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Subdividing Land: Tips for Landowners from a Developer (Part 1 – Evaluate)

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Learn to evaluate the risks and rewards of subdividing land into residential lots. In this first of three articles on the subject, a developer and real estate lawyer provides landowners specific items to evaluate when considering whether or not to subdivide land. Come back for the next articles in this series that provide insights for landowners based on the author’s real world experiences with the subdivision process, as well as a hands-on description of the steps landowners should take when subdividing land.

Why Subdivide My Land?

Sub·di·vide (v.): to divide into several parts; especially: to divide (a tract of land) into building lots.

Successfully subdividing your land into residential lots can have many benefits, including providing a landowner both increased profits and flexibility. If you are buying or already have a large parcel of land for sale, or even a home lot that has “extra” land area, you may wish to consider whether subdividing your land can help you maximize your real estate resources, something that many landowners are evaluating in the current market conditions.

 

Photo of yard with extra land -- Learn How to Subdivide Land

 

More Lots May Mean More Money

Depending on the situation and the local market conditions, you often can increase the total value of a parcel of land by subdividing it into smaller pieces –lots – that are then sold to one or more buyers. In essence, through subdivision the parts can be more valuable than the whole.

 

Save Some Land for Yourself

Another benefit of subdividing for homeowners who would like to liquidate some of their real estate without having to sell the farm (literally), is that they may be able to both cash in on a portion of vacant land and stay put on the rest. Holding onto some of their land can give that property time to increase in value as the surrounding subdivided land becomes developed.

Increase Marketability

In addition, landowners may more readily find buyers for smaller subdivided parcels that are more affordable than one larger piece of land. Try to understand the market’s needs. Completing the lot subdivision up front saves the purchaser the time, effort and risk of doing it themselves, increasing the salability – and often the value – of the overall property.

Evaluate the Feasibility of Subdividing Your Land

Subdivision concepts are common knowledge and practice among experienced professionals like home builders, land developers and real estate agents. In fact, subdividing land really is a fundamental part of all real estate development, but it is only one part of the overall development process.

Subdividing land also can be risky and costly if you are not thorough with your due diligence. Whether you own the land or are just evaluating a potential new purchase, the risk that a subdivision is not able to be done – or at least done in a way that makes financial sense – can often cost you money and valuable time.

There are a number of preliminary items that help you decide whether a subdivision is feasible. If you are a landowner or homeowner considering subdividing land into vacant lots, read on to learn more, and – as always – plan to seek the guidance of experts.

 

Smaller may be Simpler

So you think your land is a candidate for subdividing? You need to consider the size and scope of your plans, because there can be different degrees of difficulty when subdividing land and, to put it simply, these can align with the project’s size – the bigger the project in acreage and number of lots, often the greater the complexity.

If you are dealing with a single lot being subdivided into two or three residential lots, you may be able to handle this by working with a few real estate professionals that will help you in the process. Be thorough during your due diligence and planning so you can evaluate whether subdividing is feasible and makes financial sense. (More on this in a minute.)

 

Larger may be Complex

Once you get over about an acre in size and two or three lots, the complexity of the subdivision process can rise dramatically. The level of difficulty – and expertise needed — can be compounded if you have a site where lots will not front on an existing public road or where utilities and infrastructure must be built. This likely will require you to undergo municipal oversight (possibly even state or federal, for some situations) for the subdivision’s site design and layout, as well as construction of roads, utilities and other infrastructure. In this scenario, you basically are stretching the activity from simply subdividing a parcel to full-scale community and land development.

In short, the bigger projects are best left for the pros.

 

Guidelines for the Fearless Subdivider

If you are interested in subdividing a parcel to increase the value or use of your property, we wish you luck – and provide you the following recommendations:

 

Check for Restrictions!

One of the most important first steps before subdividing your land or land you wish to buy is to make sure there are no restrictions that will block your plans. Everything from ordinances, neighborhood covenants to deed restrictions may prohibit – or fatally complicate – your plans. Review these items carefully, plus order a professional title review (typically through a real estate attorney) so that you can understand whether there are any deal killing issues that apply to the property and prevent subdividing.

If you find items during your review that may be problematic, you and your attorney should evaluate them carefully to find a solution, or see if you are able to get title insurance that provides specific coverage to protect you and ultimately your buyers. But never ignore a tricky restriction or convince yourself that it won’t be a problem. Beware, even the pros can get into trouble if they become too wedded to their grand plans. You may get away with bypassing restrictions for a while, but doing so can cost you down the road – especially when trying to sell or finance the property. We’ll describe more of these real-world risks in the second article.

 

Understand Lot Layout, Sizing, Services…and the Market

When subdividing a parcel, make sure your proposed lot layouts and lot sizes are appropriate and will work not only legally, but for the market.

Selling lots is not like Field of Dreams, where “if you build it they will come.” You need to make sure there is a market for lots in your area and at a price that makes sense. Determine the size, layout and other requirements that are expected for new lots to be marketable. A good real estate agent with expertise in land can help you with this. You also may be able to get some advice from builders – reach out to the ones who are active in your geographic area and in the price range for new homes that would likely be built on your lots. Getting their input could be the key to successfully subdividing marketable lots.

Even if you’ve confirmed that there are no restrictions that forbid subdividing the land (or make it unfeasible), you and your experts also should research the local zoning, subdivision and development laws so that you can understand the layout and size limitations for your planned lots. Each county, city or other authority will have its own regulations that describe important items like current zoning requirements, minimum lot widths, setbacks (front, rear and side), buffers, building heights, required open space and other significant details that affect the size and layout of your lots.

You also need to confirm that each of your planned lots will be properly serviced. Most homeowners expect to face a public road (with adequate frontage) and have water, sewer, power and other utilities available. So be sure to confirm both that typical utilities are available for your lots and that they will have the capacity to handle the load from any new homes that would be built on the subdivided lots. Do your research and have your surveyor locate water, sewer, gas, electricity and other utility lines and infrastructure on your plan.

Many of these lot size, layout and service matters will be driven by the local requirements, but others will be driven by the market.

  • If builders and new homeowners only want to buy 70 foot minimum lot widths in your area, you may not want to create a subdivision that results in narrower 45 foot wide lots – even if you can.
  • Likewise, consider the negative effect of providing any infrastructure, utilities or other services that are less than normal for the market – so even if it is allowed by law, using a dirt road as your lots’ access will not compare well to a nearby lot on a paved road with sidewalks.

Evaluate these items carefully in advance and include the related costs in your financial analysis and budget.

Understand Impacts & Other Requirements

Another surprise to landowners attempting to subdivide their land is that the act of subdividing can raise any number of additional requirements and costs on your land. While your existing parcel may have been grandfathered so that it does not have to comply with some newer laws and regulations, undertaking a subdivision can trigger a new set of impacts and requirements.

These can include a requirement that you dedicate part of “your” land that is in the road right-of-way to the local government, causing you now to be working with a smaller parcel. Other rules may require you to build or improve roads, sidewalks, curb and gutter and even to plant trees. In addition, you also may be required to install water and sewer connections and meters for the lots, or to pay capacity fees, impact fees and other assessments when adding the new homesites.

You will need to keep items like these in your budget too, including contingencies for some which may not be known upfront.

We hope this helps provide valuable insight for landowners about the pros, cons and items to evaluate when considering subdividing your land. Check back soon for our second article in this series about Subdividing Land: Tips for Landowners from a Developer, where we will describe some real world issues that we have seen in subdivision attempts. Plus, the third article in the series will provide hands-on details about the steps to take if you decide to subdivide your land into lots.

 

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Discussion

  1. John Simpson says

    Consider taxes, sub-dividing may trigger ordinary income tax instead of long term capital gains treatment

  2. Paul Bondo says

    Well said! I have subdivided many parcels and the one item a developer should also consider is the NIMBY group. If neighbors do not want your project they can create all kinds of trouble, even if your project meets code so have experienced legal advice!

  3. says

    Steve,

    We currently own 10 acres of land with a lot of road front footage. A very large nice development is underway adjacent to our property; the developer also recently had some type of auction and sold 92 lots. It has been brought to the attention of my husband and I that no homeowner construction can begin until development access issues are resolved. Presently, they have issues with line of sight entering into and out of the development; the development has a small privately paved 2 lane road entering onto the public highway system. Our property sits high on a small hill, it is large enough to occlude site to the left when pulling onto the highway. Our home also sits on a curve. We also have fencing – similar to what you might call pasture fence – that also occludes a drivers site pulling out as well. The developer has sent a neighbor (also his friend, may even be a partner) – who lives in the only house built in the development – although how they built that with restrictions in play – I do not know… Maybe because it was a single dwelling??? It was there before the current developer purchased it from the previous developer (who built the home in there as a “spec house”. First, this representative showed up saying they would like for us to move our fence and they would pay for us to move it (how kind). We just listened… And told him we like our fence just where it is – we know that even with the fence moved the line of site is still occluded – the hill would have to come down or be graded somewhat for it to work. 92 homes would also generate a lot of traffic. A turn lane was mentioned but no details were given – in fact no plan was presented at all. We think he was just feeling us out. My real question is how much should or could we ask for the property if we agreed to whatever their plan is – of course, we would see the plan proposals and bring in a lawyer. I don’t know how to begin to calculate it! I have considered 92 lots multiplied by something! Maybe 20,000 each? My husband spoke with a member of the NCDOT who was out here doing some surveying – he stated that the DOT really had no interest in the property – I want to take that to mean they would not force access for the developer – but I do not know – my knowledge is very limited on this subject. Bottom line is they are in “a real pickle” if we decide not to accommodate/sell them the needed frontage. No money has been offered – it was just stated that we would be compensated. It seems we are in the position of power as far as a selling price – as they cannot develop without meeting those requirements. What would/do you advise and what resources should I use to educate myself. I have found the Policy on Street and Driveway Access to North Carolina Highways and been reading over it. I really do not want us taken advantage of either as far as the construction phase and the end result to our remaining front yard.

    • says

      Hi, Victoria. Thanks for your post, and for reading the LotNetwork.com Blog.

      I would first note that you’ve described a very situation-specific set of facts, so you definitely should work with a local lawyer who knows real estate. You can use some of the information that the lawyer gathers to help you understand what you are really facing. With that said, here are some thoughts.

      You mentioned that the adjacent development already is “underway” and that the developer recently sold 92 lots. This makes me wonder why the developer would be coming to you now about roadway frontage for a turn lane. Usually the road improvement plan is in place prior to the subdivision being formally approved and recorded and the developer secures rights to all of the land it needs for turn lanes in advance. The existence of lots in this development suggests that the road plans already should be approved. Get information from your local planning or subdivision department (as applicable, or possibly the DOT) and see if you can find the plans for offsite road improvements for this subdivision. It’s possible that there was a lapse in the planning process — or that the original roadway improvement plans have expired if the project was abandoned during the downturn — and the need for land for a turn lane has recently come to light. Do your research to understand the facts.

      Also note that many landowners think they “own” all of the land along the roadway in front of their property, but often that land along the existing pavement is owned by the local government or DOT as part of the public right-of-way. Mailboxes, landscaping, fences and walls often are built in the right-of-way, but will need to be removed or relocated for road improvements. Confirm with a survey where your property line actually ends along the right-of-way.

      And consider that the developer may not really “need” your property, and may just be looking into options for improving the entrance to the community. It’s worth noting that a more beautifully landscaped or designed community entrance adjacent to your 10 acre property could increase your property’s value. Also, building a friendly relationship with the developer may lead to a buyer for your property in the future.

      As for pricing, your suggestion of $20,000 x 98 seems high for a sliver of road frontage to add a turn lane. Granted, you have the right to try to sell your property for whatever you think it is worth (unless it is a government taking for market value, or if you just don’t own the property in the first place), but that does not mean someone will buy it if it is overpriced. The developer likely has other options. Usually valuations in a situation like this are based on an appraised (or negotiated) value per acre or square foot, and then a survey determines the precise size of the sliver of land that is being conveyed at that rate.

      Again, I urge you to work with an attorney who knows real estate and can help you look into the facts up front.

      Good luck!

  4. Jane says

    Steve, my son in-law has 10 acres of land. About 13 miles from a town & we have talked about me living on a small part of the land he would need to subdivide about 2 acres to me. But if he does sell me these aces. I want to make sure that he gets the land back can the land be in both our like a car title. & being I am getting older it would be nice to live close to one of my family members. & I love to out country. Jane

    • says

      Hi, Jane. Some of your situation will depend on local regulations (as always), but I would think you could handle this scenario by subdividing the 2 acres off as a building site but your son still keeps the land in his name. In other words, there likely is no need to transfer the property to you at all (unless you just wanted to do it that way). If he keeps title you also may avoid incurring unnecessary taxes, transfer fees and other transaction costs. Check with a local real estate attorney, and good luck!

  5. Chris A says

    Hello and thank you for this great topic. I have about 4 acres of land in on my residential property. My home is on the river with a dock etc and has about 1.5 acres itself. I have these 4 parcels of land that can be developed into residential properties yet I have no idea how to approach a developer. There is easy access to the main road and I have been told I could subdivide these plots and also provide river access via a trail running along the side of my house, that wouldn’t actually interfere with my main home at all. Should I simply put a sign up advertising these available lots or should I contact private home builders in the area. The home is in a highly sought after area where many would like to build homes. The previous owners told me they had been offered well over $1.6m for the lots but turned them down.(They were elderly and didn’t want to sell just the land). Any suggestions would be greatly welcomed! Thank you!

  6. viz says

    Hi I have 5 acres of land,what is the minimum block of land that can be subdivided to maximise blocks of land for subdivision

    • says

      Hi, Viz. That really is going to depend on your local laws and any possible restrictions related to the land, as well as the best size to make the new lots appealing to builders and home owners in your local market. You should get in touch with local real estate experts in your market, like a surveyor, attorney or real estate agent with lot and land expertise to help you better understand the local regulations and the most marketable lot sizes for your subdivision plans. Good luck!

  7. Dustin says

    Hi, my father in law has 10 acres of land and we have talked about building a home on an acre of his property. Does he need to subdivide the land to us? And how does he go about doing this?

  8. Ricardo says

    Really need some advice!!!!! We have a 100 acre plot of land in the Caribbean. We are in the process of having a Subdivision drawings done an also engineering drawings. We are not experienced developers!!
    Would you advise us to eventually go in partnership with a developer i.e 60/40 agreement?? Or would it be better to sell some lots and get an experienced builder on board??
    Really need some advice!!! We’re trying to maximise our profits.

  9. Rob says

    Hi Steve…great article! In my village there is a 1.4 acre lot that is of interest to me, but I don’t want the whole thing. I am only looking at about a third of that. Problem is…the entire 1.4 lot is owned by our local school district and the administration building sits on the front part of it. The backside of the lot (the part I am interested in) is totally unused and mostly wooded. There is a very distinct treeline to where the lot could be divided. How difficult would it be acquire that piece of land behind the building…given it’s owned by the school district?

  10. mary says

    I have 40 acres that has already been subdivided into ten acre parcels. Our personal home sits on one of the 10 acre pieces. I would like to sell the back ten acres and use that money to build another house on the remaining 30 acres. Because I am taking the money from the sale and putting it back into the property do I owe any tax?

    • says

      As you likely can imagine, every landowner/taxpayer has unique circumstances that apply to them. You’ll need to thoroughly discuss your plans with your accountant to understand whether you are recognizing any taxable income from what you are proposing. Good luck.

  11. Judy sargent says

    Steve, I reside in San Jose California and and my brother and sister were given our parents home in inheritance and they are considering carving out a parcel for another family member, my question is where to begin this process?

  12. Trevor says

    Hi Steve,

    Very informative articles, and exchanges. I have a general question about subdivisions. I am looking to sell a 5 acre parcel, that would accommodate about 45 lots. The lots would be sold, with houses built, for a minimum of $750,000 each. Would you say there a rough guide, as to what percentage the cost of land should be for each lot sold? Obviously, the lower the cost of the acquired land, the better for the developer, but I’m just wondering if there is a ‘rule of thumb’ in the business. For example, no more than 25% of a lot’s sale price should go towards the cost of the land? I am not looking to push the buyer to their break-even point, but I want to get a fair price too.

    • says

      Very good question, Trevor. We plan to do a blog article on this subject soon. You are pretty much on the mark with your example of 25% of the final to-be-built home’s value as a rough guide to a lot’s value. You’ll see that some markets use different valuations (even within the same city or region), but in many markets an estimation of the value of the lot generally can range from around 20% of the home value (for more rural or lower price point homes) up to around 30% or more (often for higher end communities or for urban/infill areas with less lot supply and higher home prices). Of course for some lots/properties these rules simply don’t apply, like oceanfront lots or land with other unique characteristics.

      Good luck.

  13. Bruce says

    I have an opportunity to buy 53 acres of recreational land. 9 of the acres is a pond and another 16 acres is CRP land. I was thinking about sub dividing these lots for a private campground. I currently own a single lot in a private campground about 70 acres and most lots are .18 ac that sells for $4000 each. I am looking to do the same as the owner did years ago, but with possibly my own piece of land. Without tipping off the owner on this opportunity, land for sale, what problems may I encounter, or unforseen costs will I run into?

  14. Brett says

    I have a home on a lot that is large enough to be subdivided. I met with the city to discuss subdividing and they said that each lot needs a 20′ street frontage (currently I only have a 20′ street frontage. They said that I can subdivide if I put in a drive tract to the subdivided section. However, they would consider the drive tract a road and as a result I would need to remove an attached carport because the rules indicate that a house needs to be 20′ from a road. The only reason that I need the drive tract instead of a typical driveway was to create the 20′ street frontage.

    I proposed a similar solution to the city that I create a small drive tract (well over 20′ feet away from house/carport). This would provide me with the street frontage required and a conventional driveway would be able to connect to the subdivided section. The city’s initial response is that I would create a “land locked” plot.

    Have you ran across a similar situation that has allowed you to subdivide?

    -Brett

  15. Leon says

    We have a 20 acre parcel in California. A public road runs through it splitting it into 12 acres on one side and 8 acres on the other side. Is there a state law in CA which allows for an administrative split in such situations? Thanks

  16. says

    Your sight is great at guiding a new land owner though the development stage. I like that you discuss risks of due diligence and size of the property. I’d like to post this as a link to my site for those I know that are in the process. Thank You.

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