Transcription
You found yourself the perfect piece of land. You contacted the listing agent, and you made them an offer that you know you can afford to pay. But even better, the sellers accepted the very first offer you made. And ever since then, every time you have a question, they're really responsive with the answer. Whenever you call them, they pick up on the very first ring, and they're so happy to talk to you. The sellers have been so helpful that, in fact, you're almost starting to feel like maybe they've been a little too helpful. And that's when the question hits you: Am I paying too much for that land?
In this video, we're going to talk about how to look at local markets and value land upfront so you don't overpay. We're going to talk about how to identify when you've already overpaid and then also what to do in terms of renegotiating price with the seller so that you can buy the land of your dreams at the right price. So let's get started.
The best way to avoid paying too much for a piece of land is to know that that land is overpriced before you make your initial offer. For example, let's take a look at this 5.29-acre piece of land in Smithfield, North Carolina, that is listed at $399,000. If I were new to this market and I wanted to buy a piece of land that fit this description, the first thing that I would want to know is what price similar land had sold for nearby in the last 12 months. The two most similar, most recent sales comps in this market are a 4.7-acre piece of land that sold in Selma for $75,000 and another 3 and a half-acre piece of land that sold down the road in Smithfield at $125,000.
Of the two sold comps, the 3 and a half-acre property is definitely more similar to the subject property because it has extensive road access. But in addition to that, it also has a pond in the back of the property, just like the subject property that is in our listing. And so they're very similar. Despite the 5.3-acre property we're looking at being substantially larger than the 3 and a half acres we're comparing it to, I don't think that the 5.3 acres is clearly more valuable than the three and a half acres sold comp. To be clear, I think it probably is, but the fact that I would even hesitate before concluding that just tells you a lot about the similarity in market value. In fact, the 5.3-acre property that's currently listed at $399,000, I would estimate that the market value of that land is probably closer to $150,000 on the open market.
Now, a lot of times you realize that you're paying too much for a piece of land in the process of due diligence after the offer has already been approved. For example, we were buying this piece of land that's 12.7 acres for a price of $23,000. This land is located about 800 ft off of the main county road, accessible through a deeded easement that grants people legal access from the county road to the subject property. Now, what we discovered in the process of buying this property in due diligence was that the documentation for the easement that we were counting on was not as robust as we had hoped for. In fact, the extent of the legal description for this easement that appeared on the deed of the subject property was, and I quote, "over and across that existing farm path leading from State Road number 1218 to said property," without any further backup documentation of the easement, including survey maps or detailed meets and bounds legal description of the easement boundaries. It became very clear that when push comes to shove, we can't exactly prove where that easement really is. Because in spite of being able to clearly identify the farm road that was being used to access that property, the fact remains that the easement description is not detailed enough to create insurable legal access for the standpoint of a construction loan in the future. In other words, that land would never be viable as a residential home site because a mortgage lender looking at that legal access would know that it wasn't significant enough to count on over a long period of time. If that farm road got overgrown or got swept away in the sands of time, how could you prove where your easement was? And all of a sudden you're going through 2,000 feet of private property and trying to make nice with the neighbors who don't even know who you are.
Because of that, I liked the land, and I still thought that it was probably worth more than the $23,000 that we were getting ready to pay, even with the sketchy access. But the reality is we had to sell it, not to a residential buyer, but we were going to then prepare to sell it to a recreational buyer that's going to use that land for hunting, fishing, camping, and outdoor recreation, which is great, but it's just not as valuable as if it were suitable for a home site. And so, based on the information I shared with you, I shared the same exact information with the seller, and I was able to negotiate the price down from $23,000 to $12,500 to buy this piece of land, which enabled us to sell it on the market at a better profit than we expected. If we're being honest, um, but regardless, it enabled us to manage the risk of the acquisition and the sketchy access.
Because a lot of times it's not going to work out that smoothly. Sometimes, even when you realize that you're paying too much for a piece of land, you can find someone nearby who'd be willing to pay more than you are for that land. And if you can, you're able to still make a little bit of money on that transaction, even in cases where you have no intention of actually taking title and owning that land long term.
To give you an example, we had an opportunity to buy this 18-acre piece of land for $45,000 last year. Nearby comparable sales data suggested that that land may have been worth closer to $100,000 on the open market. But the problem is that the seller has a nephew, and that nephew has been using that land as his private campground for years. As a result, he has all his stuff all over that land. We're talking about multiple trailers, utility sheds, farm equipment, chicken coops—anything that you can imagine, probably somewhere is back in those woods. For us to be able to haul that stuff away would cost us about $20,000 or $30,000 in demolition and junk removal, and so it's kind of a deal killer for us because we knew that at $45,000, unless that stuff was taken care of before closing, we were not going to be able to do the deal because the seller was not going to be willing to work with us at a penny below the $45,000 that we had already agreed to pay her.
So what happened was the seller ended up giving me the nephew's phone number because she wanted to coordinate the removal of the junk from the property, and he told me that he would. But despite his repeated assurances, as we got closer to the date of closing, it started to dawn on me that maybe that was not his top priority. But what I also realized was that by the time he figures out where he's going to put all this stuff and how he's going to haul all this stuff off the property, the reality is, for the nephew, he may as well just buy the land and keep all of his stuff on it. And it would probably be easier for him to do it and also better for him long term financially. And that's what he did because a couple of weeks later, we ended up closing the purchase with the seller at $45,000, and that same day, in that same law firm that handled the closing, we did a double close, which meant that we simultaneously then resold that piece of land to the nephew at $57,000. And after closing costs and everything, we were still able to make more than $10,000 on that transaction.
What was really interesting is that leading up to the close date, both the nephew and his aunt both knew that they were actually transacting with one another and that I was just a middleman in the middle of this deal, taking a spread on the transaction that ultimately I wasn't going to be a party to for more than just a moment. And it's funny because the seller asked me at one point if I was making money on this transaction, and I told her that I was, but I also told her that if I were to step away from this transaction, she would lose leverage with her nephew because then all of a sudden there's no other credible buyers. But my presence as a buyer in that deal creates urgency for the nephew to get his business in order because if I buy that land, I can kick him off of it because he doesn't have my permission to leave his stuff on that property. So if I'm in the loop, I can drive urgency with the nephew, but if I'm out of the loop, I can't. And furthermore, if there's no other buyer in the mix, the nephew can just play hardball with his aunt and say, "Oh, no, I don't know about this price," or, "Hey, I can't close today, maybe tomorrow," and he would just keep kicking the can potentially to the point where he might end up offering her less and less and less, and she may walk away with less than we were getting ready to pay her. When I told her that, she laughed because what she shared with me is that, "Yep, that's what happened every single other time that he tried to buy that land from me, and I don't want to do business with him, so I'm glad you're on this deal, and you deserve to make the money." And that's what happened.
Sometimes, when you realize that you're overpaying for a piece of land, there's no one to blame but yourself. You just did your numbers wrong, and you overpaid. Several years ago, we had just that scenario because we were in the process of buying this 5-acre tract for $38,000, where the offer price was primarily based on comparable sales data for nearby property in the same county. But when I looked at the sales data for the surrounding neighborhood and the area immediately adjacent to the land that we were buying, I saw that some of the neighborhood values were much lower than they were across the county as a whole, and that the land that we were buying at $38,000 was potentially worth even a little bit less than that on the open market, and we were overpaying. See, I could have seen it earlier, but I just didn't. And what I did is I explained this mistake to the seller and let her know that no matter what price we settle on, the reality is that her land is worth more than I can ever afford to pay her because for me to get market value, I have to first pay all the closing costs, which is multiple thousand dollars on the buy side, even more on the sell side. I also have to go do a soil report, get the septic permits lined up with the county, and all of this happens across a six-month period of time where I'm holding the bag and taking the risk in the open market. So the reality was that for me to do that, I have to have a margin of safety; I have to be able to make a profit. And what I told her is, "Look, I can't do the $38,000, and I understand if this doesn't make sense for you, you're not going to like me as much when I tell you, but I want to buy it, but I'd have to be closer to $15,000 instead."
Thing is, guys, most people, they just want to know the truth: why you're buying the land, what you plan to do with it, and what you can actually pay. You can't lie to sellers; it doesn't work, and it's not even worth trying; it's bad business. When you have a specific plan that enables you to make a profit on that land, real sellers will not be put off by you sharing this information because there's an honesty to it. It gives the seller a framework to understand that your offer is real, that you are real, and that even if your offer is substantially lower than they thought they were going to accept, it's you who is actually going to close that deal and make it happen. In this case, we were able to renegotiate this acquisition from $38,000 to $15,000 just because we were honest enough to look the seller in the eye and tell her that we did our numbers wrong, we made a mistake, and we have no one to blame but ourselves.
The next video on our channel is going to analyze this phenomenon of overpriced listings in land in more detail. It's going to tell a story of a piece of land that is listed on the market and just saw a $650,000 price cut, and get this—it's still overpriced. Click this link to learn a little bit more about the phenomenon of overpriced land and how you, as a buyer in today's market, can navigate this market successfully.