Does buying a lot and sitting on it count as land banking?

Question

I've been reading in circles on this. One thing I read said land banking is what big homebuilders do, where they option lots from a third party who holds them so they don't sit on the builder's balance sheet. Another said it's just buying raw land and waiting for it to be worth more. Those feel like different activities to me.

Also, and I might be wrong here, somebody told me vacant land doesn't get taxed the same way because there's no structure on it. That doesn't sound right but I don't know why it's wrong.

If I bought a five acre piece with nothing on it and held it for eight years without touching it, what is that called and what am I paying every year to do it?

Rena Guide · Accepted Answer

Strictly, land banking means buying raw undeveloped land, making no improvements to it, collecting no income from it, and holding it for years on the expectation that development and population growth reach it and lift the value. That's your five acres held for eight years. In this room, that's what the term means.

The builder arrangement you read about is a different thing that borrowed the name. There, a capital partner takes title to finished or nearly finished lots and the builder holds an option to buy them back over time, paying for the privilege. That's a financing structure with income built in for the holder. Public land banks are a third meaning, where a city or county holds tax-foreclosed property to return it to use.

On taxes, vacant land is assessed and taxed. The bill is usually smaller than on an improved property because there's no building in the assessed value, and in agricultural states a qualifying use can reduce it a great deal more. It isn't zero, and it tends to rise as the surrounding area develops, which is the same trend you're betting on.

The part that surprises people is what you cannot do with land at tax time. There's no depreciation deduction, because land isn't a wasting asset, and how the property taxes and any interest get treated depends on your situation, so that's a question for a tax professional in your state.

Budget for the tax bill, any mowing or brush clearing the county requires, and the fact that nothing comes back in until you sell.

raj_mehta14 · Answer

The builder version and your version share a name and almost nothing else. The builder one is a financing structure with an option contract and a fee, and there's a capital partner earning that fee. Yours is just you owning dirt.

brandonlee36 · Answer

You'll definitely get a tax bill. Vacant land is assessed like anything else, the assessed value is just lower because there's no improvement on it. What you don't get is depreciation, since land isn't depreciable.

nicole_adeyemi · Answer

There's a third use of the phrase that trips people up. Some cities and counties run public "land banks" that take title to tax-foreclosed and abandoned property to get it back into use. Totally different animal from a private investor holding acreage, and if you search the term you'll get a lot of those results.

karen_whitfield · Answer

Eight years is a short hold for this. I'd plan on the possibility of fifteen and be pleasantly surprised. The parcels that move in eight are usually the ones where development was already visible from the property line when you bought.

tonyv88 · Answer

On five acres, ask the county whether there's a weed or brush ordinance before you assume the annual cost is only taxes. I've seen abatement notices turn into a bill the owner didn't budget for, plus a lien if it's ignored.

jessreyes12 · Answer

What I never understood: if you make no improvements, what exactly makes it worth more later? Somebody else building nearby? That's the whole bet?

nataliehsu · Answer

@compass yes, roughly. Growth arrives, the land in front of it gets rezoned or absorbed, and demand shows up for parcels that used to be too far out. If growth turns the other direction you're holding the same field you bought.

omar_haddad · Answer

Coming from the renovation side, the thing I find hard about this is that there's no lever. On a rehab I can add value with a decision. Here you buy correctly once and then you have no further input for a decade.

wendy_park48 · Answer

Read the deed and the title commitment before you get attached. Mineral rights severed decades ago, a utility easement across the buildable middle, an access strip that isn't actually recorded. Those show up constantly on raw parcels and they all affect what a future buyer will pay.

sonia_alvarez · Answer

Also worth knowing before you plan the purchase: raw land financing is its own category. Lenders that do it typically want much more down than they would on a house and amortize it over a shorter term, and the terms move around, so get an actual quote in writing rather than assuming a mortgage-like structure.

Does buying a lot and sitting on it count as land banking?

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