Extracting Resources from Real Estate
(An excerpt from 69
Ways To Make Money In Real Estate)
By Steve Gillman - 2006
If done right, this is a predictable way to make money.
It may take some time.
Land often has trees, rocks, clay, gravel, or other things
of value that come with it. The value of these things is not
always recognized in the price, however. Often the land is priced
on;y according to its primary use, as in the following example.
A friend of mine bought a house with a small piece of land.
He thought the wooded part was too thick, so he called a lumber
company. They came and cut half the trees. No charge for this.
In fact, they paid him $4,500. When they had finished cutting,
I couldn't see the difference. The property was residential,
and worth just as much the day after the cut as the day before.
Now, of course, buying land just to make $4,500 and then reselling
it doesn't work because the numbers are to small. You have to
overcome the transaction costs of buying and selling. However,
what if the land was larger and there were $30,000 worth of trees?
That might be worth doing.
It isn't just trees either. I knew a man who sold gravel from
a hill on his small property for years. I don't know how much
he was paid, but he was paying off his land contract early he
said. Of course, it was probably against the terms of the contract
to remove resources before paying in full, but if the money goes
to pay the seller his money, he would probably agree.
To do this more systematically, find out what the resources
are worth before you buy the land. Also find out how long it
will take, because you will have carrying costs. Depending on
where the property is located and what it has, you might be able
to sell trees, clay, gravel, special rocks used for landscaping,
or sand. Make calls and get quotes.
The safest way to do this is to make an offer with a contingency
that allows you to cancel the contract if the quotes come in
too low. The reason to make the offer first? So the seller doesn't
take your idea and run with it. If you have no contract, and
he talks to the timber inspector looking at his trees, he might
just cut them himself.
Removing some resources will lower the value of the land.
A hill torn open to get at the gravel isn't a pretty sight. Make
sure you know how the resource extraction will change the land,
and what this is likely to do to the price.
The whole formula? Add the projected sales price when done
to the projected income from the resources extracted. From this
subtract the purchase price and all other costs of buying, selling
and holding the property. What remains is your potential profit.
If it is worth it to you, proceed.
If you found this useful or interesting, please share: