Investment Land Feasability
- Land Location |
- How to Buy Land |
- Land Features |
- Investment Timing |
- Opportunity Costs |
- Community Acceptance |
- Single Lot Investments |
- Residential Lots |
- Speculative Lots |
- Lease vs. Resale |
- Building to Suit |
- Acreage |
- Acreage for Resale |
- Land Evaluation |
- Land Promotions |
- Land Bankers
Land Promotions
Many land-promotion schemes are the consequence of speculation in raw acreage. The promoter buys a large tract of vacant acreage at wholesale prices, divides it into smaller parcels and resells these smaller, usually unimproved, lots at retail prices to buyers scattered throughout this, as well as other, countries.
These lots are marketed through various promotional plans and advertising media. One of the more common marketing methods is to invite prospective buyers to a free dinner during which salespeople extol the virtues of the property through lecture and film.
Often, these dinners are followed by an offer of a trip to the site, with any costs for traveling reimbursed by the promoters after purchase of a lot. Generally, the various large companies involved in such land promotions follow a format of marketing the individual lots as second, or retire-ment, homesites.
The financing designs of both the original purchase of raw acreage by the promoter and the subsequent sales of lots to individuals are the most important elements in this form of real estate investment.
A purchase of land for use in a sales promotion usually requires the seller of the raw acreage to carry back a substantial portion of the sales price as an installment land contract or purchase-money mortgage. Thus, after the promoter makes an agreed-on cash down payment, usually about 5 percent to 10 percent of the purchase price, the landowner will accept a lien on the acreage involved for the remainder of the sales price. This balance is to be paid by the promoter on some regular amortization schedule. Under a land contract, the seller retains legal title to the acreage until the terms of the contract are met, usually the requirement that the balance be paid in full.
Most land-promotion property is sold to subsequent small-lot owners with any underlying financial arrangements left intact. As a result, each individual sale is made subject to the lien of at least one existing encumbrance, the installment contract or purchase-money mortgage between the promoter and the seller of the acreage. The existence of an underlying encumbrance poses a serious threat to the purchaser of an individual lot if the promoter does not make payments as required. The small-lot owner may be financially hurt in a subsequent foreclosure of the master lien.
To offset this problem, most legitimate promoters will secure a recognition clause in their original financing agreement in which the vendor or mortgagee agrees in advance that if the promoter should default during the term of the agreement, the lender will respect the rights of subsequent lot owners and honor their contracts.
Alternatively, a release clause may be inserted in the land contract under the terms of which individual lots may be released from the master lien after a certain agreed-on percentage of its balance has been paid by the vendee.
The sales of lots to individual purchasers are generally designed as installment land contracts. Most buyers of these promotional lots make small cash down payments and the balance is carried back by the selling company to be paid in regular monthly installments. Frequently, the seller's signature is not notarized, and, consequently, the contract is unacceptable to the appropriate county office for recording.
A promoter hopes that the initial sales campaign will generate enough individual sales to quickly develop the cash flows necessary to meet the required underlying contract payments. Sometimes it takes a few years to reach this break- even point, and the promoter must be prepared to meet payments and operating costs with other funds. A promoter can offset a cash shortage either by selling the individual contracts secured through early sales, a process called factoring, or by pledging these contracts as collateral for a bank loan to meet operating expenses. Once a break-even point has been met, however, continued sales will generally result in substantial profits.
Because they recognize the complexities and possible pitfalls for the consumer in this form of land promotion, both federal and state regulatory agencies carefully supervise such programs. All interstate land sales must conform to the requirements of the federal government's Regulation Z. The promoters must prepare and distribute to all prospective lot purchasers a full disclosure report describing the subject property and the complete financial arrangements of the transaction. Many states require that the promoter post bonds in amounts adequate to complete any promised improvements to the land, such as roads, golf courses, clubhouses and lakes, before granting the promoter permission to market the lots.
- Land Location |
- How to Buy Land |
- Land Features |
- Investment Timing |
- Opportunity Costs |
- Community Acceptance |
- Single Lot Investments |
- Residential Lots |
- Speculative Lots |
- Lease vs. Resale |
- Building to Suit |
- Acreage |
- Acreage for Resale |
- Land Evaluation |
- Land Promotions |
- Land Bankers
