Tom Kelly: Vacant property often comes with more than meets the eye

While real estate typically is an excellent long-term investment, property buyers should be cautious when buying vacant land or raw land even if there clearly is marketable timber on the property.

Even experts in the field have made mistakes and become too aggressive over what seems to be a terrific deal. For example, Douglas Yearley, chief executive officer of Toll Brothers, one of the largest home-building companies in the world, has a plaque on his desk that reads: “You can buy more land in an afternoon than you can get rid of in a lifetime.”

From 2000 to 2006, Yearley and many of his competitors watched finished lots in good locations climb by an average of 162 percent, according to statistics provided by John Burns Real Estate Consultants. Once the housing bubble burst, average values declined 46 percent from peak to the trough in 2009 and still need to climb another 21 percent to return to the peak of eight years ago, Burns reported.

Raw land or “raw ground” differs from vacant property. Vacant land or lots generally have all or most services, including sewers, water, access and power. Raw land does not have the services necessary for building and usually is a tract larger than a single-family lot. Depending upon location, the costs to turn raw land into a ready-to-build site can easily surpass 25 percent of the cost of the home.

Like any investment, vacant land and raw land hold boom or bust potential. The boom often occurs through development while bust is typically brought on by taxes, slow (if any) appreciation in land value and lack of income-tax deductions or depreciable dwellings. For example, you can depreciate your rental unit, but if the lot is vacant, there is nothing to depreciate. There is no monthly rental check on raw land.

In a land deal, the buyer usually has to pay interest on any borrowed money. The interest on that money most likely is going to be at least 6.5 percent. In addition, when the buyer is going to sell, he’s going to have to pay an agent 6-10 percent commission (the going commission rate on vacant land often is higher) on the sales price. To offset those costs, the property should appreciate about 20 percent a year.

If you are going to use the property solely as a getaway, however, and expect to derive great joy out of doing so – consider that as your return on investment.

The idea of using available timber to offset your costs raises a variety of issues. You probably have heard the awful stories of despicable landowners who buy and/or divide their property, clear-cut all or a portion of the land, sell the timber, and then quickly move out of the territory. Those stories become more and more common as the price of timber goes up and more private owners purchase more public land.

An alternative to clear-cutting is a selective “thinning” cut that not only can protect homes from precariously perched trees but also can help prepare and show a site for a potential building while netting several thousand dollars. In fact, some woodsy lots are so thick that a very lucrative thinning often can go unnoticed.

Checking vacant land

You are driving down the road and find the perfect piece of vacant property for your residential or recreational needs. Here are a few tips to help you obtain information about the property:

• Call a local real-estate agent to determine who owns the property, or check county tax records to determine the owner.

• Ask any neighbors if the land significantly changes (slides, water runoffs) during the rainy season.

• Make sure local zoning will allow for your intended use.

• Make any purchase offer contingent upon an engineer’s inspection and future availability of roads, water and power.

• If there is no sewer system, make any purchase offer contingent upon the approval of a septic-system design and percolation test.