The market in the small rural town of Centerville has been very hot. Values are stabilizing but single-family residences remain scarce. A potential buyer inquires about the advisability of purchasing some out-of-town farmland to convert into single-family lots for sale to developers. He has noticed that several builders are already preparing for new subdivisions by preparing new lots. How could a broker best advise this potential buyer.

a) you should suggest to this potential buyer that your opportunity is perfect. The slowdown in the residential market will give you the opportunity to get lots ready and you can probably pre-sell some to builders and raise some cash. Since strong markets typically last a decade or more, you should get your financing organized and get started.

b) in a cycle like the one described, builders always play "follow the leader." Obviously, builders will sell their new homes quickly and a broker should encourage this potential buyer to move forward with his plan so that he can be ready to make a profit by providing the next round of lots.

c) You should warn that the current shortage will probably continue to raise prices and make the plan of potential buyers feasible. As prices rise, the price of surrounding land will drop due to the encroachment of suburban neighborhoods. Land is much cheaper than developed lots, so there is plenty of room for your profits. The broker can even encourage the buyer to make a profit by contributing part of the commission to the project.

d) You must warn this potential buyer that developing the land is risky and complex. It will take considerable time and money to produce satisfactory lots with zoning and other measures. The market shows signs of slowing down so the market is a risk. The buyer may be better off for another real estate investment opportunity