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Sure, Land Is Cheaper. So Is It Time to Buy?

The real estate market may have cooled, but investor demand may soon be heating up for at least one type of property: land.

Some of the most attractive deals lately have come from land developers and home builders, who are divesting parcels in many parts of the country as they whittle down excess housing inventory. Even smaller landowners, facing their own financial strains, are selling off lots once meant for building.

“The time is ripe to start looking; I haven’t seen this market in 20 years,” said Jaime Raskulinecz, a real estate investor and property manager from Verona, N.J., who wants to buy land in the hard-hit market of Cape Coral, Fla. During a recent visit there, she found lots for sale on or near the water at about a third to half below their peak prices of two years ago.

On a larger scale, H. Ray Alcorn Jr., an owner of Park Real Estate in Blacksburg, Va., is picking up commercial and residential parcels after two years on the sidelines. Mostly using cash, he has bought more than 100 acres throughout Virginia this year, some from lenders and much of it at reduced prices, and he has options to buy more.

“I’m looking at a lot of stuff, and I’m being very picky,” he said, explaining that the land he buys generally has zoning and various building approvals in place, making it easier to develop or resell.

By some accounts, acquiring land is the purest form of real estate investing. (As Mark Twain once said, “they’ve stopped making it,” at least around these parts.)

Yet buying land, even at today’s prices, is not nearly as simple as it seems. Real estate experts raise many signals of caution, particularly for the neophyte investor.

“Because everyone’s running away, some people think it’s time to invest, but it’s not for the faint of heart,” said C. Joseph Blackbourn, the president and chief executive of Everest Holdings in Scottsdale, Ariz., an active buyer of home-building lots in the Southwest since late last year. “There are a lot of expenses in holding land.”

Land investors will need to have cash on hand to cover most of those expenses. “Lending has all but disappeared,” said Joel B. Shapiro, the chief executive of Timbervest, an Atlanta investment company that manages about 900,000 acres of timberland nationwide. Just as the credit crisis has made terms on home mortgages more stringent, land loans, already deemed riskier by lenders, are harder to get and typically carry even higher down payments and interest rates.

So what are some of the other costs associated with land ownership, besides high borrowing expenses? There are property taxes, of course, and there may be liability insurance (in case someone is injured on the property) and maintenance expenses (to cut the grass or provide other upkeep).

Owners will also need to ensure that the land is environmentally safe. Sometimes toxic trash may be dumped on the property “unbeknownst to you, and you’ll be responsible for the cleanup,” said John T. Reed, the publisher of Real Estate Investor’s Monthly, a newsletter. “At 2 o’clock in the morning on a moonless night, who’s to say what’s being put there?”

Your green fields could really be brown

For that matter, who’s to say what might have made its way onto the property before it was sold? Seemingly pristine raw land, for example, could be contaminated with pollutants, which is why real estate experts urge buyers to have an environmental audit done as part of their due diligence. (Also important are engineering reports, to let buyers know if the land is buildable, and surveys, to establish true boundaries.)

But even the most nimble investors cannot control everything, especially when it comes to local politics. A city or town may impose a building moratorium or rezone an area to reduce density. “You might buy land that is zoned for 10 houses per acre and then it goes down to 2 per acre,” Mr. Reed said, “and there goes 80 percent of your value.”

There’s no guarantee, either, that economic expansion in a community will benefit the land investor. “It’s hard to pinpoint which direction growth will go, and to predict when and at what magnitude,” Mr. Reed said.

Indeed, as many seasoned investors know, waiting for land to appreciate can be, well, like watching grass grow. But the value can also shoot up like a weed almost overnight, providing some hefty returns.

“We tell our investors that they should not expect to see anything for four to six years in overall investment returns,” William A. Shopoff, the chief executive of the Shopoff Group, a private real estate investment company in Irvine, Calif., said of a new, land-focused real estate investment trust called Shopoff Properties Trust, for which he is now raising money.

Mr. Blackbourn agreed that it could take years for markets with a glut of unsold property to stabilize. “If somebody buys land in South Florida, how long would they have to wait?” he pondered. “Up to 8 to 10 years perhaps.”

Ms. Raskulinecz, the investor looking to buy in southwestern Florida, says she’s willing to ride out the economic storm. “Since the area was the first to sink, maybe it might be one of the first to come back,” she said.

Meanwhile, investors who can afford to buy and hold “get compensated for time,” Mr. Blackbourn said of the myriad good deals now available in many regions.

Nationwide, land prices fell by more than 6 percent last year, according to data compiled by Real Capital Analytics, a research firm in New York. And prices have continued to decline. For instance, Real Capital said the price per buildable square foot on land earmarked for retail development averaged $44 so far this year, compared with $79 in 2007, while the average price for land for condominiums was $87, versus $151.

Big investors, which include institutions like pension funds, are finding many of their land deals through developers and builders looking to liquidate assets, as well as lenders who were forced to foreclose.

Land auctions are another source. “They can’t afford the debt — it’s easier to sell it at fire sale,” Mr. Alcorn, the Virginia investor and author of a home-study guide, “Dealmaker’s Guide to Commercial Real Estate,” said of many sellers. “On average, you’re getting a discount of 60 percent,” and sometimes even 70 percent.

Investors of all types can find property for sale with the help of brokers as well as through online commercial listing services like LoopNet.com and CoStar.com. Thomas P. Byrne, LoopNet’s president and chief operating officer, says undeveloped land makes up about 15 percent of his company’s 600,000 listings. CoStar’s chief executive, Andrew C. Florance, says 148,000 land listings are now on his site, totaling around six million acres, or “two times what it was two years ago.”

For the less intrepid investor, there are passive investments. Those with larger sums could put their money into private funds offered by companies like Mr. Blackbourn’s Everest Holdings and Mr. Shapiro’s Timbervest. There are also dividend-paying timber REITs, which hold portfolios of timberland. Their shares are publicly traded.

Mr. Shopoff’s REIT, which is publicly registered but sold privately, will focus on undeveloped and underdeveloped land. The minimum investment is $19,000. “We hope to capture appreciation in excess of 30 percent compounded annually,” Mr. Shopoff said.

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