When you want to buy land for development, you should think of your offer as consisting of two parts. Buyers and sellers often focus only on the price part of the equation and ignore the one that’s just as important – terms. In fact, the terms and conditions that are included in the land development offer can be even more critical than price. Why is that?
There are several reasons. People buying land need to have contingencies built into their offers that allow them time to get certain things done. Land developers typically want the ability to walk away from a deal when they learn new “adverse” information or when something else happens that, in their opinion, lessens the viability of doing the deal. Terms and conditions in land development offers address the purchaser’s bottom-line concern: I want to be able to get out of this deal if I can’t do what I want with this property or if the deal no longer makes sense for me.
If you’ve read my previous article (“Due Diligence for Real Estate Investing: An Overview”), then you know that virtually everything land investors need to find out about a property has to be investigated because it isn’t readily apparent or visible. Doing or not doing the deal can depend on the facts uncovered by your investigation. As a result, due diligence plays a huge role in the land business. So how do you give yourself the right in the contract to get the necessary information?
Land development offers provide for an up-front period of time, often 45-90 days from when the contract was signed by both parties. During this due diligence or feasibility period, buyers can do whatever investigation and testing of the property they want at their own expense, such as verifying the zoning, obtaining site-specific information (topography, floodplain, soils, wetlands, boundaries, environmental contamination and utilities) and data relating to the area (plans for future development and growth or property values).
At the conclusion, the buyers can continue with the next phase of the transaction or terminate the contract and be refunded any down monies if they’ve learned something that negatively impacts the feasibility of the deal. The purpose of this up-front period is for the buyers to get the information necessary to determine if the property can be developed as they want. Even if the buyer’s offer doesn’t contain any other contingencies, it will provide for this feasibility period, and if you think about it, it doesn’t make any sense to buy land without knowing all of the material facts.
Other contingencies in the land development contract generally depend on the scenario contemplated by the buyer. For example, if the property is going to be subdivided, the contract might state that the purchase would be conditioned on the buyer getting a minimum number of lots approved by the municipality. Provisions for getting use approvals (such as a variance, special exception or conditional use) or an outright change of zoning classification would be included. Since the ability of the property to be served by public or private utilities may be important, the offer would contain language relating to getting the requisite utility approvals and permits.
Land development offers are not cookie cutter. They need to be customized to take into account the particular property and the buyer’s intended use. Accordingly, buyers don’t work with the forms customarily used in buying or selling houses. These forms simply wouldn’t be adequate for this type of real estate. Instead, developers employ attorneys to assist them in preparing the contract and modifying it as the situation warrants.
Land investors who want terms and conditions have to be prepared to pay a higher price for the property. Land owners who want to get the highest price for their properties need to be willing to give terms and to allow buyers the opportunity to work through reasonable contingencies. If they try to get buyers to purchase the land “as-is” (without any contingencies), they are likely to discover that there’s no market for their parcels, perhaps at any price. This doesn’t mean, however, that sellers should give buyers an open-ended contract (i.e., an unlimited amount of time to satisfy the contingencies). This is where land sellers would be very smart to retain a “real” real estate attorney to guide them in evaluating land development offers and whether particular contingencies (and time frames for satisfying them) are reasonable and realistic.
Source by Nancy Chadwick
