-family residence to a condominium. Even though you might be somewhat restricted by the building and zoning codes, you still get the opportunity to pave your desired investment route right from scratch.
About THE AUTHOR
Brittany has been in the land business since 2020 when the world was starting to shut down. Since then, we’ve sold to dozens of people from ATV weekend warriors to camping enthusiasts to retired truck drivers. Our inventory spans mostly in the western United States. We’ve been trained by experience, land acquisition courses, and hundreds of hours meeting with county assessors and clerks, zoning officials, realtors, and land investors. We’ve answered hundreds of questions from people regarding the buying and use of land.Read More About Brittany Melling