Debunking the myths about land banking, Part 1: Why Buy Cheap Land?

We love what we do, and we talk about it often. Inevitably, we get questions like, “Why should I bother to buy cheap land? Isn’t it just money down the drain?” These kind of prevailing misconceptions are one of the reasons that people who do choose to buy cheap land do so well. People are misinformed, so demand is low; demand is low, so even moderate appreciation in value can yield impressive gains. Let’s explain.

Myth #1: “Cheap land doesn’t exist here in the US.”

Let’s get this one out of the way. We don’t know where it comes from, but we hear it all the time, especially from people who live in cities or highly populated suburbs. Developed land in those areas can cost $500 or more per square foot, but the United States is full of pockets of cheap land in the path of development, which opportunists see as factors of production and sources of profit.

Myth #2: “Cheap land is probably worthless (or a scam). Otherwise, why would it be so cheap?”

The “too-good-to-be-true” mentality is perhaps the number-one reason people refuse to buy cheap land. They believe that no one would sell valuable land at a low price. We don’t blame them; it’s true that some sellers have convinced people to buy cheap land that has only limited potential. However, valuable land can be available at affordable prices for many reasons, including the following:

a. The sellers bought it at even lower prices, and it has appreciated enough for their purposes.

Just like you, other people invest, wait ten or twenty years, and sell their investments when they feel that they have profited. Twenty years ago, land that’s now available at $5 per square foot may have been $0.50 per square foot. Sellers who are ready to retire and have held onto the land for that span of time may be satisfied with the returns they’ve earned.

b. The sellers are willing to negotiate lower prices because they aren’t attached to the land.

One of the best ways to buy cheap land is to negotiate with the sellers until it’s cheaper. Undeveloped land, by definition, isn’t the same as residential property. People selling their homes feel emotionally attached to them and are less willing to sell below the asking price than sellers of undeveloped land are.

c. Many people don’t do their research, so demand is low.

Finding good land to purchase takes time and energy. Often, demand for good land is low simply because people don’t do the research required to find parcels with the most promise. When demand is low, prices are low, and sellers are forced to reduce their prices. For this reason, well-researched land banking yields astonishing returns. If you can locate and buy cheap land in the path of development, you need only hold onto it and wait for developers to get there. However, most people aren’t willing to go the extra mile (sometimes quite literally) to isolate the best real estate investment opportunities.

Now, next time you hear someone exclaim, “Why buy cheap land? It’s probably a scam!” you’ll know how to answer.

This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. Please consult with a professional specializing in these areas regarding the applicability of this information to your situation.