High Land Price And Investing: What Is An Average Investor Without A Rich Relative Or A Fat Wallet To Do?
BATTLECALL GUEST EXPERT: Robert J. Abalos, Esq., InvestingInLand.com
High land prices seems to be the most formidable obstacle to real estate investment and development for most new investors.
It doesn't have to be. In fact, high land prices are actually an advantage and a blessing in most cases for the land investor and developer but it takes some counterintuitive thinking to arrive at that conclusion, something the novice in this area lacks due to inexperience.
I get at least twenty emails each and every week from visitors to this website or readers of my that start off this way:
"I'd like to start investing in land but the cost of land in my area is so high that I think...."
Some of the usual responses are:
"....I'll drive about 100 miles from my home where land is cheaper."
"....I'll buy land where my parents live in rural Arkansas instead of Portland, Oregon."
"....I'll stick with rural land for mobile homes and campsites first."
I hope you get the idea. Instead of looking for land bargains where they are most likely to find them, their own home area, these investors think CHEAP LAND is available someplace else, somewhere, and they are determined to find it.
Their thinking is flawed and I'll tell you why.
Why is Land So Expensive in Some Places?
First of all, land prices are all relative to one another. What is "expensive" to one investor is cheap to another. One look at land prices in Southern California near the Pacific Ocean or in Beverly Hills and the land investor from Omaha will recoil in horror. But bring in a land investor from Tokyo and they will jump for joy at the bargains they see. So the first step in understanding this land/price relationship is to realize that land prices are not only relative to each other but also to an investor's individual purchasing power. Putting prices in context is crucial. A half-acre building lot for $800,000 may seem expensive to some but very cheap to others.
So when I hear Mr. Email telling me "Land is so expensive where I live" my first response is "Expensive as compared to what?" I'm sure an acre of land in your community is more expensive than a wheelbarrow or a five pound bag of sugar but that really begs the actual question.
What this investor is really saying is:
"I want to buy some land but I don't have the money to buy land in my area so I'm going to buy some land where land sells for a lower price and I'll be able to afford some with the cash and credit I have."
This is a BIG mistake. Cheap land is cheap for a reason.
Supply and Demand, Right? WRONG!
Why does some land cost more than others? Why does a 1/16th of an acre of land in Manhattan cost more than 60-acres in the Arizona desert?
Normal market forces would suggest supply AND demand. But the real answer is just plain demand.
Use some common sense here. The absolute cheapest land you can buy without question is rural desert land far in the wilderness. Show up in some tiny sagebrush town out of an old John Wayne western with a briefcase full of cash and announce your intentions to buy some land there and you will be hailed as a conquering hero. The locals will throw you a parade and carry you around the town on their shoulders like you were a Pharaoh from ancient Egypt.
Why? Because the cheapest land you can buy is also the most difficult to sell. Put another way, this land is cheap precisely because no one wants to buy it, in other words, there is no demand for it.
Now why is that 1/16th of an acre of land in Manhattan so expensive? Because that land is in high demand, everyone wants to own it. It is incredibly expensive but also easy to sell because there are many buyers for it.
The normal forces of supply and demand are turned on their head here. You would expect as prices fall, demand would rise. Not here. With land, as demand increases, prices rise, further increasing demand.
Well, what about supply? Basic economy theory would suggest as demand increases, prices would rise, and this would bring about an increase in supply as sellers attempt to capitalize on the higher prices which would force supply and demand to meet at an equilibrium price.
This works for commodities but not for land. Again, common sense will tell you why. The amount of land in a community available for development is permanently fixed. Like Mark Twain and Will Rogers said about land "They just ain't making it anymore." You can't easily increase or decrease the amount of undeveloped land in a community in response to changes in demand or prices. Land isn't like sugar or wheat, semiconductors or paper clips. You can't respond to an increase in demand by trucking in a trainload of supplies from a distant storage depot. Sure, there is some land that can be brought onto the market during price rises but the amount does not dramatically affect the overall market. A few acres here or there don't matter to a hot area. When people want to build or live in a certain place, land prices will rise since the "supply" of land was long ago fixed by God and Mother Nature.
What Does All This Mean For Land Investors?
Chasing cheap land means buying into someone else's problem. If some land is cheap, it means few people want it. If the land is relatively cheap ($400,000 versus $900,000) that means that fewer people want it. The land most in demand will have the highest price. The market here is functioning like an auction where demand keeps driving the price higher and higher until the gavel finally falls.
If you are investing in land, there are two lessons that I teach:
First, Buy Great Land at Fair Prices, not Fair Land at Great Prices.
Obviously the land with the highest prices will be the "greatest" land assuming it can be purchased at or below its intrinsic value. "Great Land" according to my Course assumes a number of characteristics but two of them are land that can be bought and sold quickly and land that has immediate development applications.
High priced land has both. Cheap land has neither. Relatively cheap land has some or none, it depends. That is why such land is best called "fair" and not "great."
My Course also teaches to Buy and Sell Land Quickly, As Fast As Possible.
Is it easier to sell land in high demand or land with lesser or limited demand quickly? You answer this question yourself.
Rules For Land Investors
You want to buy and sell land fast. The best and most expensive land in your area is key to doing that, again so long as this land is selling at or below its intrinsic value. Land selling at $1 million per acre is a bargain if it has an intrinsic value of $1.5 million.
You want to buy land with current development potential. Obviously the "best" land for that purpose, land with easy-to-obtain or even current permits is ideal. That land will sell at a premium to other lesser parcels of land but so what? Again, if you are buying at or below its intrinsic value current market price is irrelevant.
The more expensive the land in dollar terms, the easier it is to make a large profit on it. It's easier to make a 5% profit on an $800,000 parcel of land than a 40% profit on a $100,000 tract but both dollar profits are the same $40,000.
Your time considerations on a $1 million parcel are exactly the same OR LESS than on a $100,000 tract. You have to do the same work on each but you make money much faster with the more expensive property since it likely will be easier to sell.
Now, Listen Carefully!
I'm not telling you that you should go find the most expensive land in your area and buy it. That is buying on the basis of price, not value.
What I'm telling you is that you should be examining the best pieces of land in your area regardless of price to determine if any is selling at or below its intrinsic value. Those pieces of land will be expensive relative to the average prices for land in your market. I've said many times here that most markets, like the real estate market, are inefficient and that's true. But they aren't half-witted or stupid either. You won't be able to buy 100-acres of prime commercial development land for $2,500 no matter how hard you look. But you can find that same land selling for 70-90% of its intrinsic value, even if that sum is in the millions of dollars. That's what you are looking for because if you can own that land or otherwise control it you're going to make some really nice money fast.
And you need to look for land bargains in your own local investing area. Your best bargains will be found driving around where you live and work, not hundreds of miles away. You need to intimately know your local area and its players, you can't do that from two or three cities distant. I recently got a great deal on some land because I drove past the vacant site everyday on the way to my office and noticed that the FOR SALE sign some broker had posted was overgrown with weeds and shrubs. It had been there for a long long time and it turned out the seller was indeed anxious for a sale. Thinking that there are all these great land bargains available in the next county over or in some city or state to the north or west reminds me of this stock market investor I knew that was obsessed with buying shares in companies everywhere but the United States. He'd buy stocks in Asia, Africa, Europe, but not in America, claiming the bargains there are enormous. I could only think that if this guy couldn't find any great deals in the equity markets of the United States, by far the largest in the world and bigger than all those other markets COMBINED, he was looking very hard. If you can't find land bargains where you live, you aren't trying.
But I Don't Have The Cash!
Great, I hear some of you saying. I realize I should be buying $1 million parcels of land. But I don't have the money or credit to do that. An acre for $50,000 would set me back some, like into the poor house.
If you can find great land selling at or below its intrinsic value, you will have the world on a string. One technique from the Course is to merely option the land. A $1 million tract can easily be optioned for $10,000, or 1% of its value, and that is certainly within the ability of most average investors. If you follow the techniques outlined in my Course you will instantly know who would want to buy your optioned land and why.
If you are an average investor with limited means, putting all your capital and borrowing capacity at risk into a single parcel of land is NOT the way to invest. It is better to highly leverage a great piece of land you can buy at or below its intrinsic value and quickly sell for a profit than outright own an average tract of land bought at the same relative intrinsic value.
Options are common in land investing and represent only one way to go, albeit a very effective way. The key is to realize you want to own (or control) the best land in your area, not the cheapest, because the best will be easiest to sell due to the high demand for it and you get paid and earn your profits in cash at the closing table and not before. And it's easier to find the one buyer you need when you have a large pool of them competing for the land you own or control.
Got an opinion? We want to hear from you. Post your thoughts or comments here in our Mortgage Warrior Forum. Come join the conversation and say hello...onward mortgage warrior!
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