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Subdividing Land: Tips for Landowners from a Developer (Part 2 – Lessons from the Field)

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Are you a landowner who is thinking about subdividing your land into residential lots? In this second of three articles on the topic, you can learn about subdividing land from the real world experiences of a real estate lawyer and developer.

Be sure to check out the first article in this series that describes the common benefits and risks of subdividing your land. As noted in that article, some of the benefits may include:

  • Increasing the total value of your land,
  • Providing you the flexibility to keep your home, but still get income from selling your extra land, or
  • Boosting the marketability of your land.

Sometimes a small-scale subdivision can be done by a landowner easily and successfully with the help of a just a few experts. But, as we described in the first article, not every opportunity should be pursued by landowners and sometimes even the pros learn lessons the hard way.

Subdividing Lessons Learned

Extra land ready to be subdivided

Here are just a few anecdotes from some of our real world subdivision experiences:

 1)    Deed Restrictions Cost Professional Developer: We considered purchasing a large parcel of very desirable property to build a high-end infill housing development, but after some due diligence we discovered an 80-year-old deed restriction that would prohibit subdividing the land. We evaluated it thoroughly, but there was no way to get around it. So we walked away. Six months later, a large sign was installed on the property offering multiple lots for new homes. In a phone call with the new owner/developer, it came to light that he was not aware of the deed restrictions against subdividing and had already purchased the site. The sign came down a few weeks later. That same developer still owns the undeveloped parcel after more than 4 years.

2)    Homeowner Violates Covenants: In a planned community with large homesites, a homeowner decided he wanted to subdivide their 2-acre lot to keep their existing house on a smaller lot and to sell the second vacant lot to someone for another home to be built. The homeowner failed to carefully review (or ignored) the Covenants, Conditions and Restrictions (CCRs) that were in the land records, and that applied to their property and prohibited subdividing lots in the community. The other homeowners on this cul-de-sac, also situated on 2-acre lots, weren’t happy with their neighbor’s plan. They and the HOA used the covenants (and a lawyer) to put a stop to it. Even though the subdividing homeowner had already paid to formally have the subdivision done through the municipality, thanks to the CCRs the subdivided building lot was illegal and would never be able to be sold separately. The homeowner lost all their expenses related to the subdivision.

3)    Subdividing May Require Additional Infrastructure: One of our team members was considering a large suburban homesite for subdivision and development. Homes on larger lots in some areas can be serviced by their own well and septic system (as was the case here), but the smaller lots that would have been created by this subdivision would require new municipal water and sewer service. Unfortunately, after much time, effort, due diligence costs and negotiations with a downhill neighbor, the issue of a right of way for the sewer to service the “new” subdivided parcel(s) was not able to be resolved. The deal fell through.

Subdividing Tricks of the Trade

Subdividing land can be a lucrative undertaking when done properly and in the right circumstances. Here are a few tips to consider from our experiences – subdividing tricks of the trade, if you will – that may help your subdividing efforts be a profitable tool for you. We’ve had great success using these strategies.

  • Investors can look for houses on large lots that can be subdivided. First subdivide the land to create additional vacant lots to sell, and then rent, sell or demolish the existing home that is now on a smaller lot. We have found that the market often values the home about the same, even though it may be on a smaller parcel. So the value of the new subdivided lot(s) can be a nice bonus for your investment.
  • If you find a lot or land that you want to buy, but don’t like the way the site is configured, consider purchasing all or part of adjacent parcels. You may be able to combine the parcels and subdivide the land with new lot lines. And, in some cases, combining the parcels may allow you to create three or more lots.
  • When purchasing property to subdivide, your contract should list official subdivision approval as a required condition for closing – failure to get your approvals should allow you to terminate the purchase agreement. And, because you cannot control the timing of the local planning authorities, the inspection period and/or closing date generally should be extended automatically until you have the subdivision approvals you need to close.

We hope these lessons from the field have been helpful, as these real world scenarios can highlight some things to consider when subdividing your land.

Do you have any interesting subdivision-related stories to share?

Come back soon for the final article in this series on subdividing land that will walk you through the typical steps of how to do a small-scale subdivision.

 

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Discussion

    • says

      Thank you for reading the Blog and asking about part 3 of the Subdividing Land series, Henry. These subdivision articles have been very popular on the LotNetwork.com Blog and we intend to post the 3rd installment soon. We try to be very thorough with these articles, so they do take some time.

      If you like the articles, be sure to share them with your friends and colleagues. Thanks again!

  1. Diane Trotter says

    I plan to buy a house in Little Rock, Arkansas, suburbs. Some have really large lots. I can’t wait for Part 3.

  2. Linda says

    Where I live . Is 8 homes, they are all indivual homes, however, they are all considered condos. We have 3 owners that want to change them to single dwelling homes.

    Do you know the procedure .. IS IT EVEN POSSIBLE -?
    The homes were built in 2007

    Thank you for your time.

    • says

      Hi, Linda. Laws vary by state for how condos are treated, so you will need to check with a local attorney with expertise in this area.

      I suggest that you first get the 3 owners who are pushing for the change to show you how they would do it, and what they believe supports their strategy. They may have already worked with an attorney and may have some insight for you on how this could be done.

      Thanks for reading the LotNetwork.com Blog!

  3. Cam says

    I have a client who wants to sell a house and with large acreage. The buyers interested only want a portion of the acreage with the home. Can he subdivide in the sale if he pays the lender what they are owed and sale the house and a few acres and retain the remainder for himself? If he is able to do so, What does he do first? Does he start the process of subdividing before contract is written or add wording to contract of his intentions and handle when title work is done?

    • says

      Hi, Cam. You absolutely can subdivide the land in the process of doing a sale.

      First, you’ll likely need to have the land surveyed to reflect the separate parcels — mostly you’ll just need to show the parcel that is being sold so it can be separately identified (work with the buyers to make sure everyone is ok with the layout). Then specify in the “Property Description” for your contract that this to-be-divided parcel is being sold with the house purchase (attach and refer to the survey, if you wish). So in this process the land does not have to be formally divided yet, but your separate property description allows the contract to precisely specify what land the buyers are actually getting in the purchase. Make sure to include as a condition to closing that the land must be able to be successfully subdivided as described in the property description (your client should not be in default if a technicality blocks the land from being divided).

      Your closing attorney will need to confirm that the proposed subdivision is OK per restrictions, etc., and can write up the deed so that your client only transfers the to-be-divided parcel that includes the house. At closing, your client transfers that parcel to the buyer, pays off the lender with the proceeds and keeps the balance of the land. If there are not enough proceeds from the closing to pay off the entire loan, your client may need to either (a) bring funds to the closing or (b) seek approval from the lender for a partial pay off and release of the newly created house parcel (the balance of the land would continue to be subject to the mortgage).

      You definitely should work with an experienced real estate attorney on this. I also will clarify that this process may not be considered a formal “subdivision” in many jurisdictions. Your client really is just deeding off a portion of the overall property, which often is easier to do than getting a formal subdivision approved for creating multiple lots for new homes.

      Does that make sense, and help?

  4. Ram Mohan says

    Hi: In a “partnership” between a sub-division landowner and a builder, does the builder pay out the entire cost of land from sale proceeds first before taking any money or….what are the standard terms?

    • says

      As the real estate market begins to pick up, many landowners are starting to consider partnering with builders and developers. The terms of such a deal really are up to you and the builder, and such an arrangement can be set up in any number of ways. For example, if you would like to treat your land as more of a loan or a deferred payment then you may want to require that you simply are paid off in full first. But if your arrangement is more of an investment or partnership where you are participating in the profits and risks, then you may be willing to have some of your payments come later and at the same time as the builder. Good luck!

  5. says

    I was wondering if you have a sample letter to request info from the city on subdivision… I have no idea what to ask!

    • says

      Hi, Jo. I suggest you simply stop by the local planning/subdivision office in person, make a phone call to the office or check online for information. Your local office can help you with any suggestions based on their local procedures, forms, etc. You also can get proposals from surveyors or engineers about your subdivision ideas and plans, and these professionals can handle most of the paperwork for you if you move forward. Good luck.

  6. Maria says

    Hi,
    Thanks a lot for this two articles.
    I am planning to buy a big lot, and then sale subdivisions. I HAVE NO IDEA how to start . With your articles I get a better clue…. but, what is the firts step? Would you can help me please? .

  7. Nicholas says

    These are fantastic articles; thank you for taking the time to write them.

    What would be great to see in part 3, that seems missing from most articles I find online, is the actual process of checking on the laws and regulations. For instance, who all needs checked with (state, county, borough, township, homeowners association, etc) and even more importantly, how do you check with each of these? The latter question is where I think 90% of interested readers hit a wall; I certainly wouldn’t have the slightest idea who to call or where to get the number, even though I know I need to check with my township.

  8. Doug says

    Hi Steve,
    Useful articles. I have a somewhat different problem. Our family has done a fairly large subdivision in Maine, infrastructure in, community building, dock, underground utilities, etc. We now have decided because of age, health that we would prefer to sell the project rather than complete and market individually. We know this will entail a substantial loss. Can you recommend a method of doing this? Local brokers seem to only do houses and lots. Should I look for a nationwide broker?
    Thanks,
    Doug

    • says

      Hi, Doug. I suggest you add your Maine subdivision as a “Project” listing on LotNetwork.com — the site is made for helping you find buyers of that kind of project. Here’s a link to a helpful article about selling projects like yours: http://blog.lotnetwork.com/sell-development-projects-portfolios-of-residential-lots-with-project-listings/. And using a Featured Listing will get you the highest exposure possible, which is appropriate for a large subdivision sale like that.

      LotNetwork.com is a strong supporter of the real estate brokerage community, so you certainly can find the right kind of broker to help you sell your property too. You can search LotNetwork.com for brokers with similar properties for sale in your area. You are wise to try to use a broker with appropriate project-selling experience, because their network and expertise can make a difference for you.

      Good luck!

  9. says

    Steve
    Would it be a good idea to purchase an existing subdivided parcel of land with paved streets and utilities? There 108 lots and owner is asking 3.5 million, negotiable. Developed land has been around for years, with tall grass, and not sure of reason for selling. No housing has yet been built, all lots currently empty.

    Any creative financing ideas that you could recommend?

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