June 18, 2024


Mad about real estate

Rezone Property for Profit

Rezone a property and you can instantly make it more valuable. Of course, zoning is not your decision, and there is no guarantee that you can get a property rezoned. There are some ways to make it more likely, however.

Rezoning can instantly increase or decrease the value of a property. The value of real estate is not determined just by where it is located and what is on it, after all. It is also a matter of what the owner can legally do with the property. For example, I have even seen small lots in mobile home subdivisions sell for more than bigger pieces of land nearby, just because there were so few places where the zoning allowed mobile homes.

A house on a small lot might be worth $90,000 if it can only be used as a rental or as an owner-residence. But that same piece of land might be worth $150,000 after the house is torn down – if it is zoned to allow a store in its place.

The idea, then, is to buy a property, and request a new zoning designation which makes it more valuable. If you can get the zoning changed, you can then resell the property for a profit. And if that sounds too easy, you are right. It takes some work.

Start by finding properties that are on the edge of better zoning, or even mixed in with properties that have a more valuable zoning. Often an area’s zoning is changed by the authorities over time, but they don’t change the designation for all the properties. Since a property zoned residential in the middle of a business zone doesn’t make sense, getting it rezoned may involve simply asking.

The primary problem with this strategy is that there really is no guarantee that you can convince the zoning officials to zone your property the way that you want. And if you get the property zoned before you have an accepted offer, the seller will realize that the value has increased and ask more for the property. So how do you avoid the risk of buying a property that is worth exactly what you paid for it?

Do your homework, for starters. Look at the city’s master plan, to see what they expect the city to look like in the future. If the zoning you want is in line with their plan, they usually won’t refuse your request once you point that out.

Don’t expect to get a home in the middle of a single-family home subdivision rezoned for a duplex or a business. You are looking for properties which you can reasonably argue should be zoned the way you want. Other properties adjoining it should already have the zoning you want, and you are more likely to succeed if properties on two sides or more are zoned the way you want.

Another thing to watch for is what has happened with other property owner’s requests. If the local authorities have been systematically approving zoning-change requests on a given street, buy a cheap property there and get in line.

Of course, you also have to look at how much of an increase in value you’ll get with the zoning change, and how much it will cost for the whole project. A property with a ragged old house might be worth $50,000 more once it is zoned commercial, but what if it will cost $45,000 to buy it, get it rezoned, pay the holding costs, tear the house down, and sell it? I wouldn’t even consider doing a project on that narrow of a profit margin.

There are other possibilities that don’t involve selling right away, of course. If an area is changing, becoming more commercial, you might buy a little rental home that at least covers your costs every month, just to be ready when the zoning changes in a few years and the property values soar. You might also get zoning that allows you to convert a home into offices for attorneys or other professionals, and so get higher rent than from a residence.

To just buy with the expectation of getting a property rezoned is speculative to some extent. To reduce the risk, at least buy at a good price based on the current use and zoning designation. That way, if your plan falls through and you have to sell for close to what you paid, you’ll only lose your transaction costs.