Who actually buys a banked parcel in year 12, and how should that buyer be underwritten at entry?

Question

Take 60 acres about nine miles past the last recorded subdivision. Asking is $4,200 an acre, so $252k, taxes run about $1,900 a year on the current ag classification, no structures, county road frontage on one side. Entry underwriting on a parcel like that takes an afternoon. Check the price per acre against the tax bill, walk the property, and the file is done. The exit is where most holders stall. In year 12 somebody has to hand over a check, and when people try to picture that person they get vague answers and no numbers. A builder is the usual answer, another holder is the second, the neighbor with the cattle is the third, and none of them comes with a number attached. The question worth putting to the room is how people here underwrite the exit buyer at the time of entry. Something more specific than "land goes up": what does that buyer's own math have to look like for the entry price to work? If the buyer is a developer, the parcel is an input cost in somebody else's spreadsheet, and anyone tying up $252k for over a decade should understand that spreadsheet first.

Rena Expert · Accepted Answer

The exit buyer for 60 acres at the exurban edge is usually a lot developer or a small homebuilder, and they don't price off land comps. They run a residual. Projected finished lot revenue, minus horizontal development cost, minus their required profit and carry, and whatever's left over is what they can pay for raw ground. So your year 12 price turns on whether retail lot prices at that specific location will support development cost at that location, which is a different question from whether land in the county went up.

Two consequences for how you underwrite now. Sewer and water proximity does most of the work in that residual, because septic and well ground caps achievable density, and density is what generates the lot count the developer is dividing by. And 60 acres suits a local developer more than a national builder, since the big builders generally want finished lots delivered in takedowns rather than raw acreage they have to entitle themselves.

Your model is resting on the parcel staying divisible on the terms that exist today. Minimum lot size, road frontage per lot, and access standards all get rewritten, and a rural county can move a minimum from 1 acre to 5 in a single comprehensive plan cycle. That change alone can cut the residual to a fraction of what you underwrote. Read the current ordinance, then ask the planning office when the plan is next up for revision.

One more thing on that $1,900. If it's low because of an ag or timber classification, find out how rollback or recapture taxes work where the parcel sits before you treat the exit as clean. Several states claw back part of the tax difference for prior years when the use changes, and it lands on whoever holds title when the change happens. The recapture period isn't uniform, so confirm it with the county assessor and a tax professional who works in that state.

nataliehsu · Answer

Who even lists ground like this? Every broker sign I see out that far is the same two names, and I assumed that was coincidence.

omar_haddad · Answer

The residual number that kills deals in my experience of watching horizontal budgets is dirt work. If there's rock at three feet, or the fall on that 60 acres means the developer is importing fill for roads, the cost side of their math swells and the land line shrinks to absorb it. Same behavior as scope creep on a rehab, just at a scale where the overrun is measured in hundreds of thousands. If you can get a soils map and a rough contour off the county GIS before you buy, you're pricing what they'll price.

wendy_park48 · Answer

Before you get to year 12, pull a title commitment and read Schedule B rather than skimming it. County road frontage on one side does not automatically mean legal access at the point a developer needs a road entrance, and commitments turn up where the only access of record is a 20 foot easement described by a fence line that no longer exists. Also check for a mineral reservation. A severed mineral estate with surface rights attached is the kind of thing that shows up in the developer's own title work and turns into a price cut at exactly the moment you have no leverage.

sonia_alvarez · Answer

Worth knowing how that buyer pays you. Developers frequently want an option or a rolling takedown rather than a cash close, so the offer that arrives in year 12 might be $50k down for a 24 month option while they entitle, with the balance at closing. That can be a perfectly good outcome, though it is a different instrument than the one being modeled. And on the financing side, raw land with no income does not get treated like a rental, so plan on a large down payment and short amortization if you borrow at all. Terms move, so get whatever a lender tells you in writing.

megan_doyle15 · Answer

What's a residual? I've read the reply twice and I think it means the land price is whatever is left after everything else, but I want to be sure I'm not inventing that.

paulgrant17 · Answer

Yes, rigging, that's it. Land is the last line they fill in.

My question for thatch is different. Once your name is on a vacant 60 acres, do you get buried in mail from people wanting to buy it? I hear that's constant.

tashaford30 · Answer

Is there a size that is actively awkward? Sixty acres sounds fine on its face, but if a local developer wants 20 to 40 and an ag buyer wants 150 plus, some parcels sit in a gap where neither pool bids. Worth checking which pool 60 acres falls into in that county.

aliyah_b · Answer

Running thatch's carry so I understand the shape of it. $1,900 a year for 12 years is $22,800, assuming the classification holds and the assessor never revalues, which it will. On $252k that's roughly 9% of purchase price spent just to keep the parcel. Add whatever the $252k would have earned somewhere else and the appreciation you need to break even is a lot larger than the tax bill suggests. The tax line is the small part of the cost and the easy part to see.

renee_dubois · Answer

Consider this the dissenting voice. A rental unit tells its owner something every month, sometimes something expensive, but it tells them. Raw ground tells you nothing for a decade and then delivers the entire verdict at once. None of that is an argument against it, and some investors are built for exactly that. The honest question is whether you can hold through year 7 when nothing has happened and you are still writing checks to the county.

tylerbrooks9 · Answer

Isn't the simplest exit the neighbor with the cattle, at a lower number? Slower money, fewer moving parts.

Who actually buys a banked parcel in year 12, and how should that buyer be underwritten at entry?

14 replies