on Jan 7th, 2008An Introduction to Land Investment
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Investing in land is not an exact science.
Success and failure have come to all types of people and organizations that have tried their hand at real estate speculation - especially where land is concerned. Sometimes land investment results from not much more than a hunch - or gossip - without any research being conducted beforehand. At other times the investment only happens after exhaustive research and due diligence.
Some transactions have been executed with a handshake or on the back of a napkin, while others have had contracts so lengthy and cryptic that it might take an army of lawyers and judges to decipher them should a disagreement arise.
There is no correct method to investing in land and there is certainly no shortage of formulas for determining the probable success - or failure - of a speculative real estate investment. Yet that hasn’t stopped people - or countries - from trying.
Around the world land has come to mean growth and prosperity - as well as stability. Control of land translates into power not only for individuals and corporations but for countries as well. The discovery of North and South America was driven on the desire for wealth for the explorers and conquerors as well as their noble benefactors back home. Discovery of the New World can be thought of as one of the biggest land speculations in human history.
The high risk and opportunity for reward in land investment has produced some memorable stories in our countries lore (for instance the $24 purchase price for Manhattan Island from the Algonquin Indians).
So it should come as no surprise that buying, developing and selling land has produced a fair share of our country’s greatest and oldest fortunes. It has also given us some of our most colorful entrepreneurs, its most vicious battles and its greatest failures and scandals.
If history is any indication we can see a clear pattern of real estate as one of the more volatile investment vehicles around. Depending on who you listen to and where you are you’ll hear that land is either incredibly undervalued or incredibly overpriced.
The last few years not withstanding, price in land typically move very slowly - either up or down. On top of that land is an illiquid asset that could take years to provide any meaningful cash. So in order to succeed in land speculation you need tremendous patience and precise timing.
At its heart the economics of land investment is quite simple. You need to maximize your return by capitalizing on the basic supply and demand forces or you need to leverage your return using an option-based approach to development. Typically, these approaches influence each other and tend to work in conjunction.
