How to Make Money with Subdividable Lots

The holy grail of real estate investing is turning a single piece of real estate into multiple pieces. This is where the big bucks are and what larger real estate development firms typically do. However, it does not mean smaller mom-and-pop investors are entirely left on the sidelines. In fact, our borrowers have been making tons of money with one of the most popular strategies for turning a single piece of real estate into several pieces: condo conversion. Condo conversion expands a single-family detached house into several condos, each sold separately. Condo conversions are common in high-priced, densely populated areas such as Washington, DC.

Another major strategy is lot subdivision. While the opportunities to subdivide an existing lot of land into separate buildable lots do not come too often, they are out there. Because of their high profit potential, savvy real estate investors should be familiar with the benefits associated with lot subdivisions and be able to evaluate each opportunity effectively. In this article, we will focus on recognizing subdivision opportunities and the steps you need to take to complete the subdivision process legally and efficiently.

Land Subdivsion: Basic Real Estate Terminology

First, I suggest we familiarize ourselves with terms such as “lot” and “parcel.” The terms “lot” and “parcel” are often used interchangeably in real estate. Still, they can have slightly different meanings depending on the context.

A lot typically refers to a specific portion of land designated for a particular purpose, such as residential, commercial, or industrial use. Lots are often identified by lot numbers on subdivision plats and are usually associated with a specific address or location. If you buy a residential house, it will have at least one lot associated with it.

A parcel is a more general term that can refer to any portion of land, regardless of its size or intended use. Parcels are often used in legal descriptions of land. They can encompass one or more plots or a larger area of land that has not been subdivided. For example, a developer might buy a “parcel” of land – such as an old farm – subdivide it, and sell individual lots to construction companies or individual buyers to build homes on.

The critical difference is that while both terms are used to describe a portion of land, “lot” is more commonly used to describe a developed piece of land. At the same time “parcel” is a more general term that can refer to any portion of land, regardless of whether it has been subdivided. In other words, both lots and parcels can be sold and bought, but you need to turn your parcel (or a portion of your parcel) into a lot before you can start building on it.

Unless you are looking to purchase an undeveloped piece of land, aka a parcel, chances are any subdivision you will be involved in will be a lot of subdivision: a lot with an existing property that can or cannot be subdivided into two or more buildable lots.

Real Estate Investor Goals with Lot Subdivision: Buildable Lots

Subdivision aims to create buildable lots. The value of non-buildable lots is low, and dividing a lot with an existing home into one “buildable” lot and one “non-buildable” lot might hurt its overall value rather than enhance it.

A lot is typically considered “buildable” if it meets specific criteria and requirements set by local zoning regulations, building codes, and other relevant laws. Here are some common factors that determine whether a lot is buildable or not.

1. Zoning: The lot must be zoned for the type of development intended, whether residential, commercial, industrial, or mixed-use. Zoning regulations specify the allowable land uses, building sizes, setbacks, and other requirements.
2. Size and Shape: The lot must meet minimum size requirements and have a shape that allows for the proposed development while complying with setback requirements and other regulations.
3. Access to Utilities: The lot should have access to essential utilities such as water, sewer, electricity, and gas. If these utilities are not readily available, the cost of extending them to the lot may need to be considered.
4. Topography: The lot’s topography, including slope and drainage, should be suitable for the proposed development. Steep slopes or poor drainage can pose challenges for construction.
5. Environmental Considerations: The lot should not have environmental constraints, such as wetlands, floodplains, or endangered species habitats, that would restrict development or require special permits.
6. Infrastructure: The lot should be accessible by public roads or have legal access via an easement. Adequate infrastructure, such as roads, sidewalks, and drainage systems, should be installed or feasible.
7. Legal Requirements: The lot must comply with all legal requirements, such as easements, restrictions, and covenants, that may affect its use and development.

How to Know Whether You Can Subdivide Your Lot

Use online real estate listings and websites that allow you to search for properties based on specific criteria, such as lot size or zoning. Look for properties that have larger lots or are listed as potential for subdivision. Sometimes, the best way to find properties with subdividable lots is just to drive around the area and look for signs of potential. Look for larger properties with ample space or properties that are underutilized and could be subdivided.

Remember, to be “buildable”, a lot should be met the criteria discussed above and it will be your responsibility to make sure that it does. Here are the steps you should take.

1. Check local zoning regulations: Start by reviewing the local zoning regulations for your property. Zoning laws dictate how land can be used and subdivided in a particular area. Look for information on minimum lot sizes, setbacks, and other requirements for subdividing land.
2. Consult with Planning Department: Contact the local planning or zoning department to discuss your plans to subdivide the land. They can provide information on the specific requirements and procedures for subdividing land in your area.
3. Hire a professional: Consider hiring a professional, such as a land use attorney or land surveyor, to help you navigate the subdivision process. They can provide guidance on the feasibility of subdividing your land and help you understand the legal and technical requirements involved.

What are common challenges real estate investors experience while subdividing lots?

Lot subdivision is not a trivial task. You should expect to invest both capital and time to subdivide your lot successfully and maximize the value of each lot. Here are the common challenges you might experience.

Bureaucracy and Delays

The time it takes to subdivide a lot into buildable lots can vary widely depending on various factors, including the complexity of the subdivision, local regulations, and the efficiency of the approval process. The subdivision process can generally take anywhere from a few months to a year or longer. The process typically starts with conducting a feasibility study, hiring a surveyor to create a subdivision plan, and preparing the necessary documents to submit to local authorities. Once the subdivision plan is approved, you may need to meet certain conditions, such as installing infrastructure and obtaining additional permits. Only when you satisfy the final conditions, the subdivision will be recorded with the county or municipal land record.

Significant Costs

Subdividing a lot can be expensive, as it involves various costs such as surveying, engineering, legal fees, permit fees, infrastructure development, and utility connections. The total cost of subdividing a lot can vary widely depending on factors such as the size and location of the lot, the complexity of the subdivision, and local regulations and fees.

Subdividing a lot can be a costly endeavor, with expenses ranging from several thousand dollars to tens of thousands of dollars or more. It’s essential for real estate investors to budget meticulously for these costs and factor them into their profitability evaluations. By working with seasoned professionals and conducting thorough research, investors can gain a clearer understanding of these expenses and navigate the subdivision process more efficiently.

Lien Holder Objecting to Subdivision

If you have a mortgage or any other lien against the title of your property, the lien holder can object to subdividing a lot, especially if the subdivision negatively impacts their ability to collect on the lien. When a property is subdivided, it can affect the value and marketability of the original property and, consequently, the lien holder’s ability to recover the debt. If the subdivision reduces the size or value of the property that secures the lien, the lien holder may have concerns about their ability to recover the full amount owed and will not allow the subdivision.

In some cases, the lien holder may require the property owner to satisfy the lien or provide additional security before allowing the subdivision to proceed. It’s important for property owners considering subdividing a lot to communicate with their lien holder and address any concerns they may have to avoid potential legal issues.

Benefits of Working with a Private Lender While Subdividing the Property

At New Funding Resources, we financed many deals when our borrowers bought or inherited a property with a lot large enough to subdivide it into two. One part of the land had an existing structure, which was eventually renovated using our private funds. The second part was turned into a buildable lot sold as a piece of land ready for construction or, in some cases, actually “developed” by our borrower into a brand-new home.

Because hard money lenders typically base their loans on the future value of real estate, they have significantly more flexibility in financing transactions with potential lot subdivisions. If you own or about to purchase a property with a subdividable lot, reach out to us about how to best manange and finance such transactions.