Control The Dirt, Control The Deal . . .
A Super Niche Business Model That Offers Raw Land Owners A Premium By Getting Their Land “Shovel Ready” For Home Builders
My first adventure in real estate investing was to buy & hold single family rental homes. I’d buy houses that were not in great shape but added value by fixing them up so they would earn higher rental rates.
My next move was to invest in multifamily syndications where the sponsor buys older apartment buildings that need to be updated. After the sponsor adds value to the property by remodeling the interiors & curing deferred maintenance, rent is pushed up to market rates & potentially sold at a profit.
My rental houses have slightly higher monetary returns, but the apartments deals are 100% hands off so I’m able to get an asymmetric return on my time invested per dollar returned which is a key super power.
The core principle behind both investment models is straightforward: buy at a discount, add value, and sell at market rates. When I research new opportunities for myself & my investors, this formula is a key criteria.
Over the last few quarters, my long time multifamily investors have inquired about other flavors of real estate backed investment ideas. They asked me to find investment vehicles that followed the formula above, and given the market dynamics over the last 18 months, they prefer ideas without interest rate risk.
So . . . I investigated Car Wash syndications, ATM machines, Farms, Cattle, Nightly Rental funds, Debt funds, Rescue Capital funds, funds of funds & the list goes on.
The thing I landed on is a new twist on an oldie timey idea: Raw Land.
Now, Raw land has never attracted my attention. Buying parcels or acres then holding it for years & years banking on appreciation for profit at a later date (aka flipping land) didn’t align with my and my investors’ interest or needs. I know land development deals can be very lucrative but typically carries more risk than I am comfortable with.
However, I was recently introduced to the super niche land investing model called Raw Land Entitlement.
Specifically, the entitling of raw land and selling it to home builders. This process not only offers interesting return potential but also contributes to addressing the persistent housing shortage.
Raw land investment, particularly acquiring off-market land with development potential, presents a unique opportunity. However, the key to unlocking this potential lies in the land entitlement process. This process involves securing the necessary legal permissions to develop the land, thereby increasing its market value.
The Power of Raw Land Entitlements
Land entitlement is the process of securing approvals, permits, and legal rights to develop a piece of raw land for a specific use. It is a crucial step in transforming raw land into a favorable real estate investment. Homebuilders need land to build their neighborhoods, but they almost always prefer to buy development sites with permits and entitlements already lined up. Permitting can be a lengthy process that requires hyperlocal knowledge, making it easier to outsource than cultivate internally.
To better understand why homebuilders prefer to outsource this laborious stage in the raw land development cycle, here’s a quick look at the process.
Research and Due Diligence - Understanding the local zoning laws, land use regulations, and any environmental restrictions that may affect development plans.
Pre-Application and Consultation - Working with local planning departments, community meetings, and discussions with neighboring property owners.
Formal Application and Review - Typically involves submitting detailed development plans, environmental impact assessments, and other required documentation to local authorities. The review process can vary significantly depending on the jurisdiction and the complexity of the project but generally involves scrutiny by planning departments, public hearings, and possibly revisions to the proposed plans.
Obtaining Entitlements - Once the review process is complete and any required modifications to the development plans have been made, the local authorities will grant the entitlements. These may include zoning changes, variances, conditional use permits, and other approvals necessary for the development to proceed.
Finalizing the Entitlement Process - After obtaining the necessary entitlements, there are some additional steps, such as finalizing engineering plans, securing financing, and obtaining building permits.
How Long Does This Take?
Feasibility Study: 60-90 days
Land Use Application: 45-90 days
Application Review: 30-60 days
Application Approval: 60-120 days
Prepare Subdivision Engineering: 45-90 days
Engineering Approval: 45-120 days
Total Avg = 15 Months
As you can see the land entitlement process isn’t easy. It takes considerable time & expertise that home builders don’t like to do because it’s beyond their core competency: building houses . . .
and THIS, my friends, is where the value add opportunity lies . . .
I’ve discovered a super niche business model where highly specialized raw land development sponsors get acres of raw land under contract for purchase from private owners (think farmers, ranchers, rural areas, or urban holdouts where the land has been in the family for years etc . . .)
That contract remains in place for 18+ months up to a few years while the sponsor walks through the steps to get the land entitled & legally ready to start building (aka- shovel ready).
Once the raw land is legally entitled, the sponsor purchases the land from the private seller & simultaneously sells it to the homebuilder (double closing). The key advantage here is that during the entitlement stage, the sponsor doesn’t own the land, but they control it via the sales contract. This allows the sponsor to avoid the need to deploy investor capital to purchase land before it’s entitled & assume the risk if entitlement falls through.
If things play out as designed in the model, the land owner could receive a handsome paydirt & the homebuilder can immediately start construction.
The sponsor & their investors may participate in the spread between a lower acquisition cost from a self sourced/off market land contract & the final sales price of fully entitled “shovel ready” dirt to a home builder hungry to start building.
Bottom Line . . . Net . . . Net
Like all great ideas, it’s important to acknowledge this investment strategy carries inherent risks, including the potential for delays in the entitlement process, changes in zoning laws, and the possibility that the entitlements may not be obtained as planned. These factors can impact the feasibility and profitability of the investment.
Aligning with sponsors who are well connected in this space, have years of experience working with municipalities and a solid history of selling to home builders can go a long way towards mitigating the execution risks while driving towards a positive outcome for sellers, buyers & investors.
If you would like to learn more about the Land Entitlement model and/or be added to our Deal Alerts for future opportunities, please reach out to mitch@back9investments.com.
This material has been prepared for information and educational purposes only, and it is not intended to provide, nor should it be relied on for tax, legal, or investment advice. Investors should consult with their own tax, legal, accounting and financial professionals before engaging in any transaction. Investments in private placements are highly subjective and illiquid, and there is the risk of loss of all principal investment.