Future Home Builders
Attempt to 'Bank Land'

June 26, 2003 -- Samuel Hopkins knew that he wanted to retire to the rustic, rolling hills of Pennsylvania one day. But he was far from ready to quit his telecom-technology job and begin construction on his dream home.

As the housing market heated up, however, and new construction started creeping all over the once-idyllic region, he began to worry that there wouldn't be any land left for him. So he decided to buy vacant land now, and build later.

"My plans were to buy a large parcel of land and slowly get it into shape for a home," says Mr. Hopkins, now 29. "I wasn't ready to go totally country, but I figured [I'd be ready] in four to five years." He bought a large parcel of land three years ago near Pittsburgh, Pa., from a coworker.

It seemed like a smart move, and probably was. But there have been surprises along the way, including a strange insurance quirk that essentially required Mr. Hopkins -- who was renting at the time -- to purchase a motor home so he could get homeowner's insurance for his property.

"What the insurance company said was, 'If God didn't put it there, the land isn't vacant,' " he says. "So I ended up having to spend a lot of additional money I hadn't counted on to make sure the property" had something insurable on it.

Banking land is sounding like an attractive proposition these days, especially after a three-year bear market in stocks. What better way to plan for your retirement than to buy retirement property?

But as Mr. Hopkins and others have learned, buying vacant land with an eye toward future building can be fraught with unexpected costs and consequences. From choosing the property to insuring it to paying for it, land buyers need to do more legwork than typical homebuyers.

Major considerations fall into three general categories: geographic, environmental and financial. Here's an overview of the benefits, and what to do to help make sure it works out for you.

Why Buy Now?

Worried about the combination of a shrinking supply of buildable land, and the seemingly endless juggernaut of residential and commercial construction, many homeowners question whether their dream retirement homes will be there when they're ready for them, says Alan Fields, co-author of "Your New Home." Like Mr. Hopkins, more people instead are choosing to buy now.

"As buildable lots become increasingly rare, more and more people are telling me they've decided to buy a piece of land with a plan for building five to 10 years out, on the theory that there won't be that much land left," he says.

The concern is understandable. The land available for home building has grown scarce. Builders already have gobbled up many of the most desirable parcels and have bid up the prices of remaining land close to urban areas. A backlash against builders by city councils and neighborhood groups -- fueled by concerns about rapid development -- has further cut down on the amount of buildable land.

All of which makes buying far in advance -- to avoid an even tighter real-estate market in the future -- a viable option. But that doesn't mean it's easy.

Learn Your Geography. Banking land has one inherent risk: time. Today's pristine waterfront property may one day to fall victim to federal wetlands regulations. The state's 10-year plan to build a four-lane highway may disrupt what is now a tranquil wooded setting.

So shop first with your head, and then your heart. After you've decided on your region of choice, don't pile into the car and go vacant-lot shopping. Instead, head to the county or municipality offices and ask to see the region's long-range land-use plan, says author Mr. Fields. "Look for lots that are zoned for residential use near green spaces -- parks and other state-owned land -- and avoid areas zoned for business or commercial use," he says. "Then check to see whether there are any planned improvements to public roads that may impact you in the future."

Next you need to find out what type of property you're looking at: It is a subdivision or unclaimed space? If it's a subdivision -- large chunks of real estate that have been divided into smaller residential lots by land developers -- you may face restrictions on what you can build in the future. Municipalities typically have their own rules and restrictions (how high your fence can be, how large a home you can build). But subdivisions often set limits that can affect your quality of life (Is it an age-restricted community, where visiting grandchildren won't be welcome?).

If you're the nonconformist type, a more attractive option might be a vacant lot, where a previous residential structure has been torn down or removed, or land outside existing residential boundaries that has yet to be developed. Both are becoming rare, so it makes sense to work with a real-estate broker in the area in which you plan to build who specializes in land purchases.

Become an Environmentalist. Buying land in the "exurbs" -- land even further from major cities than the suburbs -- can raise environmental issues, Mr. Fields says. "Former farmlands may involve pesticides, or contaminated water may have seeped into the groundwater," he says. Urban and even suburban properties also may hold potential environmental dangers, particularly if the property or nearby properties were once used for industrial or business structures and later reclaimed for residential use.

"When you buy a new home, the developer or builder has incurred much of the costs of making sure the property is suitable," says Dennis Smith, president of housing-information provider Home Builders Research Inc. in Las Vegas. "With vacant-land purchases, it's up to you make sure the property is suitable for living."

Mr. Fields recommends that potential land owners have geographical and environmental surveys performed on the soil and groundwater, to ensure the land is free of contaminants.

Unclaimed or unrecorded lots, usually found in the exurbs, hold their own concerns, says Cynthia Kroll, senior regional economist at the Fisher Center for Real Estate and Urban Economics at Berkeley, Calif. "If you're building in an area where paved roads and services like water, electricity and sewerage are already provided it can be easier and less expensive than buying a lot where it's not," she says. Indeed, she says, if you're the first person in your new "neighborhood," you'll foot a large part of the bill for other home builders who will eventually follow.

Email your comments to rjeditor@dowjones.com.