For Investors Seeking Stability, Land Maintains Its Classic Appeal

Increased buyer interest, lower taxes and carrying costs, and ease of shopping from a social distance

Source: Virginia K. Smith, Mansion Global

One of the most compelling arguments for a land investment right now: after the pandemic, demand may be set to skyrocket.GETTY IMAGES

In the ongoing fallout from the coronavirus pandemic, the real estate market has been altered almost as dramatically as the stock market. Sales and showings in many cities have slowed to a trickle, inventory has fallen off a cliff, and for many buyers, priorities have changed.

And for many would-be investors, this shift may lead to an increased interest in empty plots of land, which offer relative safety as an asset in the short-term and a broad range of sales and construction options once the current crisis has passed.

“Some people are looking to just have their cash in dirt, if you will, rather than sitting in the markets or in the bank,” said Shelly Tretter Lynch, a Compass agent based in Greenwich, Connecticut.

Besides protection from a volatile financial sector, land offers buyers other immediate benefits that suit the current moment. Taxes and maintenance costs are lower than for comparable properties with pre-existing homes, and on the most practical level, a plot of land is far easier than a home to view either virtually or from a safe distance. And with growth anticipated in suburban and second-home markets, snapping up a lot now could mean a lucrative flip later.

Empty lots come with their own particular sets of challenges, though—most of them in the form of tricky-to-obtain permits and mortgages.

A Safe—and Flexible—Investment

Though land isn’t impervious to market downturns and fluctuations, you’ll avoid paying extra for pre-existing construction that may need improvements, or has simply fallen out of favor with buyer trends.

“When a property appreciates, it’s the land that’s actually appreciating,” said Jonathan Miller, president and CEO of appraisal and consulting firm Miller Samuel. “The actual asset—the improvements, the structure—is depreciating.”

This means that a land purchase is more likely to net buyers the best value possible, while also making it easy to keep options open until the dust settles, whether that means preparing for a construction project, or simply flipping the land as-is to the next interested buyer.

Some buyers are already looking to move money out of mutual funds and into a piece of land that they see as a safe space to store their assets and net a reliable return of at least five percent per year, said Los Angeles-based Douglas Elliman agent David Solomon. “Maybe one day you build, or maybe one day you just let it go and sell it. You’re getting a blank canvas. You’re not paying for someone else’s work. You’re putting your money in an asset that you can control when you want to unload it.”

And until a new structure is built, both property taxes and maintenance and utility fees will be far lower than they would be for a typical property, keeping an owner’s expenses to a minimum.

“Your tax basis is absolutely going to be lower, your purchase price is going to be lower, maintenance fees are going to be lower,” said David Parnes of Los Angeles-based The Agency. “And land can be tailored to any kind of market. You can build as big as you want, or build something smaller if you feel that’s the direction the market is going in. It’s a great time to start planning your project and getting it ready to deliver at a more ideal time.”

“Having a piece of land is like having a bond,” Ms. Cohn said. “The values don’t change as much, and it’s an easier sale, as far as someone just has to like the land, they don’t have to like the house you’ve built on it.”

Buying From a Social Distance

While agents and brokerages have sprung into action creating digital viewing options ranging from 3-D tours to personalized Instagram Live Q&As, many buyers may currently feel uncomfortable purchasing a property they haven’t set foot on in person. With land, this calculus is significantly less fraught.

“Acquiring land is easier in a period when access to real estate is limited,” Mr. Miller said. “You’re not dealing with interior inspection of a property where somebody lives. It certainly is more practical.”

And though an in-person visit to a plot of land can be conducted more easily and safely than a house viewing right now, in some respects, digital options like Google Earth views and aerial footage are actually more relevant.

“We had a call with a prospective buyer last week and went through photos, video and drone footage of the property,” said Scott Tamkin, a Los Angeles-based Compass agent. “We went through a lot of the documentation, plat maps [which show how the property is divided], then did a virtual fly by on Google Earth, pointing out areas of interest, access points. It’s almost better than being on the property because you can see it from overhead.”

A Better Bet for Buyers With Cash and Time

Not every aspect of a land purchase is simpler, and investors buying with an eye to future construction will either pay a premium for a property with all its permits in place, or settle into a potentially laborious process of approvals and inspections.

“There’s a lot that goes into analyzing raw land that has no approvals,” said David Turner, an agent with Houlihan Lawrence in Westchester, New York. “It’s not for the faint of heart. You can spend a long time going in front of the town planning board with engineers, studies, septic tests, and wells, but it all depends. If it’s an easy lot [that’s not located near complicating factors such as wetlands or steep slopes], it doesn’t need all those approvals.

Red tape varies depending on the area—many California properties require a geological study to ensure that properties built on hills at risk of slides, for instance. “It typically takes about a year longer than buyers think it will [to get approvals],” said California-based Douglas Elliman agent Zak Freedman.

“My advice is that if it’s a parcel that’s had no due diligence on it whatsoever, it may appear to be a great price, but if the regulations change, and square footage amounts change, all those things could change the value of a property,” Ms. Tretter Lynch said. Obtaining a proper survey of a piece of land, she added, “could range anywhere from $1,500 to tens of thousands of dollars or more, depending on the size and complexity of the property.”

Land purchases are also best for cash buyers who can afford to skip financing. While low mortgage rates lured a large number of buyers into the market at the start of the year, banks tend to require more expensive financing and higher down payments on land purchases, meaning you’re less likely to get a deal.

“Most banks will finance up to 65% or 70% on a piece of land,” said Melissa Cohn, executive vice president of New Jersey-based mortgage banker Family First Funding.. “I have one bank that has a construction loan at 2.99%, but if a buyer just wanted to finance a piece of land, that would go up to 5.5%. When they offer a land loan, it’s a bridge loan until you can build a house.”

Getting Ahead of Buying Trends

One of the most compelling arguments for a land investment right now: after the pandemic, demand may be set to skyrocket.

“Especially if we’re talking about luxury markets across the country, I think that second-home markets are going to be poised for growth at least in the first couple of years after we come out of the crisis,” Mr. Miller said. “Part of that is rethinking living in a metro area versus splitting time with somewhere outside the city. I think that applies to most U.S. metro areas.”

Buyers across the U.S. are already showing increased interest in large lots with expansive acreage, said Mr. Freedman, indicating an interest in private, open space as well the desire to create custom homes that could be comfortable if another crisis like the current one ever takes place.

“I think the demand, this is just the beginning,” Mr. Freedman said. “The longer we go through this, the more demand there’s going to be for it and people sort of re-evaluating how they can live their life and make their job work and also have this space like a sanctuary.”

Which means that land purchased now could potentially be turned around into a swift, lucrative sale to a buyer in search of more space after their experience in quarantine.

“I’ve got builders and developers who are sensing that there’s a coming wave of people wanting to leave the city,” Mr. Turner said. “I’m having a lot more interest and inquiries specifically for my land listings. Everybody’s thinking about this.”

Filed under: Headlines by Alec Reimon
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