Can Investors Afford
A Real-Estate Gamble?

Question: On a recent business trip to Arizona, I saw a flier for a company that sells 40-acre plots of land for between $600 and $1,000 per acre. Though the site provides magnificent views, the area is mountainous and largely undeveloped. The plots for sale are all developable, but the area is fairly desolate and the land is about 15 miles from the nearest town.

The broker told me that the first phase of sales went fairly quickly, though there is little evidence that anyone did much with their land, other than a few small homes that dot the area. There is very little in the way of infrastructure. Water has to be dug (there is no promise that water will be found) and the existing houses are solar-powered. Another broker told me that an investor has purchased a huge tract of land to build a retirement community about a mile from the plots in question, and this project is scheduled to be completed in five years.

I know that investors generally should avoid buying homes in distant locations because of the maintenance issues that inevitably come up, but I imagine the rule doesn't apply in this case because the plots are undeveloped. The financing rate offered by the owner is very high (10%) but depending on how much I put down, I may be able to have it reduced to about 8%. What do you think about this and similar deals that seem to be sprouting up all over northern Arizona and Nevada?

-- Jonathan, Los Angeles

Jonathan: There is no more speculative real-estate investment than buying bare land. The reason is obvious: All the potential use of the property is in the future. Unless there are some mineral or water rights, there usually is no way to use such properties to generate income in their present state.

Most people speculate in bare land hoping to buy low and, in fairly short order, resell high. But this usually occurs only when there is some new development coming along. For example, worthless land in the desert might suddenly become prized -- if a new state water-development project were to arrive. Or virtually worthless mountain land might suddenly become highly valuable -- if a new ski resort and road were built. But beware of talk about these kinds of projects, which often is followed by little action. There may be dozens of projects in the works in wilderness areas, but only a few ever come to fruition. In addition, the value of a piece of bare land often is determined by how developable it really is. If there's no electricity, water, sewer, phone or even paved-road access, it is essentially not developable except by extreme measures.

If you have some gambling money that you can afford to leave unused for years, consider speculating in bare land. Pay cash for the parcel, pay the taxes and any upkeep, and let the land sit. Who knows? Five or 10 years down the road, your investment may pay off like a lottery ticket! But I don't believe in buying bare land if you need to make monthly payments. This investment structure anticipates a return in a reasonable amount of time -- something you can't count on with bare land.

-- Mr. Irwin has more than 25 years' experience as a Los Angeles-area real-estate broker. He is the author of more than two dozen books about real estate and is recognized as one of the most knowledgeable writers in the real-estate field. Mr. Irwin's most recent book is "Tips and Traps When Renovating Your Home," (McGraw-Hill, 2000).

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