So many prospective land-buyer inquiries had the same few misconceptions, this this article was written as a letter to as a warning to what they were considering. It became so popular, it was published in a real estate trade magazine, and Michael was invited to participate in radio talk shows.
SEVEN SINS OF DIRT DEALS
Common Mistakes in Buying, Selling, and Owning Land
Published in Pro/Agent Magazine
Becoming the “Lot Guy” or the “Dirt Demon” or the “Duke of Dirt” was even less glamorous as it sounds. I chased infill lots, the deals with the smallest paychecks, the longest escrows, the least chance of closing, and the strongest potential for getting sued. But hey, I could wear jeans and tennis shoes. The spec builders promised that if I found them a good lot, they would give me the golden pot at the end of the development rainbow, the listing on the house. Rarely did they. I always believed that I would get the ‘next one.’ But the lot buyer that really gave me anxiety, forcing me to turn to writing as therapy, was the ‘wanna-be-builder/owner’ or as we call them the ‘retail buyer.’ I would babysit these buyers through development school only to have them go buy a 40 year old condo from their newly licensed cousin. I soon began recognizing the tell-tale signs of these dreaded buyers. These are my favorite with my responses:
1) “I want to build to build my dream home.” My standard reply: “Sure, you can buy a lot, you may be able to build a house, but it ain’t gonna be no dream.” Zoning limitations, setbacks, height restrictions, building ordinances, size limitations, deed restrictions, building moratoriums, design review boards, planning commissions, city councils, appeal processes, neighborhood opposition all may just turn your dream into a nightmare. Be flexible. The ego of having everything your own way will be expensive in both approvals and construction, and, unlikely to happen.
2) “I found a lot I really like.” What you see is usually not what you get. Roads, fences, neighboring houses aren’t necessarily indicators of property lines. The property will rarely start at the edge of the road, or the sidewalk, or your guess of the day. You may need to bridge across a down slope gap, or excavate a hillside just to get to your property. Easements or encroachments can give others the right to use your property, or prevent your use of the property. Utilities may not be available or very expensive to get.
3) “I want to hold land as an investment.” Sure, property values go up, but so do building costs and fees, often faster than values. You won’t get any income from land to help pay the mortgage. You probably won’t get any tax benefits. The value of land is determined by its potential use. Zoning changes and limitations may greatly decrease your land’s potential. Long term holding of land is not investing – it is speculation. Go to Vegas.
4) “I can save money by building myself.” Cities, neighbors, utility companies, and many other entities which have a say in your project all want to cure their problems with your checkbook. Surveys, soils engineers, architects, designers, application fees – here a fee, there a fee, everywhere a fee-fee. Then after you get your design approved there are structural drawings, working drawings, energy calculations, and of course more fees. Water meter fees, sewer fees, service fees, hook-up fees, school fees, traffic mitigation fees, park fees, and on and on and on. One local town came up with “Non-Specific Mitigation Fees” just to be safe they didn’t leave any coins in your pocket. Then there is the construction loan with more fees, points, and appraisals. Building costs have likely gone up since you started this project. Each delay releases your subcontractors from their time commitments and each change opens negotiations of their original bid. A big financial “OUCH!”
5) “I will borrow money to buy a lot.” Land financing is not like regular house financing. Down payment and qualification requirements, points, fees, interest rates, due dates are very different. There are basically three stages of financing: land advance/purchase, construction, and take-out financing (when the home is completed). Each stage has its own requirements and costs, and risks. Owner financing has risks for both seller and buyer, and agents – judges think we are supposed to know this stuff.
6) “What’s the rule of thumb for ….” There is one rule of thumb in land development: If you rely on rules of thumbs, you will get eaten alive. There is no easy way to get away from doing your home work right in the first place. Check out all your costs up front. Leave yourself room for error. Check out comparable sales of similar finished homes to make sure your project will justify the costs. It usually won’t. Get very specific with all the details. Don’t be afraid to walk away from losing money, and saving yourself to go through this again.
7) “I’ll represent myself.” You may be in and out of escrow several times with those “dream home” buyers while they get their education on the first six sins above. Also, there are the spec builders. These guys are real pros, the sharks that feed on the flesh of naïve land sellers. They like to “make my profit going into the deal.” You may save a real estate commission, but an experienced land agent will greatly reduce your stress and risk and increase your net profit.
Land sales are the wild, wild, west of real estate. Land contracts and disclosures are completely different than in homes sales. Land buyers and sellers are treated as sophisticated investors. As with any investment, keep your eyes open and insist that your buyers do their homework well themselves. Don’t get caught telling them what you heard from city hall, or from the utility company, or you will be writing the next article on dirt deals.
Michael Williamsen is a real estate broker in San Rafael. Licensed in 1982, Michael has become known as “the Lot Guy.” Michael has represented buyers and sellers in well over a hundred development transactions and many projects as a principle. He has consulted on many development projects including single family, multiple family projects, sub-divisions, and remodels. Currently involved in a local neighborhood association as the chairman of the development committee, Michael’s goal is to provide affordable housing that enhances the neighborhood and supports neighborhood safety, traffic, and parking.
“The best development deals I have ever done, were the ones I didn’t do. You only have one chance to go bust. Mike Williamsen puts deals together that make me money.” R. Fitzgerald, Developer
“Mike’s advice is always direct and to the point, never self serving.” L. Nibbi, Novato, Investor/Developer
Would YOU like a no-cost, free, no commitment or obligation chat about YOUR real estate thoughts with Michael Williamsen? YOU can reach him at