How to Develop Raw Land For Investment

by Contributor ; Updated July 27, 2017

Professional Land Developers spend a great deal of time seeking the "path of growth." They research economic and population projections and key factors, such as job creation trends, to identify geographic areas with favorable growth outlooks. They explore communities and neighborhoods to determine directions of future growth and new construction. The process requires a seasoned research team and a network of external contacts, including local government officials, business leaders, real estate brokers and builders to conduct due diligence and help locate raw, undeveloped land in the identified path of growth.

Step 1

Once land is identified in the path of growth, the land developer will negotiate favorable terms for acquiring the property. There are a number of ways that land developers acquire property, the two most common are upfront purchase of the property and acquisition of an "option to purchase" agreement, through which the land developer obtains rights to buy the land by a set date at a set price by offering a non-refundable deposit. Investors are typically sought at this stage to help fund the acquisition of the property and cover costs associated with additional steps. These are typically "silent" investors in the land development project.

Step 2

Plans are drafted for a proposed future economic use of the land, for example, a master-planned community, a shopping center, a business park or an industrial complex.

Step 3

The proposed plans are submitted to the city, county, state and federal governments for necessary approvals. This is known as "the entitlement process" and involves all of the critical sign-offs and approvals required for the newly proposed use of the property.

In this step, the land developer literally creates value, which is why raw land development can be so profitable. On average, the process creates an increase of 300 percent to 500 percent in the value of raw land — often with limited associated costs for even higher profits.

Step 4

After the raw land's value has been increased by the completion of the entitlement process and other improvements, such as access to utilities, municipal water and sewer, roadways, etc., the newly entitled property is sold to construction contractors.

Step 5

The raw land development process ends when the newly entitled land is sold, profits are realized and investors are paid.