A Real Estate Investing Opportunity

Homes with extra lots may present a real estate investing opportunity. They may provide a way to reduce the cost of a rental home you want to buy, or just a way to make a profit buying and selling. Of course, this can be tricky if you don't know the rules.

Typically when a city was platted, the residents proceeded to build a home on each lot. Of course, some built on two lots. This is why even in regularly spaced homes there will often be house or two that has a larger yard than the rest. If these homes, along with their garages and other out-buildings sit properly on one of the two lots - meaning they are set far enough from the lot line to comply with city regulations - the extra lot can be sold.

Usually, even if the property has been combined into one tax parcel, you can split off the other lot, get a new tax number for it and sell it. Why is this significant? Because the value of the home on one lot plus the value of the other lot sold separately is often much higher in total than the house will originally cost with both lots.

I first heard about this idea from a real estate agent who had done this in a small town in Northern Michigan. He had noticed that many homes in one area had two lots, but the houses were sitting squarely on just one of them. The lots in that area could be sold for $45,000, yet the homes with the extra lots only sold for about $20,000 more. People will only pay just so much extra for what appears to be just a large yard.

The obvious plan for an investor was to buy the home, sell the lot and then sell the home -which is what he did. Of course a big chunk of that potential $25,000 profit was eaten up by the transaction and holding costs. Ideally, then, you want to combine this strategy with a low offer so you get the home for a little under market as well.

There is another way to use this strategy. If you were looking for a rental home as an investment, and homes with extra lots are similarly under-valued in your area, take a look! You might pay $20,000 more, but if you sell the lot for $45,000 and have just $5,000 in costs associated with doing that, you net $20,000.

This might be tough if you financed the deal, but the bank may allow you to sell the lot if the proceeds are applied to the mortgage loan. In that case, you lowered your cost for that rental home by $20,000 when compared to other homes. Refinance, and that could be enough to turn a negative cash flow rental into a positive one.

Apart from being a real estate investing opportunity, you could do this when you buy your own home as well. If you really don't want to mow a large lawn, buy a home with an extra lot and sell that lot. If you can get the seller to agree to selling it as two pieces of property, you could pay cash for the lot, and so be free to sell it without getting approval from your lender.