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
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.