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7 Land Development Tips for Real Estate Developers

Land assembly is the joining of adjacent lands to create a larger parcel. Typically, this is done to develop a project that is larger than the size of the property before the assembly. Parceled land sells at a higher price than if selling it in pieces to individual buyers, as this opens the market for large real estate developers to purchase the assembly.

If you’re looking to develop a land assembly, it’s important to note as much information as possible about the land and what is permitted in the Official Community Plan for the neighborhood. Considerations include how much land is being assembled, how challenging it will be to acquire the smaller pieces of land, what you’re aiming to develop, and the time frame for your proposed development.

To secure financing for your project, whether that be through Finpedient’s network or traditional lending sources, you’ll have to conduct appropriate market research, figure out how to market the development, find the partners you’ll be working with to get the project done and convince the individual land buyers to sell their parcels. This is a legally sensitive initiative, so it might make sense to have a lawyer on retainer for the services. These are complex documents, and the lawyer has to take the time to read and understand them to properly advise you.

There are ways to move forward with the development without outright purchasing the land through the use of “subject conditions,” which are terms that make the contract binding with the owner of the area you intend to buy only when they are removed. This is standard protocol for savvy real estate developers, allowing them to tie up property so they can’t sell to another party.

1. Property Zoning and the Official Community Plan

Another important aspect to this is Property Zoning, which is why every development on Finpedient’s network has the zoning and official community plan built into the software. If your plan for the development complies with the municipality’s OCP, it can help you significantly along the journey to breaking ground. In the next three years, more than 1,000,000 people will immigrate to Canada, so residential opportunities will be aplenty.

 2. Deep Pockets May Not Be Necessary with the Right Investors

It’s evident that vacant land equates to no income, and that if the property brings in no revenue, the bank is unlikely to finance your purchase.

This means that it’s an excellent opportunity for you to leverage real estate investors in the area by listing your proposed real estate development on Finpedient.

Depending on how the negotiations go, you may be able to put very little money down, but secure financing with the sellers at a palatable interest rate.

3. Vendor Take Back (VTB) Mortgage 

If the sellers are willing to take on vendor take-back mortgage, the capital gain can be potentially deferred over five years, instead of one single year.

Vendor take-back mortgage means the seller becomes the lender. The seller will lend the buyer money to go towards the purchase of a home, and the buyer then repays the seller over time with an agreed-upon interest rate that’s generally higher than their standard mortgage rate but lower than borrowing with a private lender. This can only occur if the seller owns the property outright.

The sellers may get tax benefits if they finance your purchase for you. In addition to that, they may get some interest income along the way.

4. Terms of VTB Mortgage Vary

After educating the sellers on the tax benefits involved with financing your deal, you may negotiate with them on the actual conditions. The terms and rates are dependent on the sales price as well.

The longer the term, the more risk the seller would have to bear and thus the higher the interest rate. The more the down payment, the more security the seller has and the lower the interest rate.

5. Be Prepared for a Long Negotiation Period

Negotiations can be long and tough. Sometimes it can range from a couple of weeks to 6 months.

Many sellers aren’t aware of the tax benefits of doing vendor take-back mortgage, and educating them the benefits can be time-consuming.

In addition to that, vendor take-back mortgage terms can vary from deal to deal. Changes to the interest rate or terms of the agreement can affect the ultimate profit substantially.

All these take time to sort through.

Be prepared to have a lengthy negotiation period when you are getting yourself into land development.

6. Return on Investment can be Lucrative

Because of the possibility of vendor take-back mortgage, it may mean that a land developer can put in very little money at the beginning.

When the land is developed, you can work with a builder to build all the houses/condos, or whatever you intend to have built for you.

7. Know Your Numbers and Structure your Deal Properly

Make sure you have a budget ahead of time. Be sure to do a sensitivity analysis to the best case scenario and the worst case scenario.

Land development is considered a business. If you own the land in your personal name at the beginning, it may cost you some significant tax costs when you decide to transfer it to a corporation.

Land development may take years to progress, so it’s essential you secure investments and funding for your real estate development projects – this is where Finpedient becomes a useful tool.