The current real estate market, economic situation, and high interest rates continue to limit options for buying real estate. While prices have come down from their peak in many areas, the recent increase in interest rates means that affordability has not improved for the average buyer. There is also very limited inventory on the market, as many would-be sellers are choosing to stay put. Many buyers have to look in more affordable regions, go even more remote, or consider homes or properties that are smaller or in poorer condition.
With all these challenges, many would-be property buyers are turning to more creative strategies. One potentially feasible and cost-effective route is to team with friends or family to buy and develop a piece of land instead of purchasing property separately.
This path is also a natural fit for those hoping to relocate as a group or establish their own rural neighborhood. Being able to “pick your neighbors” like this can make it much easier to get settled and provide immediate mutual support.
Several routes can be taken, to develop land as a team effort. The simplest is to buy multiple parcels as a package from a single owner. This might an existing rural subdivision with multiple lots available. As another possibility, look for a piece of property that already has multiple legal parcels. This could be multiple undeveloped parcels or a farm or ranch property with one parcel for the homestead and multiple undeveloped parcels around it.
If you cannot find a large property already divided into multiple parcels as a pre-approved subvision, then look for a larger parcel (with or without an existing home) that meets the requirements for subdivision. This depends on the local ordinances. Many counties have no limitations on lot splits above 20 acres or more, and they are permitted by right. Check with your county what regulations govern lot splits and subdivisions, and consult a local zoning map to ensure that the candidate property is suitable.
If you cannot make a legal subdivision, then you may have to consider a shared ownership arrangement. This is least preferable because of the long-term complications if one party eventually ends up having to relocate or sell and the conflicts that can arise from holding property in common. This approach is also potentially problematic with local ordinances, which may limit you to one “single-family residence” per parcel. Many jurisdictions also allow the construction of an Accessory Dwelling Unit (ADU) along with a primary residence but with limitations on its size and occupancy.
As with many other things, land is often cheaper in quantity, while already subdivided and developed land sells at a premium. There are opportunities to be had by taking on the role of the developer if you’re up to the challenge.
The People
Your first challenge will be finding the right people to work with. This needs to be people that you can trust and rely on. Any property development is a large investment with very real risks. Stick with like-minded people with whom you have good references or ideally those that you have a solid personal or business experience with.
Working with family is common in these situations, but it’s important to ensure everybody (and their spouses) is fully on board and committed. It’s unfortunate but not uncommon to see a deal fall through because one party had second thoughts at the last moment.
Take the time to ensure you’re aligned on your vision, in full accord with the property requirements, and have a solid plan for future improvements to the property and the legal issues. Talk through the financial situation openly and in detail, and be upfront about any possible factors that could cause problems in the deal. Make sure you are all clear on the financial requirements and that the funds needed are actually available.
The Property
When you look for property, it’s not just a matter of finding a location and property you all like but making sure it is practically and legally suitable to complete your plans. At a minimum, this will mean researching and reviewing several issues in detail:
- Parcel details and title report: Work with a title company or real estate attorney to ensure that you have a clear picture of the parcels being purchased and the title situation and that each subject parcel is distinct and buildable in the eyes of the local jurisdiction.
- Covenants and easements: A title search is intended to uncover any written easements, shared well agreements, or CC&Rs. Review them carefully with an attorney to ensure they do not obstruct your intended use.
- Local subdivision ordinances and process: Your project will be subject to the timelines and processes established by the local government. Educate yourself, and get advice from people who have been through the process before.
- Planning and zoning issues affecting property: Check not only current zoning but “planned use” or other future issues that might affect the property or influence whether you can get approval for your project. For example, if your development is in an area that is expected to be the site of a future highway bypass, you will likely encounter problems getting approved.
- Road access requirements (practical and regulatory): Local fire protection and highway districts typically have authority to make minimum requirements for private roads and driveways connecting to public right-of-ways, including access road slopes, bend radii, and widths. Make sure you account for these requirements in your plan and budget.
- Septic system requirements (practical and regulatory): The local jurisdiction that regulates septic systems will have an important say in whether your proposed lots are buildable. Check regulatory requirements and confirm that each potential homesite can pass a percolation (“perc”) test or septic evaluation.
- Water source requirements (practical and regulatory): Determine whether your water source will be separate for each parcel or shared, and any state or local requirements or permitting it will require.
- Site development requirements and costs: Develop a plan for the requisite site development, including power, internet, access, internal roads, and building sites. Ensure that they are feasible within the constraints of your budget and the property topography.
The Process
There are two phases to the how. First, how is the purchase handled? Second, how do you arrive at the desired end state?
The simplest situations are typically when one party makes the purchase, handles the subdivision, and then sells or transfers the resulting parcels to the other parties. This minimizes complications in the process but also means that sole authority and responsibility are vested in one individual.
In other situations, you may prefer to establish a trust or Limited Liability Corporation (LLC) to purchase and develop the property. In other cases, multiple parties may purchase a property in joint ownership (e.g., tenancy in common).
These arrangements become even more complicated if a bank is also financing the property purchase. For this reason, many groups pursuing a project like this opt to finance the project with cash, private financing, or through a home equity loan or home equity line of credit (HELOC) on their existing property.
Most importantly, get qualified and experienced help in the process. Each situation and location is different, so having a professional real estate attorney assist and consult can be invaluable.
Challenges
Keep in mind that there are always things that can go wrong. Have a contingency plan if things don’t work out as intended or life circumstances change unexpectedly. Suppose you have multiple people investing in the project. In that case, you need to have a plan that allows the other parties to continue on or the ability to end the project gracefully. Likewise, if unavoidable obstacles arise, consider developing a satisfactory Plan B that’s still workable for all parties.
Be prepared for an extended timeline. Unless the situation changes, many local governments (not to mention contractors and well drillers) are running with a significant backlog. Depending on the situation, you are likely to have a multi-year process to go from identifying the property to being able to build.
Be prepared to deal with unexpected costs, necessary changes to the plan, and the potential for disagreements or second thoughts. Clear assignment of responsibility and delegation, along with clear communication on ongoing expenditures and decisions, are essential.
Two Case Studies
Every situation is dramatically different, but I’ll present two real-life case studies as examples of how a project like this can turn out.
Case #1:
Single 20 acre parcel. The property was found by networking with family and friends. Someone the family knew had a neighbor willing to sell a 20 acre parcel adjoining theirs.
The family in question did not have a budget sufficient to both purchase the property and build on it. They brought in another family member interested in the same area. Between the two families, they had sufficient cash to make the purchase. Initially, the title was held jointly.
The property came with CC&Rs that appeared to prevent further subdivision, so a plan was made to have one family build a primary residence while the second family would build a shop that could be permitted as an accessory dwelling unit.
Initially, it was only expected to be a temporary situation, with a future buyout from one family once they were in a sufficient financial situation.
They had a lucky break after consulting with a real estate attorney. In an unusual situation, the CC&Rs were no longer legally in force. This circumstance allowed them to pursue a formal subdivision with the county.
The subdivision was still a year-long process, including a survey, road improvements, and county approval. While the zoning was appropriate for the 10-acre parcels they were creating, some neighboring landowners initially opposed the subdivision. The county granted approval in the end but noted that it was a very close call due to the narrow access road and hilly topography.
Lessons Learned: Research every property carefully. The advice of an attorney can be highly valuable. Hope for the best, but plan for the worst.
Case #2:
Two 10 acre parcels. An older couple and three sets of adult children identified a piece of bare land to develop. All four families initially funded the purchase with the intent of dividing the two existing parcels into four.
The neighbors, zoning, and county all supported the plan, and the land had clear title with no encumbrances. Complications arose because the land was within the boundaries of a Native American reservation. While the tribal government had no title to the land or official authority over the subdivision process, they had adopted a “no development” stance. They pressured the county government to deny the subdivision.
In this case, it was not resolved in favor of the family. The subdivision was administratively denied, with little means of recourse available. Without the ability to subdivide, the entire project was dead in the water, with each family’s capital tied up in the land.
After numerous efforts to appeal the subdivision denial, they devised an alternative plan. Using a boundary line adjustment, 5 acres from the second 10-acre parcel were transferred into the first parcel, making a five and a fifteen. This allowed one family to build as intended. Meanwhile, the parents dramatically reduced their build plan to a much more modest design. The savings allowed them to “buy out” the other two siblings.
In the long term, they hope that the local governments change their policies and allow them to complete the project as intended. In the meantime, though it was disappointing, the situation was resolved in a way that allowed each family to move forward. In the future, if they successfully split the 15-acre parcel, the parents will sell off the bare 5, the 5 with their small house, and keep a single 5-acre parcel to build the originally intended home on.
Lessons Learned: Be mindful of all possible legal jurisdictions, HOAs, or special interest groups that may impact your plans and hence may influence the approval of your project. Have a Plan B that works for all parties if unavoidable obstacles arise.
Jonathan Rawles
SurvivalRealty.com
E-mail: info@survivalrealty.com