Given its illiquidity, raw land isn't a place to make a quick buck. Nor do most parcels generate income during their holding periods (and if they are individually owned, they can even create negative cash flow thanks to ongoing property taxes). There's no depreciation allowed on raw land for federal income tax purposes, municipalities call the shots on a piece of land's ultimate fate, and environmental regulations can create major snags.

"I have no clients in raw land, nor can I think of a situation where I'd recommend it," says Jeffrey Voudrie, president of Legacy Planning Group Inc. in Johnson City, Tenn. "Raw land is speculative and it's very illiquid. You typically want some kind of exit strategy with an investment.

"Even direct-placement REITs that invest in office buildings have an exit strategy either by going public or selling the buildings," he adds. "You collect some income along the way with some type of future exit. Raw land can sit for years and never move."

And Voudrie doesn't buy the argument that investors should purchase raw land now in hopes of cashing in on the rebound. "The fallacy to that argument is that land prices will go back to where they were a few years ago," he says. "If land prices were artificially inflated due to cheap money on a speculative binge, I could easily posit that the chance of land values getting back to that level are small."

One advisor who currently has clients in raw land deals stresses the need for careful vetting. "The challenge with doing something like this is you're giving your client's money to someone outside the system, so to speak," says Michael Ling, founder of Berkeley Inc., an RIA in Boise, Idaho. "Where people get into trouble is when it's outside the system. So we investigate them very carefully."

Due Diligence
Legitimate players in this space say they welcome scrutiny from financial advisors. "All of the advisors we work with vet us carefully," says Martin Stever, the president of Pacific West Land LLC in Bainbridge Island, Wash. "They look at our track record and talk with people who've invested with us."

Pacific West Land has holdings valued at nearly $200 million in Arizona, Colorado, Nevada and Southern California. Its target market is accredited investors who want exposure to the residential and commercial development process.

"When people come to us it's typically because we're filling a niche for them and they want exposure to real estate," Stever says. "I believe a lot of advisors use us to provide their clients with something they can't pick up on E*Trade. Usually it's for clients for whom giving a long-term capital gain is important. We get people with high current income such as doctors, financial managers and the like. That's because almost all of our gains are long-term capital gains. And because they have high income, they can be patient."

Stever says the average holding period for investors in the company's roughly 100 projects has been around five and a half years. He notes that the cumulative gross internal rate of return (IRR) on its projects is more than 31%, and that investors have averaged 23% net IRR over the company's 28 years in business.

"I say you shouldn't try to put a client with us unless they're at least two times the threshold of normal accreditation," Stever says. "They should have at least $2 million in investable capital or a very high income because our investments are very illiquid and no one should overexpose themselves to an illiquid investment."