What do people mean when they speak of improvements in real estate??? Well, depending on who you are talking to in the real estate realm. Ask a commercial developer and he will tell you that the only “real improvements” are those of multi-use commercial properties with restaurants and shopping. A home builder will tell you that 20 town houses or 12 one acre lot homes are improvements. While a county appraisal district will tell you that the new “she shed” your wife built last summer is an improvement.
The true definition is “Improvements to real property are generally developments of land or structures on property that do more than merely replace, repair or restore the original condition. Improvements are characterized as being permanent and adding to the value of the property.”
In our world this means making improvements buy subdividing, building roads, running power to parcels, getting new plats approved by the county and even drilling water wells.
Why go through all the cost and headache of making improvements to raw land? Simple, the more improvements you make the higher the value of your land! An example is a deal we are negotiating right now. It is 500 acres for nearly $5,100 an acre, for a total asking price of $2,550,000. This is raw land with good county road access on the south portion of it. But in this area we will have to look at the actual sold comps by acre once we subdivide, run power, build roads and drill water wells to each parcel. In this particular area of the county we are looking at a conservative $10,000 an acre when split into 25 acre parcels with power, water well and roads. Is this a good deal???
Well, it depends on how much the topography change will add to the normal road building costs, how far away the power is from the subject property and the cost to run it to each property, and how deep the water table is and how much each water well will cost???
If it costs an extra $400 an acre to improve and market the properties, plus an extra 5% in commission fees to sell…So we would have a total purchase price of $2,750,000 not counting closing fees, etc. We then pay at least $250,000 in sales commission fees, or 5% of $5,000,000 potential sales price. So, that makes our all in closer to $3,000,000, with a potential return of $2,000,000 give or take $200,000 for seller concessions, negotiations, etc. So, $1,800,000 on a $2,750,000 investment…or a 65% rate of return on your money. Is it worth the risk and headache??? For us, absolutely, especially when we use leverage…but that is a post of another day.