Did you know that just under half (47%) of the United States is uninhabited — and potentially suitable for land development? Purchasing raw land is always a good investment but developing land is no easy task. The process can be complicated and require due diligence. But if you’re willing to do the work, developing raw land can be a lucrative investment. Read our guide to walk through the necessary steps on how to develop land.
Table of content
What is raw land? Is raw land a good investment? How to buy raw land What is land development? How to develop land Step 1: Evaluate the land’s value Step 2: Calculate the total cost of the property Step 3: Learn what the land is zoned for Step 4: Secure financing Step 5: Build within zoning laws Land development tips Land development FAQs
What is raw land?
Raw land is a property in its natural state with no improvements or utilities, including sewers, water, power, roads, or buildings. This is in contrast to vacant land which may have utilities and underground infrastructure in place, and had buildings on it in the past that have since been torn down. In short, raw land is undeveloped so you can think of it as a blank canvas for your development project.
Is raw land a good investment?
Raw land is a secure investment when adequately vetted. Even if you don’t see the return on it immediately after development, there are many benefits to owning land:
Costs less to purchase and hold than a developed lot because it has minimal carrying costs, lower property taxes, and low maintenance costs.
Less competitive than residential real estate because it is not immediately set up to earn income.
Sellers often offer seller financing for raw land because banks are hesitant to loan money for vacant land.
Appreciates well even in marginal market conditions because it is a hard asset that is a scarce resource that can always be held as a long-term investment.
Offers lots of opportunities for how the land will be developed depending on zoning codes.
Raw land is a limited resource and will always be valuable. Although location does play a significant factor in how well it will appreciate. To determine its value or future value, you’ll need to research and evaluate the land.
How to buy raw land
If you're ready to purchase raw land and take on a land development project, here's how to get started:
Set a budget so you know what you can afford to spend
Choose your desired location based on that budget, as well as the climate and local zoning laws
Use real estate websites or hire an agent to help with your search
Inspect the land before buying it, checking things like topography, soil quality, and utility availability
Have the land surveyed for any issues
Submit your offer - don't forget to include contingencies for financing and inspections
You're ready to close the deal
With your raw land now bought, it’s time to learn how to develop land!
What is land development?
Raw land development refers to your plan to develop, build, or hold onto raw land for long-term appreciation or to make improvements to the piece of land.
Raw land can be used to:
Sell as property
Build a structure on and charge rent
Sit on the land to let it appreciate
How to develop land
Whether you’re an experienced developer or taking on your first project, it’s important to understand that land development is a complicated and lengthy process. You will need to evaluate, plan, and engineer the process, while following construction codes and regulations. If you’re still eager to proceed, here’s how to develop land.
Step 1: Evaluate the land’s value
Before purchasing the land, you will want to determine the return on investment for the property. The first step is assessing the value of the property.
Factors that can influence the value of the land are:
Location
Shape and size of the property
Access to roads
Access to utilities, sewers, and drinking water
Contain trees and streams
Drainage, contour, and grading of the property
Climate and air quality
Proximity to toxic waste, old wells or septic systems, or cemeteries
Unknown moratoriums
Proximity to airports, landfills, power plants, or train tracks.
See the National Association of Home Builders for a more comprehensive checklist for land development.
It’s important to vet each of these factors because each can significantly impact the property’s value. Remember, the land you are looking at is vacant for a reason. And unless the seller has openly disclosed why, you’ll want to do your homework thoroughly.
Step 2: Calculate the total cost of the property
To determine the land’s profitability, you’ll need to get estimates of any costs the property may need for land development, how it can be used for revenue and when you’ll be able to get a return on your investment. The total cost of the property includes:
The sales price
Property surveys
Environmental impact studies
Fees
Permits
Engineering services
Soil tests
Tree removal
Grading and clearing
Building access roads
Utility installation
Wells and or septic tanks
You’ll want to add up all the costs to get your total investment cost for the property. Lenders generally won’t loan more than 50% of the land’s purchase price. Make sure you have financing to cover all the costs.
Not sure which type of lot you want to build? Talk to My Site Plan to get quotes on parking lot construction plan.
Step 3: Learn what the land is zoned for
This is a vital step of due diligence when learning how to develop land. You’ll need to examine local zoning codes to find out what the land is zoned for development. It will determine what the land can be used for and what types of structures you can build on the land:
Single-Family
Multi-family
Condominium
Commercial
Agricultural
Depending on your plans for the land, zoning could ruin those plans.
Step 4: Secure financing
When buying raw land, you often have to have cash, or you’ll have to finance the property from the seller because banks usually won’t finance raw land purchases as they are seen as speculative investments. Because of this, the seller will often act as your lender and offer below-market rates.
Financing for the property will largely be influenced by how you plan to develop it. Investors will want the loan-to-cost (LTC) for the property. This is how much money the lender will need to provide to obtain the property. Lenders generally will loan a maximum of 80-85% of the overall costs.
Step 5: Build within zoning laws
Once you know how to develop land and what you want to do with it, you’ll need to pay for horizontal development. This includes grading roads, installing utilities, and even constructing a building. You’ll want to have a schematic drawn to determine the most cost-effective way to develop the property.
During this phase, contractors are paid incrementally as tasks are completed. Lenders will often hold back 10% of the loan until the project is complete.
Land development tips
Developing raw land can be a stable and lucrative investment, whether you plan to develop it right away or keep it for long-term appreciation. But for it to be a successful investment, you’ll need to research and evaluate the property’s earning potential.
My Site Plan has a team of experienced CAD designers who can create site plans for your land development project. Known for an excellent turnaround, My Site Plan can make a schematic that will work best for your property.
Do you need a site plan to obtain a construction permit? My Site Plan can create a plan for your land development project within 24 hours.
Land development FAQs
We’ve already explained how to develop land, but if you have further questions, explore our land development FAQ section below for more information.
What are the typical timelines for raw land development?
Timelines for raw land development can vary significantly based on factors like zoning, size of the project, and local regulations. Typically, it could take anywhere from a few months to several years. Initial phases such as planning and obtaining permits might take longer than the actual construction and development phases.
How does the presence of natural resources like water affect the value and development potential of raw land?
The presence of natural resources such as water bodies can enhance the value and development potential of raw land by making it more attractive for residential developments or recreational uses. However, it may also impose additional regulatory hurdles related to environmental protection and land use, potentially affecting the timeline and cost of development.
What are the risks involved in developing raw land?
Developing raw land involves several risks including unforeseen environmental issues, increased costs due to necessary improvements (like roads and utilities), zoning restrictions, and market fluctuations that may affect the land’s value post-development. Additionally, the initial lack of infrastructure can make such projects more speculative compared to developed land.
Can raw land development impact local wildlife and ecosystems, and how is this typically managed?
Yes, raw land development can significantly impact local wildlife and ecosystems. Developers usually need to conduct environmental impact assessments and develop mitigation strategies to minimize such impacts. This might include creating wildlife corridors, preserving certain areas within the development site untouched, or implementing sustainable development practices.
What strategies can investors use to mitigate financial risks when investing in raw land?
Investors can mitigate financial risks by conducting thorough due diligence, including comprehensive feasibility studies and market analysis. Leveraging seller financing, opting for phased development to manage cash flow, and diversifying the planned use of the land to adapt to market demands can also help manage financial exposure.
This post was originally published on 2020-10-29, by Ryan Crownholm. It was updated on 2024-05-29 to reflect the most recent data.
