Transitional Land: Creating Housing for a Growing Population

Florida became the third most populous state in the country near the end of 2014, with an estimated population of 19.9 million. Growth is expected to continue; a University of Florida publication projected the state’s population growth will average 278,000 per year by the end of this decade.

New residents need housing provided by developers and builders. Private housing starts in Florida peaked at 272,000 units in Fiscal Year 2004-2005, according to Florida’s Office of Economic & Demographic Research. Though the office doesn’t project a return to record-level housing starts anytime soon, it reported that “the housing market continues to trudge forward.”

The majority of Florida’s new residential developments are on land that was previously in agricultural production, including citrus and cattle. CBC Saunders Real Estate sales associates David Hitchcock, ALC, CCIM, and Clay Taylor, ALC, call such properties “transitional land.” Transitional land usually is a parcel of from 10 to 300 acres near the edge of an existing city, which provides the utilities, retail stores, and other services that new residents need.

The majority of transition land is purchased by investors, developers or home builders. Investors often look to hold the land for 5 to 10 years. Developers might start developing the property more quickly by putting in roads, clubhouses, and other amenities. Homebuilders may seek finished lots, often from a developer.

Entitled Land and Finished Lots

Before any development begins, the land needs to be “entitled;” entitled land is raw land with all the approvals (zoning, permitting, etc.) needed to begin residential development. It can take two years or even longer to get land fully entitled. Sales contracts for transitional land almost always have a contingency clause negating the contract if the property can’t be fully entitled.

Finished lots are ready to build houses on; they are developed with roads and other amenities already in place.

Valuing Transitional Land

“Demand for this land follows population and jobs,” Hitchcock says; the closer the transition land is to population centers, the higher the price.

Taylor adds that the value of transitional land “ultimately goes to the price of the house that’s going to be built.” The purchaser adds up permitting and entitlement costs, infrastructure costs (roads, utilities, and amenities) and an expected profit; then deducts the total of those costs from the expected house price. “And that’s what you can pay for the land,” he says.

A rule of thumb is that the price of an improved lot will be about 20 percent of the house’s sale price. That would mean $40,000 could be paid for an improved lot on which a house is constructed for $200,000, with a total price of $240,000.