Creating Wealth & Income Through Land Splits
by By Stan C. Strom
April, 2007

Last year I had the opportunity to join AZREIA and sponsor a booth and seminar at the annual Phoenix Convention Center show. I was intrigued with the many private investors who seemed to spend so much effort on “fix ‘n flip”, foreclosures, NNN income properties, or other residential or commercial investments for what seemed to me to be such a small return for the effort.

What I learned years ago was the ease and profit potential of buying and selling land WITHOUT all the headaches of improved property. In this article, therefore, I want to show you how to create wealth and income from vacant land through the simple process of five splits.

The underlying premise here is that Arizona only has 17% of its land mass as private, or deeded land. I wasn’t the sharpest student in college, but I did understand the economic principle of “supply & demand.” The other principle I learned afterward was that “time = money”. Today, it takes up to 12-18 months in most of our Arizona counties or cities for zoning and final plat approval for development. That amount of time can significantly affect the return that investors achieve, or in some cases, not achieve.

What if, however, I could show you an “expedited” process that allows an investor to purchase vacant land and split it up to five parcels in size (all less than 36 acres) without having to wait for the long subdivision or platting approval process? In Arizona, the Department of Real Estate oversees subdivision approvals by issuing “public reports” when “there are six or more parcels or fractional interests” after a land split. Therefore, a five split can usually be done within a few months and re-sold to other investors or users to create “income”.

Here’s why it works: There are exponentially more investors who will pay more money per acre for a smaller parcel in size. Each time a parcel is broken down in size, there are more potential buyers willing to pay higher prices.

Here’s the other reason why it works: As a land investor (owner), you can be the bank and provide seller carry-back financing secured by a promissory note and first deed of trust. First, you’ll get a significant “return” on the resale of the smaller parcels and second, you’ll get at least 10%-12% interest on your money during that term. As a seller, I always ask for a three t0 five year balloon, interest only, monthly payments and a due on sale clause. As a buyer, I always ask for parcel releases at 125% of par, no pre-payment penalty, quarterly or semi-annual interest only payments, and no credit check. The usual down payment for a land deal is between 10% to 30% cash down.

So here’s what to do: Find an affordable property with legal access. When I say affordable, let’s talk about expected returns. If you expect a 100% return and buy a property at $3,000 per acre, you’d have to sell it for $6,000 per acre. That’s certainly attainable, but if you’re paying $25,000 per acre, it’s much more difficult to find multiple buyers at $50,000 per acre to get your 100% return. So in my world, I keep my purchases under $10,000 per acre. In the last nine years, I have averaged a 400% return within 12 to 18 months. The reason I use 12 – 18 months for a holding period is mainly due to long-term capital gains tax (holding a property more than 365 days) vs. ordinary income tax which is defined as less than a one-year hold.

Then we begin the due diligence process of determining the county zoning stipulations, minimum parcel splits, proximity to water, electric or sewer, soil tests, percolation for septic systems, comparable land sales in the area, a survey, etc. May I suggest that you start with a 20 to 40 acre parcel and get comfortable with the process. Ideally, I split a 20 acre parcel into five 4-acre sizes or a 40 acre parcel into three 10-acre and two 5-acre splits. These smaller parcels are ideal for investors or end-users who may want to build a home.

Now certainly we work closely with the Department of Real Estate and County planning departments to avoid any misrepresentations, fraud or illegal land splits. That’s why it’s important to use a land professional to get good advice. The State now has a seller property disclosure affidavit that requires sellers to reveal such things as the number of land splits, legal and physical access, utilities, fissures, environmental issues, etc.

For more information on creating wealth and income from vacant land, please visit our website at www.acres4u.net or call Stan Strom at (480) 503-0777 or by email at stan@acres4u.net.