Strategic land investing can often entail buying from difficult landowners.
Landowners’ financial, occupational and emotional conditions affect their willingness to sell property… and the land buyer benefits from knowing this.
Investing in raw land for the purpose of strategically increasing its value in a relatively short period of time – typically, turning unused property into housing or commercial development over a period of 18 to 60 months – involves several moving parts that require expert management. One part is to achieve a planning authority change, allowing development where it was previously disallowed. Another part is to develop it for what the market needs (for example, the UK’s housing shortage strongly suggests that residential development is in greatest demand). But a third part is actually the first critical step, to acquire the land at a feasible price.
In most instances, this means that someone, such as a strategic land investor, will need to buy from a farmer or other landowner. This farmer or other landowner may well be content with the land’s status, probably across several generations of ownership within the same family. Acting rationally, the landowner (which is sometimes a group, such as family heirs of a recently deceased owner) will clearly wish to be paid an optimal price for the land.
This becomes a problem when the landowner’s expectations are greater than what the market will bear. They may have heard planning authorities are considering changes in land designation that would increase the value of their specific land tract. He or she may hear of quarter-hectare properties selling in nearby towns for £20,000 or £30,000 to developers. And yet they do not realize those prices come after several costly improvements are undertaken, such as site assembly and infrastructure additions (roads, water, etc.).
In such scenarios, the landowner(s) might retain legal counsel to either resist selling or to hold out for a higher price. There is nothing illegal or unethical about that, of course. But the land investor needs to be a skilled negotiator, which includes having information about the seller’s position. For the buyer, there is great benefit in knowing the following:
• Taxation on the landowner’s proceeds of a sale – The sale price hardly represents a clean economic gain for the seller. In most jurisdictions they will need to pay taxes on the sale, hence the buyer should be sympathetic to that argument. The amount they must pay can be ascertained with minimal research.
• Sense that the value will likely increase in the future – As landowners are aware of the increasing value of land and the critical need to build more housing in the country, they may subscribe to the idea that the longer they hold the property the greater that value will be. Challenging that notion, however, is the fact that land valued almost across the board decreased in the recessionary cycles since 2008. Regional shifts – and the investor having options to buy elsewhere – can affect this.
• Patience (or impatience) at turning the land into a new asset – A long-held property in the hands of one owner or a family may have outlived its use to them, the obvious case being land held by a retiring farmer. But some sellers are perfectly happy holding onto land for its use, or non-use, and therefore are less motivated to sell. Often, heirs who have recently received the land are the most motivated to sell the property – in particular if taxes on the property exceed its value to them.
• Sellers’ emotional attachment to the land – Not all land is held for rational purposes. If an individual holds an emotional attachment to property, perhaps because that person is the last in a long line of several generations of owners, they will be less motivated to sell.
Some of these factors may kill the deal, but in many situations they can be overcome and intrinsic to the negotiation. Skilled land investors never bet the bank on a single piece of land, opting instead to conduct simultaneous discussions with different landowners in different areas of a town or borough.
Investors in land funds are similarly wise to consider all investments within their portfolio with the help of a personal financial advisor. Strategic land investments can yield strong returns, but are less liquid than REITs and other market-traded securities.