Landowner FAQs: What Property Owners Should Know About Owning Land
Landowners really are the forgotten class of real estate owners. There's a ton of information on buying and owning investment properties or fix and flip strategies but almost nothing on owning raw and vacant land.
But landowners have questions. And these questions ultimately impact the value of their land and influence their decisions when owning a property.
So here are some frequently asked questions (FAQs) that may help you make better-informed decisions as a land owner.
Q: What is my land worth per acre?
This is a loaded question and not one that can be answered definitively without doing some research.
You could do a comparable sales analysis for a quick approximation of land value. This is the method of comparing your property against similar properties recently sold in the area. For instance, if a 10-acre land parcel sold for $100,000, you could conclude that land sells for roughly $10,000 per acre in the area. If your property is 20 acres, based on the comparable sales analysis, it would be worth around $200,000.
The shortcoming of the "comp" approach is that it fails to consider the uniqueness of each piece of land. For example, a property nearby that recently sold may have different zoning, may have more usable soils, could require fewer off-site improvements, and may have access to public utilities. All those factors would impact the value of your land in terms of comparable property.
So as a property owner, it's essential to understand that a comparable sales analysis may only get you in the ballpark of what your land is worth per acre. Some additional research and an understanding of the real estate development process may be necessary to really pinpoint a land value.
Q: How much is a soil study?
The cost of a soil study will depend on how large the property is and what you are testing.
A typical soil study is a "perc test," which measures water absorption on a given property. The perc test will give the property owner and potential buyers a better idea of the land's usable soils for constructing a septic system. A licensed soil scientist will often use a hand auger to drill soil samples to determine the composition and suitability of the land's soils. A perc test will cost a few thousand dollars and take several weeks to complete.
Another common soil study is a stream and wetland delineation. This is an analysis of the land's soils to determine if a stream or wetland may be present on the site. A stream and wetland delineation will cost a couple of thousand dollars and is important before permitting and developing a property.
A geotechnical survey is a third common soil study that assesses the underground composition of the land’s soils. Geotechnical surveys may cost $5,000+, and an owner or real estate developer should consult with an engineer to determine if it's necessary for the project.
Q: How can I increase the value of my land?
This is also a loaded question. We recently wrote an article, "3 tips for maximizing land value when it's time to sell," that offers landowners a deep dive into this question.
Land entitlements are the process real estate developers use to get a project approved before they're allowed to begin construction. As a result, landowners wanting to increase their land's value can do some of the required real estate due diligence and permitting work before selling the property.
A buyer or real estate developer will pay more for a property when some investigative work is already complete.
Q: How much is a survey?
Depending on the size of the property, survey costs will vary. Additionally, there are different layers of a land survey that will increase or decrease expenses as well.
It's common to have the property boundary, topography, and any improvements surveyed, but owners can elect to have trees analyzed and underground utilities investigated. Of course, the more in-depth a survey, the more it will cost to complete.
Real estate lenders will often require an ALTA survey which includes information related to the property's title and ownership history.
A survey can cost as little as $1,000 for a boundary survey on a small property to $10,000+ for a larger land parcel with various layers. It’s a good idea to consult with a real estate development consultant or engineer before deciding on what elements of a survey make sense.
Q: How much will I pay in taxes when I sell my land?
Ultimately, the amount of tax you pay will be dictated by how much you sell the property for. For example, landowners will often pay short-term capital gains tax (if they've owned the land for less than one year) at their regular income tax rate. But if they've owned the land for more than one year, they'd be subject to long-term capital gains tax at 0%, 15%, or 20%.
It’s important to note that taxes will only be paid on the profit you make from selling the land. So, if you bought a property for $50,000 and sold it for $150,000, you would owe taxes on the $100,000 profit.
Fortunately, there are ways to minimize taxes as a landowner at a property sale. For a deep dive, check out our article "The landowner's guide to minimizing taxes when selling real estate."
Q: Should I hire a real estate agent to sell my land?
Selling land is generally more complicated than selling a house. If you don't have experience selling property, you may waste time and energy trying to do it yourself.
A real estate agent can help you price your land, find the right buyer, and handle negotiations as part of the sales process.
But agents charge a commission, and many will contractually obligate you to pay them even if you find a buyer yourself. So, if you've been approached by a potential buyer or have a network of possible purchasers, it may make sense to sell the property yourself.
Also, beware that most real estate agents are not land experts. Be sure if you work with an agent that they have experience selling vacant land and understand how to analyze a property adequately.
Q: How can I harvest and sell the timber on my land?
Many owners are unsure of the value of timber on their land, and some don’t even know they can sell it without selling the property. And because selling timber is only a once or twice-in-a-lifetime event for most landowners, it's essential to get it right.
Before contracting with a buyer to purchase the timber, you'll want to consult with a forester to get a better idea of the timber's current fair market value. This is because the demand and price for timber vary significantly with the current wood products market – the property's quality, size, and species of trees also affect timber value.
If you decide to go directly to the buyer rather than connecting with a forestry consultant, you'll want to obtain several offers to ensure you're being paid a fair value. It's also critical to have the property boundaries surveyed and ensure the logger or harvesting company is bonded correctly before they cut down any of your trees.
Q: What do I need to do to my land before I can sell it?
In most situations, you don’t need to do anything to your property before selling it.
If you hire a real estate agent, they will manage taking pictures, assembling a marketing package, and listing the property. If you don't want your land listed but still engage an agent to help you sell the property, they can bring the opportunity to buyers in their network without promoting it on listing services.
If instead, you want to sell the land yourself, you'll be responsible for any signs and marketing for the property. You'll also be responsible for handling negotiations as part of the sale process.
If your goal is to cash out on your property as quickly as possible, it probably makes sense to sell the land "as is." However, if you're interested in unlocking more value out of your land, there are several land exit strategies to consider that will require different amounts of your time and money.
So, additional legwork may be required before selling your land, depending on how quickly you want to sell or for what value.
Q: How do I subdivide my land?
Every municipality has a different set of rules for subdividing property. If you’re interested in subdividing your land and don’t have any experience, it may make sense to engage a real estate consultant or civil engineer before doing so. They’ll be able to guide your efforts and help you navigate the development regulations.
If, instead, you want to tackle a subdivision yourself, most municipalities have a unified development ordinance (UDO) that outlines the rules you need to familiarize yourself with. You can also reach out to the local planning department to discuss what you're trying to do. They'll give you a better idea about the subdivision process and familiarize you with the requirements.
Land subdivision is often accompanied by land entitlement risks that make the process costly and time-consuming. So it would help if you informed yourself of the process in your municipality before spending any money on subdividing your land.
Q: When is the right time to sell my land?
There isn’t a right or wrong answer to this question, but there are “better” and “worse” answers.
We recently wrote an article, "When is the right time to sell your land as a landowner," that covers this topic in depth. Of course, you'll want to consider the health of the local and regional real estate markets. But it's also important to consider your personal goals and the development activity happening around your property.
If there is a lot of growth in your area, you may be able to take advantage of the momentum if you have a quality piece of land.
And while it's impossible to time the market truly, several important factors influence the value of your property and, ultimately, when it makes sense to sell it.
Hopefully, this helped answer some of your questions. I talk with landowners all the time throughout my development and consulting businesses. Unfortunately, many of the answers to the questions are “it depends," and there isn't a black-and-white solution.
I tried to offer some additional resources that give deeper insight into these questions and may help provide additional context as you make decisions about your property.
As a real estate development consultant, we work with property and landowners to maximize their land value and ultimately structure exit opportunities that make sense for their situations.
If you’re interested, book some time on our calendar, and we'll begin brainstorming about your property and goals.