Vacant land represents a blank canvas. It can be used for almost anything depending on its location, what you want to accomplish and what sort of financing you need to make it happen. Although the value of the land is based on its best and highest use, not everyone will want to realize the full financial potential of a vacant piece of land.
Location, Location, Location
The location and size of a piece of vacant land will often determine what it can be used for. If you have 1,000 acres of vacant land located within 30 minutes of a major city, you have near limitless possibilities. For example, you can turn it into a residential development, fence it off and turn it into a game preserve or use it as a tree farm. If you have a small abandoned lot that is an acre or less in the middle of a city, you are much more limited. Options include urban farming, apartment building, personal dwelling or even a Zen garden (Reference 1).
Best and Highest Use
In real estate, appraisals are based on the highest and best use of the land. This generally means that the land is used for whatever will create the most cash flow. For example, if you have a 2-acre plot of land in the middle of a bustling suburb, using it for a tree farm will not generate the highest possible returns. Putting up an office building that only takes up a quarter of the land probably won’t generate the most cash flow, either. Only when you make full use of the entire piece of vacant land in a way that generates the most cash flow will it reach its full value.
What you can do with a piece of vacant land is also limited by the amount of financing you can obtain to pay for its conversion. If you are wealthy and can afford to pay for the environmental engineering or construction yourself, it is less of a concern. But if you are like the majority of people with more limited means, obtaining financing is a big consideration. Traditional bank financing will be easier to get if your vision for the vacant land includes using it in a way that will generate enough cash flow to service the debt. If you are looking to do something that benefits the community, having the vacant land generate cash flow is not as important. Other sources of financing include grants from the city or other non-profits in the case of urban farming, or the Department of Natural Resources if you are planning on converting vacant land into a nature preserve.
- Terra Incognita: Vacant Land and Urban Strategies; Ann O'm Bowman, Michael A. Pagano; 2004
Jonathan Roe enjoyed a liberal arts education at Miami University where he studied philosophy and business. He is currently working on an MBA at the Weatherhead School of Management in Cleveland, Ohio, while working full time as a corporate banker. Relying on his wide-ranging education, he writes for a variety of companies.