As a result of the national urban sprawl and population growth, a number of firm clients are interested in investing in empty lots to hold for the long term and await what seems to be the inevitable expansion and development of the surrounding area and the concomitant capital gains that come with an increase in local economic development. The entry to such investments are almost certainly cheaper than purchasing developed real estate, particularly if investing in unincorporated lots with other burdensome hurdles that generally come with such assets, as discussed below. Financing is generally unnecessary and sometimes impossible to obtain, due to title issues, which makes this is a niche market. Merely knowing what one is doing, and having experience, is still not a guarantee of future profits; this is a super high risk endeavor for anyone but the largest investors.
The first item to consider with such plots is the seller. Who is the owner? Frequently such empty land has been in families for generations and has never been probated. The chain of title may be clouded, and an investor will need to search far and wide to locate the owner, after which he will need to ascertain whether the purported owner actually has clear title to be able to transfer it. A general warranty deed is certainly best, and if the seller refuses to provide it, take it as a red flag. Sometimes a preliminary title abstract (history of title) is warranted before starting negotiations.
If the property has not been probated and the owner s deceased, in Texas, an Affidavit of Heirship may be used to clear title issues where a third-party swears who the only possible heirs are and after five years such recorded document is strong evidence of title; however, for that five-year period you have a potential cloud on title, and the property may not be insurable. After such an affidavit is recorded then a general warranty deed may be filed from the heirs to the investor, which is certainly strong evidence of title, though it must be verified that ALL heirs have indeed relinquished all claims to the plot.
Next item to consider would be the survey, if a recent one is available. If not, then a buyer of the land would be gambling that the plot they think they are getting is in fact what he is getting. There could be many problems with the boundaries of a plot which would only be discoverable through a survey: adverse possession, unrecorded easements, encroachments, continuing trespass by neighbors or the government… These problems devalue the property and should result in a lower purchase price, since they are costly and time consuming to remedy. If the subsurface/underground estate has been previously sold or is being reserved by the seller, that would also substantially devalue the purchase price of the property.
An investor should then consider doing at least a Phase 1 soil test. Over the years, unless the property is in deep country, there is a possibility that a neighbor or other parties have dumped toxic chemicals onto the land which have seeped into the earth and would be costly to clean up and could result in major fines. This is particularly important to do if there are industrial properties nearby. If a problem is found at this point, the usual recommendation is to take the hit and walk away. If the purchase is made then a contract should be used, regardless of financing, which will contain warranties and indemnification provisions from the seller. Regardless of such promises to indemnify for costs and/or fines, it is highly uncertain if such funds will even be collected in case they are necessary.
Considerations to ponder for a buyer which are more business based than legal, are the projected holding period. Can you, as investor, hold the property indefinitely and pay its carrying costs? It may take a decade or more to realize a profit. Next, what are the utilities like on the property? Will a septic tank need to be removed? Likely there are none and the purchaser will need to install water and electric, at the very least, to increase the value of the land and make it habitable. Will clean up of overgrowth, trees, and debris be necessary? How are the neighbors? Are they loud and obnoxious with loud cars and play loud music late at night, or are they friendly and mind their own business? Are there any neighbors carrying on nefarious/illegal activity? One would be surprised how frequently this occurs, and this obviously is highly detrimental to property values. Is the property about to be incorporated under new regulations that could result in additional costs and administrative burdens? Incorporation will increase land marketability but will almost certainly raise taxes and other expenses.
After purchase, the first step should be to fence the property in, establish permanent boundaries and exclude any ongoing trespassers. Next, recycling and selling any natural resources on the property would help to offset the purchase price and other costs. Attempt to monetize the property any way possible; see if it can be made into a parking lot, basketball court or a playground. Remember that title insurance will be difficult if not impossible to obtain unless the title is clear, which is not great for property values until such insurance becomes available after any clouds or disputes are resolved.
This is a very brief primer on some of the issues that are inherent in undeveloped land purchases, and many more are possible. You should consult a knowledgeable, experienced legal professional and other experts in the field to assist you with such a purchase. It is almost certain that no one should make this type of investment on their own without the assistance of multiple experts.
Now just wait for the land to appreciate.
