Buying Land in Canada - The Ultimate Guide
Investing in land comes with its perks as well as its quirks. Is it right for you? Is it all it's made out to be? We take a stab at this age-old investment vehicle.
Here's the reality: land is perhaps the most misunderstood investment vehicle in real estate today.
Because it is misunderstood, it is often overlooked as a tool to generate an attractive ROI. That doesn't change the fact that owning the right piece of land at the right time makes every other type of real estate investment pale in comparison.
But here's the catch - hiding beneath the surface of any land transaction are a host of potential issues which could seriously damage the return prospects of the property.
Do your due diligence to uncover these before you already own the property and you're well on your way to owning an asset with rock bottom carrying costs and sustained appreciation over time. Fail to do your homework, and you might as well have purchased a parcel of land on the moon.
The purpose of this guide is to take you from start to finish in your land acquisition journey. From finding listings, picking up on potential issues and carrying out other due diligence, estimating the value of a property, and finally picking a way to get a return on your investment.
The Primary Benefits of Land Ownership
Chances are you've heard the evergreen parental advice to, "buy land. they ain't making any more of it." Today 'real estate investment' conjures an image of rental properties and commercial assets but raw land continues to be one of the greatest opportunities.
Landowners experience peace of mind because it is a long-term asset that doesn't degenerate or wear out over time. Add to that the fact that you don't need to brace for anything to get stolen or damaged.
In stark contrast to owning residential assets for rental income, land allows you to be completely hands-off without needing to spend on property management and as a result, sustain low maintenance costs over the course of your ownership.
3 Ways to Find Opportunities
Now that you've decided that you want to be a landowner, where should you begin your search?
Realtor.ca is the authority on public listings from certified REALTORS®in Canada. You can expect the details shared to adhere to a strict code of ethics. View all vacant land listings in Canada here.
Zonado is Canada's hub for commercial real estate opportunities. Listings here are also posted by Canadian REALTORS® as well as property owners and also include listings which are being sold exclusively - meaning those which you will not find on open platform such as Realtor.ca.
3) Kijiji, Facebook Marketplace and other Classifieds
Land owners and REALTORS® alike will often place classified ads for land they are looking to sell on classifieds sites. It is helpful to include these sites in your search. It is likely that you'll find far less opportunities and less information than on other sites. However, this medium should be used in addition to dedicated platforms.
The least conventional method is to send out mailers to landowners in a particular area that you are interested in. As the saying goes - everything is on sale for the right price.
Because most landowners are absentee investors and do not have an overly strong emotional connection to their property, they will consider selling if you make a convincing offer.
This approach works best if you're interested in specific regions, neighbourhoods, or find certain characteristics in a piece of land that are hard to find on the market.
Once you have narrowed your search and have shortlisted a few listings which are within your budget, you will want to ask yourself the following questions to ensure that you don't make a bad investment.
1) Economics 101: Opportunity Cost of Capital
When you choose to lock up your capital in land, you pay the opportunity cost of not being able to invest it elsewhere - especially in another form of investment which might be able to generate returns relatively quickly.
If the intention behind your purchase of vacant land is a Straight Sale then the appreciation in value must cover the property taxes, other costs you incurred over the course of ownership, as well as the opportunity cost you incurred by not parking your capital elsewhere.
The past century of performance data indicates that a well balanced portfolio of stocks will yield a 10% annual return, for example. The advent of ETFs allows everyday investors to hold diversified portfolios which means that generating these returns is well within the reach of the common individual. It is critical to analyze how these returns would stack up in comparison to the parcel of land in question?
2) Being Stuck with Undevelopable Land
The real identifier of land value is its highest and best use. This is the use of the property that would be legally permissible, financially feasible, physically possible, and maximally productive. The search for finding the highest and best use usually begins by evaluating zoning restrictions. Zoning restrictions are bylaws set out by every community which dictate the following:
How land may be used
Where buildings and other structures can be located
The types of buildings that are permitted and how they may be used
The lot sizes and dimensions, parking requirements, building heights and setbacks from the street
If you are unfamiliar with the zoning bylaws laid out for parcel of land in question, and fail to perform the due diligence to obtain this information, you could easily get stuck with land which is either severely restricted or just entirely undevelopable.
While there is much allure to property ownership, holding a piece of undevelopable land is a highly unproductive use of your dollars.
Luckily, there are tried and tested methods to test the usability of a piece of land. The following 10 checks should put you in a great spot to make a confident decision:
Telltale signs of undevelopable land to look out for
1) What are the zoning restrictions for the land?
When you're curious about a particular piece of land, start by calling your local zoning and planning department to inquire about the by-laws which apply to it.
It is important to note here that "B2: Commercial" might mean 2 very different things to different municipalities. So it is important to familiarize yourself with the code which applies to your specific property. It is a good idea to ask the planning office for examples of what would fall under a specific type of zoning. This might even give you ideas you hadn’t thought of for the highest and best use.
Because most zoning regulations come with conditional uses and special exceptions, it is important to browse the 'Master Use Plan' of the municipality in question. In a city like Toronto, this can be found here.
2) What is the topography of the land like?
Topography is typically not a concern if you are familiar and in close proximity to the land in question. However, this is often not the case for land owners.
If the piece of land you are evaluating is not within a drive-able distance from your location, you'll have to use alternate methods to account for any unexpected cliffs, valleys, ravines, etc.
Because topography hugely impacts the developability of land, it is worthwhile to use existing tools to gauge the features of the land in question. In Canada, you can make use of a tool like Toporama Mapping.
Start by pinpointing a location using the map (or an address) and quickly learn information about elevation, water flow, as well as view satellite imagery. You can also quickly download maps and other relevant information.
Because this tool is provided by the Government of Canada, you can count on its accuracy.
3) Is there access to all public utilities?
Water, sewer, electric, gas, phone, etc. are utilities that we take for granted in urban areas but aren't guaranteed in more remote parts of the country.
A lack of access to such utilities quickly removes certain property types from the equation. For example, constructing a house on a piece of land with no access to water won't be feasible.
In areas where water utilities are restricted, alternatives such as a septic system, well water, solar energy, propane tanks, etc. can be explored. Having said that, it is still ideal to be fully aware of these restrictions prior to entering into a deal.
As a rule of thumb, anything that may potentially get in the way of building on the property will erode the property's value and any such hindrances need to be accounted for when calculating the fair price for a piece of land.
4) What are the required building setbacks?
Setbacks are the minimum required distances from the property/lot line to the building wall. These distances are set out in the zoning bylaws for different areas of the city.
Typically, setback distances for the rear yard, side yard, as well as front yard are pre-defined.
Once again, this is information you can collect by calling the local planning department. The key determination to make here is if, compared to the size of the property, the setbacks will leave enough space for your intended use of the property.
A setback which doesn't leave sufficient space for the actual property will harm the value of the property.
5) Is the property in a recognized flood zone?
Parcels of land which are close to bodies of water can be at a high risk for flooding. From a financial standpoint, properties which are in flood zones will typically be far more expensive to insure.
While this increased cost could be offset by the fact that land close to a body of water is generally perceived as more desirable, it is important to be fully aware of the risks.
Start by viewing flood maps for Canada's provinces to determine whether the property in question falls within any of them.
6) Will a soil percolation evaluation test be needed?
A soil percolation test ('Perk test') determines how quickly water drains through the soil.
This test is particularly important in rural areas where access to the city's sewer system isn't available. In order for a septic tank system to be functional, the soil needs to be sufficiently permeable to allow the effluent discharge from the septic tank to be absorbed by the ground.
If the liquid effluent does not drain into the ground, untreated effluent may back up and pool on the surface. On the other hand, the site can also fail the test if the soil is too permeable as it will allow the effluent to reach the groundwater before it is fully treated.
Very steep slopes are also unsuitable for standard gravity-fed septic tank installations.
7) Is there public road access to the property or is it landlocked?
There are still properties in Canada which are either landlocked or just can't be accessed via a road.
In the case of a property being landlocked, it is worthwhile to investigate whether there is any way to access the property without having to trespass over the other private land.
If trespassing is the only way to access the land, it will likely be a futile asset. The only way out in such a case would be to seek an easement from a neighboring property.
An easement will allow you to cross over a neighboring property in order to enter and exit public roads. This kind of easement is also known as a right-of-way or an easement of necessity.
It is quite possible that your neighbour may demand some sort of compensation in order to allow an easement.
8) What is the size and shape of the parcel?
Even if all of the above hurdles are not present, a property could be useless based on its shape alone. Highly irregular shapes (think, extremely long and narrow parcels of land) do not easily lend themselves to commercial or residential applications.
A tool like Google Earth may not go far enough to help you make such a determination. As a result, ordering a land survey or buying a property report from a site like GeoWarehouse could be your best option.
9) Are there wetlands on or close to the property?
Wetlands are a protected natural asset of Canada. They take the forms of marshes, bogs, swamps and open water and each type helps to keep communities healthy and safe.
Up to 70% of Canadian wetlands have already been destroyed or degraded in settled areas. As a result, laws severely restrict what can be done on the land which is near or on these wetlands.
It is straightforward to find qualified wetlands evaluators who operate in your region through a web search. In Ontario, an up-to-date list can be found here. These evaluators should be able to conduct wetland identification on-site.
It is worthwhile to note that a process like this could be rather time-consuming and even more difficult when the horizon for the transaction is short and the deal needs to be closed quickly.
10) Are there any contaminants on the land?
Messes such as junk, tires, oil, rubble, or other contaminants can be expensive to clean up on the property.
The best way to inherit any such surprises, naturally, is to tour the property in person. We acknowledge that is not always an option in situations when the property in question is very remote or distant from you.
This is where services like WeGoLook could come to your aid. WeGoLook deploys an Uber-style approach of having 'lookers' throughout the country who can visit the site in question and take photos.
WeGoLook entered the Canadian market in 2019 and is primarily used for insurance underwriters to verify claims.
Another alternative is to post an ad on a classifieds site like Kijiji to have a photographer in the area visit the site and take photos. Finally, it is always a great idea to contact a REALTOR® in the area and request them to visit the property on your behalf.
Agents are usually happy to help active buyers in the market.
TL;DR for potential issues
While it isn't common for the issues outlined above to present a challenge in most land transactions, they need to be looked into nonetheless.
A good question to usually ask when evaluating a land opportunity is to wonder why the land is vacant to begin with? You want your due diligence to conclude that the reason for this is not that doing much of anything with the land will be a challenge.
Property ownership is a goal many aspire to and the low maintenance costs of owning land can also be especially alluring. However, it is wise to hold fast to Warren Buffet's golden rule of only investing in things which you understand.
Once you've narrowed your search down to a few opportunities, it is time to calculate a fair value for the property.
Evaluating an Opportunity
Most methods which are usually used for valuation in commercial real estate do not necessarily apply to land.
Traditionally, a property may be valued based on one of 3 approaches:
1) The Income Approach
If asset XYZ earns $100,000 a year in profits, its value is roughly X times $100,000 based on the multiple at which neighbouring properties or properties of this nature sell. This calculation method is sometimes also referred to as the CAP rate. If an owner demands $1 Million for a property earning $100,000 in profits a year, the owner is calculating the value of the property based on a 10% cap rate.
Unless the land is being leased to farmers or hunters, the income approach will not apply to land.
2) The Cost Approach
Similar to the income approach, the cost approach is a real estate valuation method that estimates the price a buyer should pay for a piece of property based on the rough sum it would cost to construct an equivalent building. In the cost approach, the property's value is equal to the cost of land, plus total costs of construction, less depreciation.
Similarly to the income approach, by nature of being a vacant lot, the land has no set costs to pay and therefore does not apply.
3) The Sales Comparison Approach
The sales comparison approach may still be used, but that is only if there are sufficient comparables in the neighbouring area. More often than not, such comparables are sparse and certainly not as abundant as comparables for commercial properties, or far less - residential properties.
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Congratulations - you're now a land owner! Let's start to think about how you might monetize this asset. There are 3 primary methods:
Land investing basics
The most important element of evaluating a land deal is to perform due diligence which informs you to value the property realistically, time the purchase correctly, and in some cases to know when it is time to walk away from a deal altogether.
There are 3 primary methods of monetizing vacant developable land in Canada:
Straight sale of Developable land
1) Straight Sale of Developable Land
This is the most basic way to get a return on your investment. Purchase, hold for a period of time, then list and sell for a profit.
A deal like this will usually begin by an interested party submitting an LOI - a Letter of Intent. This is a non-binding, unenforceable agreement which marks the beginning of negotiations between the buyer and seller.
Some of the details you can expect to find in an LOI might include:
Purchase price offered
Amount of the good faith deposit
Length of the due diligence period requested by the buyer
Date proposed for the closing
Any other buyer-specific issues which are important
Because the LOI doesn't bind the 2 parties, either of them are able to walk away from the deal without any liability.
What's great about a straight sale?
As an owner of the land, this is the most expedited way to see a return on your investment and instant liquidity. These deals are not overly complex and working with the right agent can make them relatively smooth.
What isn't so great about a straight sale?
By liquidating undeveloped land, you will certainly miss out on what the land could have been worth, had you gone through the trouble of trying to develop it into an income-generating property. The price you pay for speed and liquidity in the short term are much greater returns in the longer term.
2) Option Agreement
Under an option agreement, the owner of the property receives an upfront payment for the property in exchange for agreeing to sell the property at a later date for a set price. In this way, they operate very similarly to stock options.
This is a transaction method which land developers will often opt for since it allows them to tie up a prospective property for a relatively low investment while they set out trying to obtain the necessary approvals which they will need for development once the purchase goes through.
Setting up a deal in this way has its own benefits and drawbacks.
The great news is that if the developer chooses to back out of the agreement, the upfront payment is yours to keep - think of it like a fee for reserving the developer's spot in the line while others waited. In this way, you are able to contain your risk to a certain degree.
The disadvantage of this approach is one that is shared by options and futures in all trading markets - by locking in a selling price ahead of time, you are betting on the fact that future prices will either be the same or lower than they currently are.
If the market goes through a major upswing between the time that you sign the option agreement and close the deal, you will have given up on a much greater return, had you not locked in the price in advance. On the flip side however, if the surrounding real estate market dips, you will have protected yourself from the downswing.
The speculative nature of this transaction set up must be accounted for prior to entering into an agreement. If you find yourself in a particularly volatile time in the market, an Option Agreement can relieve some of your stress.
This brings us to option #3 - which deals with turning the piece of land into its highest and best use while still maintaining your ownership of it.
3) Joint Venture
Under a joint venture, you as the owner of the property will enter into an agreement with a developer to jointly develop the property. The basic fundamentals of the deal are that the developer will offer his services and the finances necessary to obtain approvals and develop the property. Meanwhile, you bring the actual property to the table.
"Often, the developer funds all development expenses under such agreements."
Part of the deal is a clear agreement on how the income and profits from the venture will be shared by you and the developer.
A developer's primary priority in such a setup is to maintain control over the development process. Your priority, as the owner, is to have a high level of confidence in the developer's ability to develop the property to its highest potential.
In this case, the developer wins by avoiding a huge upfront investment (i.e. buying the property) and only invests what the building services actually cost. Additionally, the developer avoids risking losing a deposit in an option agreement if the necessary approvals aren't received.
If the project is completed successfully and the land is developed into a productive asset, you, the owner, will have extracted far more value from the property than you would have in a Straight Sale or Option Agreement. Additionally, by sharing profits with the developer - you give the developer skin in the game.
This significantly reduces your costs and risks had you hired the developer outright. The trade-off in this scenario is a degree of control that you will have to give up over the property and development.
While there are ways to mitigate the loss of control through negotiation, trust is what will ultimately create a successful joint venture.
Our hope is that this guide has added bits of knowledge to your arsenal to help you decide if a land investment is for you - and how to navigate one once you've decided that to be the case.
Harjaap Co-Founded Zonado in 2020 with the simple goal of helping fix the information asymmetry in Canada's commercial real estate market. He's passionate about building stunning user experiences, martial arts and fast cars.