What You Need To Know About Land Banking

October 27, 2011 by · 2 Comments 

Years ago I wrote about LAND and LAND BANKING. My observations then are just as valid today as if I just wrote them.
Land remains my main focus for investing in real estate and for securing  retirement for Baby Boomers.

Everybody knows what land is, right?

Or do they?  Sure, land is that portion of the earth’s surface that is not under water.  But that definition covers a lot of “land.”

To understand land we need to understand the uses of land.

Some land is forested.  Some land is desert.  Some land is prairie.  Some land is flat.  Some land is steep. We farm the land. We build our cities on the land.

Some land is desirable.  Some land is undesirable. So far, so good. But…
The desirable land has all been snatched up.  OK.  Sure.  Somebody or something owns the desirable land. However, most of that land is “for sale” at the right price.

HIGHEST AND BEST USE

What determines the “right price” for the Seller is completely different from what determines the right price for the Buyer.

It gets down to use.  What it is currently used for has a major influence on what the current owner thinks it is worth.  What the buyer will use it for influences what he is willing to pay for it.

Ultimately, there is a Highest and Best Use for each and every parcel of land.  However, this highest and best use can change over time and circumstances. Its like beauty, it is in the eye of the beholder. How you see it is how you use it. The better your vision, the higher the use.

LAND BANKING

50 years ago 20 acres east of Hwy 101 in Encinitas California might have been best used as a flower nursery.

That same 20 acres today is very desirable for a shopping center or housing development.

But you don’t have to wait 50 years for use changes.  It is constantly changing.

But maybe you do want to wait because the use in 10 or 20 years might be significantly greater than the use today.

If you bought this land and held it for a period of time in anticipation of a higher and better use you would be practicing what is known as LAND BANKING.

Land Banking is a very good method of providing for your retirement.  Buy a piece of land in the Path of Progress, hold it, and then sell it when you want to retire. You have “put this land in the bank.” Generally speaking, this is a passive investment. It requires very little management.

If you put the ownership of the land into a “single entity” LLC which is owned by another special LLC which in turn is owned by your self-directed IRA you could rent out the land to a farmer or other “user” to cover any costs you might suffer as a result of owning the land.

It may seem counter-intuitive, but land generally appreciates at a higher rate than adjacent improved property which makes it ideal for  long-term growth. The reason for this is because improved property is a combination of LAND and IMPROVEMENT. The LAND appreciates (generally) and the IMPROVEMENT depreciates (generally), so if value of the improved property is primarily the value of the improvement, you can easily see why unimproved property will appreciate at a higher rate.

ENTITLING PROPERTY

Land banking is great if your time horizon is far enough out, but….

If, on the other hand you want more immediate satisfaction, you can find a parcel of land that is currently not at its highest and best use.  Then you can purchase that land. 

Once you are “on title” you can change the use.  Then you can sell the property for its increased value based on its better use. This is called entitling the property.

For example, a strawberry grower has those 20 acres in Encinitas that were mentioned earlier.  He is NOT using the land to its highest and best use.  He knows that.  He also knows that the land is worth more than the typical 20 acre agricultural parcel.  But what is it worth?  It is still just a 20 acre parcel of agricultural land.

To maximize its value the zoning might have to be changed.  Also, it needs to be sub-divided into more useful parcel sizes.  If the zoning is changed and the sub-division is platted and recorded, then the property has increased value based on its higher and better use.  Maybe this value is 2 or 3 times what the farmer expected and got for the land.  Maybe more!

OFF-SITE IMPROVEMENTS

So far we haven’t touched the land but we have “created” more value.  Maybe we want to actually do something to the land, like cut roadways, bring in utilities, put in sewers, put in curbs and gutters, and put up a sign announcing “building lots” available.  We have created significantly more value.  We have many options on what we can do with land.

OPPORTUNITY

Everywhere you look, you will find under-utilized property.  Vacant lots in the middle of an otherwise fully developed neighborhood.  A house along a busy commercially zoned street.  A duplex on a lot that could accommodate 10 units.

If we “believe” that certain areas of the country will continue to experience growth, then we should also believe that those areas will have many opportunities for use change.

If Southern California continues to grow, then San Diego County will undoubtedly be affected.  Land in places such as Bonsall, Ramona, and Valley Center are on the leading edge of use change.  But there are more opportunities than just that.

Older cities with Downtowns like San Diego, Chula Vista, Carlsbad, Oceanside, and Escondido are all experiencing growth and renewal at their very cores.

The real estate market is not dead!  The LAND BOOM is just getting into high gear.  There are opportunities everywhere.

HELP

If you would like to better understand your options in utilizing land to secure your retirement or as a good investment strategy, give me a call at 619-244-4610.

Bill Roberts

About William

Bill has been a Licensed Real Estate Broker in Californnia since 1975. He has a degree (BS) in Business Management (Finance) from San Jose State University (1970). He is married and lives with his wife in San Diego. Bill's interests include sailing, travelling, economics, gardening, Fox Business Channel, old movies. All in no particular order. Oh yeah, and cooking too.

Comments

2 Responses to “What You Need To Know About Land Banking”
  1. Louis Gappy says:

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    Much the same way as the esteemed Mr. Roberts is doing right now. I don’t want to give too much of the book away so click on the link on this website and buy a copy.

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