The most powerful tool in any negotiation is knowledge . I learned this decades ago in a course on negotiations, and it has proven true again and again over the years. The more information you have about a property before you make an offer the better. In addition to the physical characteristics of a land and its status under zoning, it is helpful to know why the owner is selling it now, what he paid for it, how long he has owned it. At the outset, it’s highly likely that the seller knows more about the land than you do, so do everything in your power to gather enough knowledge to level the negotiating table.
Put it in writing. Also remember to get any critical information in writing – from the seller, agent, or town official. In real estate transactions, verbal agreements or communications carry little weight. Nor do opinions, such as “I think you could probably subdivide the lot.” Make sure any important information that might affect the value of the land or your ability to use it as you desire is put in writing.
APPRAISALS: HOW MUCH IS IT WORTH?
If you’ve looked at enough pieces of land in the area, you will know if a piece of land is in the ballpark. Then you should make deductions for issues that detract from the property value – for example, proximity to a busy road or railroad track, building issues such as wet land or excessive ledge, or the need for an expensive alternative septic system.
If you’re not confident that you can fairly value the land, you can get an appraisal done by a licensed real estate appraiser, typically for $300 to $500. Real estate brokers will often do a free informal “market analysis” of your property if you are a seller. If you are working with a broker to sell your current property, they may provide the same service for you as a buyer – or if you are working with a buyer’s broker, he or she may offer this service.
There’s no guarantee that either a formal appraisal or informal market analysis will accurately pinpoint the actual sales price – it’s just an estimate of what a real estate professional thinks a property will sell for at that point in time. In slow markets, many properties sell for less than the appraised value; in heated up markets, they often sell for more.
However, an independent appraisal can help you decide if the asking price is reasonable and can also be used as bargaining tool. This is especially true if the formal appraisal price is well below the seller’s asking price. To avoid spending money on an appraisal before an offer is accepted, you can make an appraisal a contingency of the sale (see Contingencies below). If you are borrowing money, an appraisal will be required anyway, although appraisers working for the bank may come up with a different value than an appraiser working for you.
WHO WRITES THE BID OFFER AND P&S
If you’re experienced in real estate transactions, and in particular with purchasing vacant land, you may feel comfortable making an offer on your own or through a real estate agent. Otherwise, it’s a good idea to have a lawyer review your bid offer and P&S, or for a little more money, to have the lawyer draft his or her own bid offer.
Most buyers use the real estate agent’s Bid Offer form (also called an “Office to Purchase” and other things) to make an offer on a property and, if the offer is accepted, then use the agent’s Purchase-and-Sales (P&S) form to spell out all the terms of the sale. Remember that both forms are binding, legal documents. In some states, these forms can be combined into one form, locking you into a obligation to purchase under the seller’s terms in one swoop – generally not a good idea from the buyer’s perspective.
Also remember that however professional and friendly the real estate agent may be, the agent typically works for the seller and has a legal fiduciary obligation to act in the financial best interests of the seller.
After signing the P&S, the buyer typically hires an attorney to conduct or arrange for a title search and to handle the closing. On a piece of land with a lot of unanswered questions, I’d strongly suggest talking to a lawyer before making a bid.
HIRING A LAWYER
It’s wise to hire a real estate lawyer, with experience in land purchases, to assist with the title search and to represent you at the closing. However, an experienced real estate lawyer can be a lot more valuable before you make an offer. In particular, a lawyer can help you structure the offer with the right contingencies, and proper escrow arrangement, to protect you and your earnest money if, upon closer inspection, the property doesn’t meet your needs. An experienced real estate lawyer will also be able to advise you about any clouds on the title, deed restrictions, or zoning issues that may affect your ability to develop the land as planned.
Earnest money is a small amount of money put into escrow that signals to the seller that you are making a serious offer. The seller has the right to keep the money if you decide to walk away from the deal for a reason not covered in the contract – like you find a better property or just have a change of heart. (If you have a valid reason for back out and the seller is a decent person, he may refund your earnest money anyway, so it’s definitely worth asking).
The escrow amount is up to you, but often ranges from $500 to $1,000, and shouldn’t exceed 1% of the value of the property. A higher amount signals that your offer is serious, but puts you at greater risk of losing the money if the deal falters and the seller claims that you have broken the contract. Having the right contingencies written into your bid (see below) helps protect you from disputes over earnest money.
ADD CONTINGENCIES TO THE BID OFFER
When you make an offer, you will probably still have some unanswered questions about the land and whether it can be used the way you envision. You won’t want to invest the time and money required to get all the answers until your offer is accepted. The best way to make sure that no unpleasant surprises await you after the sale is to make your offer contingent on satisfactory answers to your questions. If you don’t get the right answers, the contract is void, and you can back out of the deal with your earnest money.
From the sellers perspective, a clean, cash offer with no contingencies for financing or anything else is ideal. You give them the money, they hand over the title. From a buyer’s perspective, this is far too risky. Of course, too many open-ended contingencies or anything that costs the seller money, will make your offer unattractive to the seller. For that reason most contingencies are pretty specific and require you, the buyer, to foot the bill for any testing or inspections.
Study period. Every offer to purchase real estate should include a period of time for the buyer to inspect the property in detail and bring in any consultants, as needed. This is referred to as a “study period,” “feasibility period,” or “due diligence period”. Naturally the seller (and the seller’s agent) wants this time to be as brief as possible and the buyer wants sufficient time to inspect the property.
Make sure the study period does not start until you have a binding signed offer, rather than just a letter of intent which is non-binding. You don’t want to waste time and money inspecting a property that can be sold to someone else. Also be wary if you are pressured to accept a two-week study period.
Also, make sure you have enough time to do the required inspections — 30 days at a minimum for vacant land. There has been a trend over the years to speed up transactions and shorten the due-diligence period, which is great for sellers but risky for buyers. Since raw land is much more difficult to evaluate than an existing home, you will need more time. Make it clear in the contract that inspection reports must be satisfactory to the Buyer “at Buyer’s sole and absolute discretion.” Consult with a lawyer about the specific language to use.
For a developed lot in a subdivision with all utilities in place, two weeks could be sufficient. If there are special problems that require design approval, a survey, engineer’s report, or other consultants, negotiate for the extra time needed ranging from 30 to 90 days or more.
Have an escape hatch. In my experience, it’s very useful to have at least one broad contingency that provides an easy“out” in case you discover something unexpected or have a change of heart for whatever reason. In a house purchase, this might be “Results of all home inspections shall be satisfactory to the Buyer at Buyer’s sole and absolute discretion.” On a piece of land, it might read, “Results of all land inspections shall to satisfactory to the Buyer at Buyer’s sole discretion.” Check with your lawyer about the specific language you should use in your state.
Only these same lines, if you are borrowing money, your financing contingency should state something like “Buyer is to obtain financing by [date] at terms acceptable to the buyer at buyer’s sole discretion.”
Twice I had my earnest money returned on offers to buy vacant land under these type so contingencies: On one, an engineer said that the private access road was being poorly built and would probably be flooded every spring. On another my proposed house plan was rejected by the original developer who retained full discretion to approve all house designs. He thought mine was too small, even though it complied with written HOA guidelines. In each case I backed out and walked away with my earnest money.
TYPES OF CONTINGENCIES
Contingencies on buying land typically have a time limit and expire if the buyer fails to do his part. Contingencies can also be written so they require the seller to fix a problem within a fixed period of time, but I generally avoid this type as you have little control over their interpretation of the contingency or whether they meet it to your satisfaction. That puts you at risk of losing your earnest money if the seller claims they have met your contingency and you think otherwise.
Contingencies can be pretty general or very specific: for example, a well drilling contingency might state that “Driller to find potable water of at least 5 gpm and at 300 feet or less” or it could read “Driller to find well water at a depth, flow rate, and quality satisfactory to the buyer.” As stated above, make at least one contingency an escape hatch that is general enough that, in the event that you want to back out for any reason, you can do so without a fight over the earnest money.
Contingencies will vary depending on the specific site and how much you know prior to the bid. They should be written or reviewed by a lawyer to make sure that they accomplish their intended purpose. Typical contingencies for land purchases include:
- That the buyer can obtaining suitable financing — typically within 30 days, or longer if you are using a construction loan to finance both the land and construction.
- That the lot appraise at the purchase price (if you are buying cash)
- The ability to pass a perc test and/or obtain permits for a septic system (you may specify that it must be a conventional vs. a more expensive “alternative” system.)
- The ability to find sufficient supply of well water that meets local health standards for potable water quality
- Obtaining an adequate deeded right-of-way to access the property
- A survey be completed to show that the marked boundaries are accurate
- That the design review committee approve your house design
- That the buyer can obtain approval to subdivide the land
- That the zoning regulations are acceptable to the buyer or that the variances are granted to use the land as planned
- That the buyer is issued a building permit
Broad guarantees. What, exactly, a seller is required to disclose to the buyer varies from state to state (see Disclosure of Defects). Just in case you missed anything, many bid offers contain broad guarantees that there are no material problems with the land or title. For example:
Seller warrants that he has disclosed all material defects in the land or title that he is aware of that might affect the Buyers use, enjoyment, and ownership of the property, free and clear of any encumbrances. Such warranty shall survive the closing by 12 months.
IMPORTANT DISCLAIMER: I am not a lawyer and am not dispensing legal information. Review all legal issues with a lawyer before proceeding. These are general suggestions based on my personal experience and should be reviewed by a lawyer licensed in your state before proceeding.
“Clear title” is a phrase that means that the seller has the legal right to sell you the property, that it is free of encumbrances, such as liens or other financial or ownership claims, and that after the sale, you actually own the property. Your lawyer will conduct or make arrangements for a title search before closing to make sure there are no problems with the title. A thorough search should turn up any defects, but land records (and the people who search them) are not always perfect. If you buy a property with a “cloud” on the title, you could end up with big headaches and legal expenses, especially when you go to sell the property.
If you are not using a lawyer for whatever reason, then you’ll need to find a title company to conduct the title search. Your real estate agent can probably give you some names. In addition to conducting the title search, the title company will also provide you with standard forms for purchasing real estate, and will make sure the deed is properly recorded after the closing.
Title Insurance. If you are borrowing money, the lender will require you to buy lender’s title insurance at closing. This protects the lender against most financial losses that are caused by past title problems discovered after the sale, such as liens, fraud, or long-lost relatives who claim ownership in the property. You, as the buyer can also purchase buyer’s title insurance, giving you the same or greater protection – although buyer’s policies are usually more expensive than lenders’ policies. The good news is that title insurance is purchased with a one-time fee, due at closing.
In some states, prices are regulated; in others it pays to shop around. Policies may vary as to what is covered and up to what dollar limit. In some states, you cannot shop around as all the policies are sold through the real estate lawyers who close the deals (and get a cut). Of course title insurance is a contract with the usual fine print and exclusions, but it is generally money well spent and protects you against most title problems. It’s a good idea to make your offer are made contingent on your ability to buy title insurance.
Warranty Deed. The deed is the only legal way to prove and transfer real estate ownership in the U.S. There are different kinds of deeds, including the quitclaim deed and grant deed. However the warranty deed is the strongest type. With a warranty deed, the seller guarantees that he is transferring good title to you and will pay to defend your title if it is ever challenged. This is similar to the protection you get with buyer’s title insurance – so either a warranty deed or buyer’s title insurance affords you good protection against title problems.