In This Article
Who Writes the Offer
Hiring a Lawyer
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So you’ve done your homework, have looked at several pieces of land for comparison, and have decided to make an offer. You’ve asked a lot of questions of the seller or seller’s agent, town officials, and neighbors, walked the land several times, consulted with experts as needed, worked through the checklist, and worked out a preliminary budget for land development. At this point, you will still probably have unanswered questions which should be added as contingencies to your offer.
Knowledge is power. Buying land is a negotiation over price, terms, and risk. The most powerful tool in any negotiation is knowledge. I learned this decades ago in a course on negotiation strategies, and it has proven true again and again. The more information you have about a property before you make an offer the better.
In addition to the physical characteristics of a piece land and its zoning status, 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.
The most important piece of paper is your written offer, whether a standalone bid or combined with a purchase-and-sales agreement, as is more commonly done today. A well-drafted offer will protect you against any surprises you discover when further inspecting the physical and, its legal status, or its title. Unless you are an expert, hire a lawyer to prepare your offer or, at a minimum, to review it before submitting it.
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 a 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, not in your best interest.
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 the proper escrow arrangement, to protect you and your earnest money if the property doesn’t meet your needs upon closer inspection.
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. It’s important to communicate with your lawyer about how you plan to use the land and any particular concerns about the lot or seller. Every lot and every deal is different and you cannot expect your lawyer to know the particulars about this piece of land or seller. Are there potential wetlands nearby? Access problems? Well or septic questions? Neighbors illegally using part of your land? Better to deal with these issues now than after you close.
Your initial deposit, or “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 backing 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 $1,000 to $5,000, and shouldn’t exceed 2% of the value of the property (but may be higher in some markets). 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.
It is important that your deposit be held in an escrow account, not in the seller’s personal bank account. The escrow account should be controlled by a responsible and independent third-party. This may be an escrow or title company, or either the buyer’s or seller’s attorney or the seller’s real estate agent. Escrow money is governed by state law and, in most states, who holds the money in negotiable. Ask your lawyer which is the safest approach. Read more about Earnest Money Refunds.
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 seller’s 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.
Inspection 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 an “inspection period,” “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 inspection 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. I highly recommend having an all-purpose escape hatch in your offer, in case you discover something unexpected or have a change of heart for whatever reason. You can accomplish this with at least one broad contingency that provides an easy “out” that allows you to recoup your earnest money and walk away. In a house purchase, the contingency might read “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 be satisfactory to the Buyer at Buyer’s sole discretion.” Check with your lawyer about the specific language you should use in your state.
Along these same lines, if you are borrowing money, your financing contingency should contain language 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 of 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 obtain 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 the boundaries, size of the parcel, and any easements or encroachments by neighbors
- 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.
DO I NEED A LAND SURVEY?
If you are financing your land purchase, a survey will probably be required by your lender or title insurance company. Without a full survey, your title insurance will exclude from coverage any boundary disputes that would have been uncovered in a survey. Also the town may require a survey during construction to make sure that your new home and septic system comply with setback rules.
There are different types of surveys. For example, a “mortgage inspection survey” required by a lender may be limited to a review of public documents at the county registrar’s office to make sure that the property description on the deed is accurate.
The most comprehensive survey is referred to as an ALTA survey, based on the standards of the American Land Title Association. An ALTA survey requires a review of all public documents plus a site inspection on the ground. It should include:
- Confirming or marking the lot boundaries
- Mapping any buildings or improvements on the property
- Locating any easements or rights-of-way that cross the property
- Locating any encroachments such as buildings, fences, or other improvements that don’t belong on your land
In addition, you can choose to include optional items such as flood zone mapping, zoning classification, regulated wetlands, legal access to the property, and the names of abutters. These are listed in Optional Table A of the ALTA standards.
While you may not want to pay $500 to $1,000 or more to a surveyor before purchasing a property, you should strongly consider this if the boundaries are unclear or the land status is questionable. A survey conducted by a licensed surveyor will show you exactly what you will own, and what you won’t own, and any significant impediments to your use of the land. If you make your offer contingent on a satisfactory survey, then you can walk away or renegotiate if you turn up any significant problems.
Surprising things may turn up, for example, that the roadway or the neighbor’s barn or septic system lies half on your property (called an “encroachment”), or that the house site you chose is too close the lot line based on setback rules. (I’ve encountered all of the above at one time or another.) If you are in a low-lying area, ask the surveyor to identify any parts of the site that lie in a flood plain as this can dramatically affect your insurance rates, not the mention the risk of your house washing away in the next big rain.
Even if it is not required, a new or updated survey will ensure that you do not violate setbacks for your home or septic system, and that you are not building on a right-of-way or other prohibited area. It will also keep you from inadvertently encroaching on a neighbor’s property with your buildings, landscaping, or other uses. In most cases, the cost of a survey is money well spent.
“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.
Read more on Working With Real Estate Agents How To Buy In A Seller’s Market
R Knowledge says
How Can I Lock Up A Property During Inspections?
Your article states before making an offer on land, you suggest getting a rough estimate of what it will cost to develop property. What if you bring the property of interest to developers/builders before you purchase it and they in turn put in an offer themselves to purchase land and cut you out? How can this be avoided?
Good question — three points come to mind.
First, local builders and developers usually know about land for sale before you do. So there’s a good chance they have already passed on this particular site.
Second, if you are very serious about a piece of land and you make an offer, and the offer is accepted by the seller, then you have the legal right to purchase the land, subject to your contingencies. The trick is to structure your contingencies so you have a good escape hatch in case things don’t pan out. In the article, I suggest the language “Results of all land inspections shall be satisfactory to the Buyer at Buyer’s sole discretion.”
It’s important that your earnest money be held in an escrow account controlled by a bank, real estate agent, or other responsible third party and not in the sellers personal bank account. It’s always best to have a lawyer review your agreement before handing over a large check.
Third, you could offer to pay the seller an option fee that gives you the exclusive right buy the land at a fixed price, within a set time period, if your inspections and other research are satisfactory. You can terminate the contract for any reason, but the seller keeps the option fee as compensation for the time the property is off the market.
You can also try to renegotiate the purchase price if you find that the development costs are higher than anticipated. If you go ahead with the purchase, the option fee is often credited to the buyer at closing – something you can negotiate in the option agreement.
The amount of the option fee and the length of the option period are negotiable. For a house or single lot, it is often in the range of 1% of the sales price for a period of one to two weeks. Developers may pay a lot more for a much longer option period with large parcels that require complex investigations.
Sylvia K says
How Much Earnest Money Is Right For Land?
If selling land, residential for $225,000 af many acres and only $2500 is asked for in earnest money by agent , buyers needed and got financing , a day before the closing they pulled out , extensions were given on thenP&s, we being sellers , we got only $2500.. For all the time lost in the deal the buyers walked from .the sale a day before closing . They did this for reasons not related to the land and forfeited their $2500. On home sales the amount down at P&S can be 5-10% down so if the buyer walks then the lose their P&S monies, much greater and prevents these outcomes . On land what amount is the right amount down from buyers at P& S on land ?, Rural ,but high quality, buildable land , open and ready , Perc tests all in order ready to close surveys done and the last large parcels went well years back . This land has been marketed by a realtor who only asked for $2500 earnest money and says folks walk all the time after a good bit of time passed and they go their financing But walked a day before the closing ? . What do you suggest as we now remarket and are displeased with the earnest P& S money we landed with when the realtor said they are great buyers ? We thought 5% down next time around , who wishes to keep land tied up in a process and be left with these results and just $2500? We are now out of state as were the buyers who fell in love with the land. Advice needed
Earnest money in real estate offers generally range from 1% to 3%, but can certainly go higher in a strong seller’s market. In general, a higher amount of earnest money signals a stronger offer and a more highly motivated buyer.
In the offer you accepted, the earnest money was just a bit above 1%, so it was at the lower end of the range. The amount of earnest money offered is up to the buyer, although the seller can certainly ask for more in a counter-offer. You can ask for a 5% deposit, but the buyer may not agree to put that much money at risk.
If a buyer walks away from the deal for reasons other than a specified contingency, then the buyer typically has the right to keep the earnest money as “liquidated damages,” compensating them for the time the property was off the market. In theory, the seller could sue the buyer for breach of contract, but this is rarely done in residential real estate.
If you are represented by a real estate agent, you should discuss your desire for a larger amount of earnest money. This is negotiable between the buyer and seller, like everything else in a real estate transaction. You can always turn down an offer if don’t like the amount, but ultimately it’s up to the buyer to decide the terms of their offer.
New Land Buyer Confused About Role of Broker & Lawyer
My mom and I have a real estate agent and are looking to buy two plots of land in cash. The agent said she would help us put in an offer but after reading your article I’m wondering if I need to do more? It’s a real estate agent from Realtor.com so I naively just assumed that they would supply us with a lawyer and that in order to close the agent would get us the survey and assessment and we pay at the end. Clearly I misunderstood a lot. We were originally using a lender and they said all of that was a part of closing so I guess they were going to foot the bill initially and had all of those necessary people in mind. Now that we’re doing cash, I’m not sure what the process looks like. Will I need to obtain a lawyer?
I have the original deed, PLAT and restrictions/covenants (original and updated) from the county website. Should I still get a survey done? The place has a septic tank, well and propane line so I’m assuming a perc test isn’t needed right? Also, we have a builder but we weren’t building for at least another 6 months. They checked out the land and the docs I sent them and said the soil was good for it (they’re building other in the area). They also have a preliminary blueprint of what the house will look like for one lot but the other house isn’t being built for at least 2 years. Do we still need to talk to the county and everyone about BOTH houses before closing? I guess my question there is what should I expect the real estate agent and lawyer to do and what should I be making sure we do before handing over 50k?
Also, the last assessment done on each lot had them at about 2.5k less than what the person is selling them for, is that good? We’ve never bought land or built houses before (it’s my mom and I) so I just want to make sure we don’t mess up and get screwed in the end. Thank you for any additional insight you can give!!!
A real estate agent’s main responsibility is to help the seller market a property and sell it at the highest price. If you are working with a buyer’s broker (always a good idea), their job is to assist you in finding an appropriate property at the lowest price. Often people are working with a seller’s broker (the norm) and think that the broker is working in their best interest, but their fiduciary responsibility is to the seller – not to you. Only you can determine if you are paying a fair price, based on sales of comparable properties. The tax assessment has little relation to sales price.
As part of the process, the broker can advise about market conditions, property values, and strategies to buy or sell, and help facilitate inspections and walk-throughs. Some are more helpful than others. But their main goal is to make a sale since most of their salary is based on commissions.
An agent is NOT a lawyer, an appraiser, a construction or land expert, a home inspector, or land consultant. Some are more knowledgeable than others about the many issues you raised, but you are taking a risk if you rely on their assessment of a house or building lot. You really need to find independent third-parties to help you evaluate a property and structure an offer with the required contingencies to protect yourself.
You also asked about a lawyer’s role. Again, a lawyer’s main job is to make sure that the property transfer is legally valid. They will make sure that you, as the buyer, transfer the correct amount of money to the seller at closing and walk away with legal title to the property. If asked, they can also help you write or review an offer and help you write contingencies and protect your earnest money. As a buyer, you definitely do want a lawyer to represent you at the closing.
However, neither the real estate agent or the lawyer will certify that a lot is buildable or usable for the purpose you have in mind. That responsibility falls squarely on the buyer. Make sure that your offer includes a long enough inspection period for you to do the necessary research. Each lot is different, but its useful to start with a checklist of issues to consider and questions to ask. Some you can answer yourself; others may require you to hire an expert.
At the top of the list are usually zoning and septic system approval for sites without town sewer. In some cases, a survey is justified, but on an improved lot in a development, it may be overkill. So, bottom line is that that you have lot of homework to do if you want to be confident that the land will meet your needs.
It sounds like you are on the right track in talking to a contractor and county officials. Yes, you should speak with the county about the second building project as well as the first. You probably don’t need a perc test, but make sure that a valid one is on file with the county. Check with the county health department or whoever oversees septic system permitting. You said that the septic tank is already in place. How about the drain field and rest of the septic system? You say there is a well, but that’s just the first part of the complete well system. Has it been tested for yield and water quality?
Finally, think about the budget for site development. It sounds like you are buying in a development where a lot of the preliminary work has been done. Still, you will need to spend additional money, beyond the costs of house construction. Best to get a handle on that now rather than be surprised later.
Should I Get Zoning & Building Permits Before Closing on Lot?
I’m in the process of making an offer on a piece of land. I am buying the land from a Seller who bought 2 lots 20 years ago, built a home on one lot, and the other piece of land is still vacant. The community around the lot is well established and all have wells and septic systems. Considering that, Would it be wise to assume that the town will approve my zoning permit and building permit. I did a perc test for septic and submitted an application for highlands exemption act. Both applications were approved by the town. Now , I’m closing this deal and will build a home next year or later. So is it good to close the deal without a zoning permit and building permit? Let me know your thoughts, thanks.
It sounds like you’ve done your homework and everything sounds promising.
That said, it’s always a good idea to arrange meetings with the local building inspector and zoning department. Bring a site plan, show them what you intend to build (square footage, footprint, number of bedrooms), and any special uses such as a home business. Ask them if they anticipate any potential problems. If possible, have them put any opinion in writing, especially if there is a judgement call, as there often is. Zoning approval often falls into a gray area, subject to the opinion of the zoning board. By the time you get around to building, personnel may have changed (and memories fade), so it’s good to have a letter in your pocket to document what was said.
Assuming that your building and usage comply with local zoning regulations, and any protective covenants, then you should be good to go. Even if zoning or septic system rules have changed in the past 20 years, the lot may be “grandfathered” under the regulations in place when the lots were originally subdivided. However, grandfathering rules vary from one jurisdiction to the next, as do building and zoning regulations – so it’s always good to check.
It never hurts to have the actual zoning and building permits in hand. However, this is often not feasible as sellers rarely want to wait for the slow gears of the bureaucracy to churn out the paperwork. If the seller is willing to wait, you can add a contingency to your contract to that effect.
I once made an offer on a piece of land in a 20-year-old development, where the original developer had retained absolute design review over any new home plans in perpetuity. My offer was accepted contingent on my plan passing design review within 60 days. I provide a rough plan that complied with the written design guidelines, including minimum size. The developer, who no longer had any financial interest in the development, rejected my plan because the house was too small for his personal taste. I got my earnest money refunded and found another lot.
Bottom line: You should be fine, but just make sure that your specific plans comply with all zoning and building regulations as well as any protective covenants or other restrictions on the deed.
As a followup to the above question, I’m currently looking at a piece of vacant land. If I purchase it, however, I don’t plan to start building a home until 3-5 years from now. The question is: if I don’t yet know exactly what my future home will look like, is there any value in trying to meet with the local zoning department and/or building inspector prior to closing? Would they be able to counsel me what I “can’t do,” even if I don’t have any firm plans of what I want to do with the land?
Also, for someone in my position, are there any other inspections or surveys that would NOT make sense to do so far in advance of when I intend to build?
Relevant info: will need septic, will not need a well, no access to natural gas line (would want a tank), does have access to electricity.
Thank you for this great article and any advice you can provide!
It never hurts to meet with zoning and building officials ahead of closing on a lot. You may glean some useful insights, but the meeting may be less helpful than you hope. It depends on the willingness of the officials to speculate on what they will or will not approve at a future date.
I doubt if they will address what you what you “can’t do” on the site as this list is endless. It’s best if you ask specific questions related to your development plans, even though they are vague at this point. Focus on your most ambitious plans to see whether they might meet resistance. What is the largest, tallest house you are considering with the most bedrooms (limited by perc test results)? Are you considering any special uses such as a home business, bed-and-breakfast, multiple structures, etc.? Ask if any of your intended uses might require a variance or special permit – or if your project falls clearly within current building and zoning rules. Get a list of all permits and approvals that will be required to complete your project. Take careful notes and try to get any key points in writing.
Bring a site map with a best guess for your house footprint, setbacks to property lines, road access, and other key details. The more info you provide, the more likely you are to learn something useful.
It’s hard to say what inspections would “not” make sense. It’s always a tradeoff between expense and risk. You pay now to reduce risk later. Focus on the most likely problem areas, which will vary with the particular site and project. Perc testing is always a critical issue. Beyond that, look for any red flags such as special or unusual uses, environmental issues (wetlands, sensitive areas), deed restrictions, or other aspects of plan you think might meet resistance from the town or abutters.
Should Buyer Hire Title Company or Lawyer for Closing?
I spotted a vacant residential lot among an established neighborhood. I know the market value of it and being that the surrounding area already has houses, paved street, light post sidewalks etc. the value hasn’t changed in roughly the past 10-15 years. Does land value plateau, making it a reasonable asking amount?
I did contact the owners and they are interested in selling. However, they do not have or want to have a real estate agent. Basically, they are willing to negotiate a price and have me take care of the cost of paperwork. Reading your article, would it be better to hire a real estate attorney or say a title company to handle all the documentation for the transfer of property if I and the seller reach an agreed sale price?
To answer your first questions, land values are generally more volatile than house prices – both on the upside and the downside, so having land values hold steady for 15 years is pretty unusual. It suggests that demand for housing in your area has been pretty flat and the supply and demand are well matched. In areas where land values are flat, house prices should also be fairly stable, rising mainly to reflect the increasing costs site development and construction.
For your closing, I would strongly recommend an attorney over a title company, unless you are an expert on buying and selling real estate. A real estate lawyer works for you, while a title company works mainly to protect the title insurer. The buyer is at much greater risk in a real estate transaction than the seller, whose main concern is the check clearing.
The title company cannot provide you with legal advice. A lawyer, on the other hand, can help you draft your purchase contract, add the right contingencies, safely escrow your deposit money, and give you advice about a number of issues that might come up, such as the best way to take the title. I’ve used a lawyer for almost two dozen real estate closings (both as a buyer and seller) and always felt it was money well spent. Shop around — some real estate lawyers offer a fixed-price for closings at a reasonable rate.
Renegotiate Price After Earnest Money Given?
We put down earnest money on land we loved and learned that it needs 65k in hard costs before we start the build. The land is 85k. Because we did not know actual hard costs until we put down money for a soil test and plat of survey, can we NOW negotiate a better price on the land to make up for the large amount we are paying to prepare the property for a build?
You are free to negotiate with the seller as long as you have a contingency in your offer that allows you to back out based on an unsatisfactory inspection of the land. Assuming that you are still within the inspection period, you are free to revise your price and terms. It’s done all the time based on inspection results.
Hopefully, you included broad language in your offer that allows you to cancel your offer and get your earnest money refunded if your inspection of the land was not satisfactory to you.
However, once you reach the end of the inspection period, you will have to formally withdraw your offer in writing, based on the contingency clause, to protect your earnest money. At that point you can make a new offer and begin negotiating price and terms based on the results of your inspections.
If you have a motivated seller and buyer, negotiations sometimes extend past the contingency deadline, but it is important that you take the step of cancelling your original offer in case you are unable to reach an agreement.
If you do not have a contingency clause that allows you to cancel your offer, then you are in a pickle. You risk losing your earnest money if you back out without a valid reason. In that case, the seller has the legal right to keep your earnest money. Best of luck!
Eric Feliciano says
Can Seller Back Out Of Land Sale Without Cause?
I purchased two acres with a realtor and a legal contract was signed between me and the seller .
Seller wants to back out cause he is saying he wants full price
Is he allowed to do this
A Real-Estate Purchase Agreement, sometimes called a Purchase & Sales Agreement or by similar names, is a legally binding contract between the seller and buyer. It includes the price, closing date, inspection requirements, and other terms that govern the sale.
The purchase agreement also includes the conditions under which either party can back out. It rarely allows either party to back out simply because they change their mind – which seems to be the case here with the seller.
If the buyer backs out without a valid reason, then the seller typically has the right to keep the “earnest money” deposited by the buyer. If the seller backs out without a valid reason, the buyer could try to force the seller to complete the sale under the terms in the agreement.
That would probably mean suing the seller for breach of contract – either to force the sale or to seek monetary damages. The agent can also sue the seller to collect their lost commission. If you are working with a buyer’s broker, I would start by pressing them to work with the seller’s broker to try to get the sale back on track. Even if you are working with a seller’s broker, they should still assist you in trying to persuade the seller to do the right thing.
If that doesn’t work, a brief conversation with a lawyer could help you decide whether it makes sense to pursue a resolution in court. Because of the time and money involved, it rarely makes sense to sue for this sort of thing. But a little pressure, like a strongly worded lawyer’s letter, sometimes helps move things along.
Thank you for your article! It was very helpful. I have a question. My husband and I are looking at a plot of land. We are not working with an agent, but I do plan on working with a lawyer to write up a formal bid. We are in Virginia. Can I make an offer and write that if the seller is interested in the offer we will have a formal draft with contingencies made with our lawyer?
Yes, you can certainly do this as long as the seller cooperates. He may already have a Purchase & Sales Agreement provided by his lawyer or real-estate agent that he wishes to use.
Before signing it, you would want to run it by your lawyer to make sure it protects your interests and complies with state law.
In many cases, you lawyer will provide you with a blank P&S in the hopes that you will use him for the closing. You can use that to make your offer. But, again, you would want your lawyer to review the final agreement before signing.
Where it gets tricky is that, until both parties have signed the P&S, it is not a binding contract. The seller can change his price or terms, or use your bid to try to start a bidding war. To limit that type of hanky-panky, it’s best to put a short time limit on your offer – for example, 24 hours for a yes or no response.
How to Word Perc Test Contingency
I hope to purchase property to build a home. In my offer I have stated two contingencies: One for a perc test the other for an excavation test hole. My realtor suggests that I word it as follows:
“Buyer shall bear the cost of the above contingencies unless conditions are found to exist that don’t allow for either or both. Should that be the case, then all earnest money shall be returned to the buyer and all costs of the perc test and excavation shall be paid by seller.”
I’m worried how this is worded. if conditions are not what I hope for, he makes it sound as if I won’t consider the purchase. That’s not the case, I want these tests in order to know how much the septic system will cost and whether the house plan I’m considering will work on this lot. Is there a better way to word this?
The conditions under which the two contingencies pass or fail are not included, so it’s difficult to evaluate the overall effectiveness. In general, I like contingencies that leave it to the buyer’s discretion to determine whether any inspections are “satisfactory.” Not surprisingly, sellers like more cut-and-dried. Either the perc test passes for a conventional septic system or it fails.
There is no need to worry that the seller will withdraw his offer to see if it does not meet your conditions. If the inspection falls short of your stated conditions, you still have the option of waiving that condition and still making your offer. You can also modify the offer (reduce it) based on failing one or more of the inspection conditions. Remember, the seller still wants to sell you the lot, so this is all part of the negotiation of price and terms.
The one thing I find unusual is the requirement that the seller pay for both tests if “conditions are found to exist that don’t allow for either or both [test].” I don’t think a seller will accept this and are not even sure what it means. In some cases, a perc test cannot be performed at certain times of year due to local regulations. A hole can be dug any time, even in frozen soil. So you might want to get clarification from your agent as to the purpose of this language, and consider dropping it.
Simply stated, the contingency clause should state clearly that, if any of your tests or site inspections fail to meet your requirements, then the offer will be terminated and the buyer must refund your earnest money. In the event of a failed inspection, you are always free to modify your offer or make a new one.
It would help to see the full language used in your contingencies.
Read more on Earnest Money Refunds
Thanks for responding, sorry for the delay. This is how the contingencies read:
•This offer is contingent on results of a perc test verifying that a conventional gravity flow septic system, in a location deemed acceptable to the buyer, will be approved by the western UP health district.
•This offer is contingent on a site excavation test hole, at a location approved by buyer and done at the same time as the perc test, shows suitable soils for a conventional walkout foundation.
Buyer shall bear the cost of the above contingencies unless conditions are found to exist that don’t allow for either or both. Should that be the case, then all earnest money shall be returned to the buyer and all costs of the perc test and excavation shall be paid by the seller.
I’m worried that the last statement sounds as if there’s no room for negotiations, does it read that way to you?
Thanks for your help!
The contingencies are well written in general. Everyone words these a little differently and there is really no standard language. A couple of comments:
• The first contingency is clear and the criteria for passing or failing are cut and dried.
• The second contingency does not state who decides if the soil is “suitable” for a walkout foundation. If it turns out that it is suitable but requires blasting, a retaining wall, or very expensive drainage work, who makes the determination? Where there is discretion involved, it’s always best to state that the all inspection reports must be satisfactory to the buyer “at Buyer’s sole discretion.”
The conditions under which the seller has to pay for the inspections is unclear in your offer. Does this mean that if either test fails, they seller pays for both? Or if either test cannot be performed, the seller pays for both? In either case, I doubt the seller will accept for this. It would be nice for you if he does, but in either case, you should reword this clause to make its meaning more clear. In contract law, there is a principle that ambiguous language is generally interpreted in favor of the party that did not write the contract.
Finally, you don’t need to be concerned about leaving no room for negotiation. There is always room for negotiation. Contingencies provide you, the buyer, with a way to back out and get your earnest money back if you are not happy with one or more of your inspections.
Contingencies never prevent you from negotiating for a lower price or better terms based on your findings. In fact, this is how contingencies often play out. The buyer discovers the house needs repairs and then lowers the bid by that amount, or the seller agrees to make the repair, or the two parties split the costs in some way. That’s the standard procedure. Once an offer has been accepted, both parties have a strong incentive to find a way to complete the deal.
If you’re not happy with the language in your offer, or in the Purchase Agreement, you might want to have your lawyer take a look. The real estate agent is not a lawyer, so they are winging it to some extent in drafting contract language.
Again, best of luck!
john everett says
Can Seller Require a House & Land Package?
What recourse to you have as a buyer, if a real estate broker does not accept your offer to purchase an approved lot in a subdivision for the advertised price? And gives as the reason that the buyer must enter into a contract for the seller to build the house. The broker is owner of the subdivision, and says that he can sell the lot with or without a buyer’s agreement to contact with the Broker.
If I understand you correctly, the broker is also the owner of the subdivision, including this lot, and wants to be the building contractor as well. If the broker were an independent broker, he/she would be obligated to present your offer to the seller. But a seller is never obligated to accept a particular offer.
In this case, the broker is not really acting as an independent broker, but as the seller. Regardless, a seller can reject an offer on any grounds (other than illegal discrimination), including that he wants to sell this lot with a contract to build.
So I don’t think you have any legal recourse, other than to offer more money, agree to a house & land package, or look elsewhere.
You may want to check with a lawyer, but I don’t think you have much leverage here. Best of luck in finding a suitable lot!
john everett says
Steve, thanks for your response. I do agree with your assessment. I was of the mind set that the seller should have been more forthright in his advertisement and initial discussion.
Sherrae Robinson says
Is Site Information Public & Easy to Access?
Thank you for this great insight!
Will local agencies be able to tell me if there are issues with property in a certain area (i.e., flooding, foundation problems due to soil type, etc.)? Is this public information that I should be able to access?
Thank you in advance for your reply.
Sorry to say that there are no local agencies set up to provide this sort of information to landowners or buyers. With land sales, the rule of “Caveat Emptor” – let the buyer beware – is still the governing principle. In most states, sellers are required to disclose major defects, such as buried toxic waste, that they are aware of, but it is largely up to the buyer to thoroughly research the property for sale.
This is why I think it is so important to put an adequate inspection period, with broad contingencies, into your offer.
Some of this information is available to the public if you know where to look and how to interpret the information. For example, the federal agency FEMA publishes flood-zone maps which show different levels of flood risk based on their data. However, these maps are not always up-to-date and do may not indicate localized drainage issues particular to this site.
Some sites also contain regulated wetlands, which may be mapped and regulated at the local, state, or federal level. Again, this information is publicly available but not always readily available or easy to interpret.
You asked also about soil types. Some states and counties do maintain maps showing the predominant soil types in their region. A local university with a geology or agricultural program also may have maps showing local soil data and may be happy to help you with your research. These maps will show the predominant soil type in a region, but will not show the soil conditions on your specific lot, which may vary a lot from the norm in the area.
The bottom line is that there is no real substitute for a site evaluation by one or more qualified professionals if you do not have the expertise yourself.
Best of luck with your search for a building site. To avoid unpleasant surprises after a purchase, take the time needed to thoroughly vet the building site before committing.
See also: Who Can Help Evaluate a Lot?
Phil Thornton says
Is Seller Required to Extend Contingency?
We signed a six-month purchase agreement. The main contingency is that a rezone of the property must pass for buyer’s intended use. The buyers say they will pursue a change in zoning. After six months, the change in zoning has not been acquired. The buyer asks for an extension 2-3 more times. On the 3rd extension, is the seller required to sign another extension or can he refuse.
As with all contracts, the answer depends on the specific language used.
Typically, in residential real estate, if a contingency expires and is not revised or extended by mutual written agreement, then the sales agreement is terminated and the earnest money is refunded to the buyer. Either party can refuse to sign another extension.
However, if the buyer has not fulfilled his obligations under the contract, then the seller may have the right to keep the earnest money. For example, if a contingency states that a buyer will apply for a zoning variance and he does not make a good-faith effort to do so, then the seller could claim that the buyer has breached the contract and should forfeit their deposit. In this scenario, the deposit compensates the seller for taking the property off the market during the due-diligence period.
Of course, the buyers may not agree with this assessment and demand a refund of their deposit. They could argue that six months was not a realistic time period for obtaining a variance or rezoning.
To avoid exposing yourself to legal action, it’s always best to check with a lawyer when contract issues are disputed (I am not a lawyer).
When a long due-diligence period is needed, some sellers require that the buyer pay an option fee for the time the property is off the market. In that case, the buyer is purchasing an option to buy the property at a fixed price for a fixed period of time. This is more common in commercial real estate. Commercial contracts may also contain a liquidated damages clause that spells out the penalty for missed deadlines or other contract breaches.
From my perspective, negotiation is almost always preferable to legal action for resolving disputes. It’s cheaper, faster, and less wear and tear on the people involved. This may mean extending the contingency or refunding the deposit and finding a more suitable buyer.
Should A Survey Be Done Before Closing?
Husband and I made an offer on an empty lot almost 6 weeks ago. Our offer was accepted, and closing date is now less than a week away. Still no survey has been done, and all our real estate agent can tell us is that he has has “verbal reassurance” from the city inspector that there’s no impediment to our having a home built on the lot.
Isn’t there supposed to be some official paperwork that the inspector has signed? Why has there still been no survey done? We have nothing on paper that we can look at. We’re getting very very nervous. This all seems very last minute and iffy. This is our first time buying any real estate.
If you are financing the purchase, a minimal “mortgage survey” is often required by the lender. The title insurance company also typically requires a survey for full coverage. Otherwise, they will limit their coverage to exclude boundary disputes. Survey requirements may differ on a lot in a subdivision vs. vacant (unimproved) land.
Even if a survey is not required, it is always a good idea to conduct a survey before closing on the purchase of vacant land. Otherwise, the governing principle is “caveat emptor,” or Let the Buyer Beware. You’re not really sure what, exactly, you are buying.
If there is a survey contingency in your offer to purchase the lot, then the closing will have to be delayed until the survey is completed and approved by you. If you do not have a survey contingency in your offer, then you can still chose to pay for a survey. However, your earnest money will be at risk if you back out for reasons not spelled out in your offer.
As a buyer, you should definitely have a lawyer representing you in this purchase. Ask your lawyer about the need for a survey and written assurance that you can build on the lot as planned. In addition to a survey, the key issues are usually zoning, perc testing, and well water (if you do not have municipal utilities).
To build, you will ultimately need a zoning permit and a building permit. It never hurts to schedule a face-to-face meeting with a zoning official and the building inspector to discuss your plans and ask if they foresee any problems. This is easier to do in a small town or city like yours than in a larger city.
At the end of the day, it is these individuals who grant you permission to build and they have a certain amount of discretion. In most cases, they are decent people who are glad to meet with you and answer your questions. In some cases, they will provide written documentation of their “opinions” if asked – a valuable piece of paper if you can get it.
A verbal discussion is not a replacement for lots of legal documentation, but it might put your mind at ease about your purchase. Most likely, all will be fine, but better safe than sorry!
Best of luck with your purchase.
Donna M Davis says
We Viewed One Lot; Bought Another: Who Is At Fault?
What are our options on property that was purchased 1 and 1/2 yrs ago based solely on a physical address that “EVERYONE” & I mean “EVERYONE” 2 different surveyors( 1st hired by realtor representing of us the buyer) and: 2nd was hired and representing the home builder ALL, and I stress ALL went to the same physical location based on GPS accordance and this same reasoning was what we based our decision to purchase the property. And, once the builder had staked out where the house was to be placed they hired someone to prep or clear the soil and removal of a tree to make ready for the build.
And two months after the “site” was prepped, we were called for an urgent meeting. Only to be informed that what “EVERYONE” thought was Our property address was incorrect and our property was 1 1/2 blocks further away and more over, the actual location of what “we PURCHASED” was in fact ” Unbuildable” so in 3 days from today on Mar 1st 2018 it will be 6 months from the closing on our home construction loan and , per our contract, our original home loan pre-approval will EXPIRE.
And, I have been sending email after emails that have yet to be answered from our salesman with the home builder as to where we stand. And, in addition the builder informed us that we are “libel” for $20k that supposedly the builder I had to compensate the party of the location everyone thought to belong to us and that the amount that was paid to the actual owner of the land that was incorrectly prepped(cleared) will be added onto the total of Our home loan. But, we have been cautious and not signed off on anything that would incriminating our financial liability in regards to this other party.
Also, because this loan pre-approval will EXPIRE in 3 more days, are we legally responsible to re-apply for a new loan? Or, will we have the option to finally walk away from this nightmare and also will we have legal grounds to file suit against the original property sellers for the absence of disclosure regarding the land that is located within a “flood plain”? And lastly, can we legally request the County Tax Appraiser to tax our “Unbuildable” land at a significant reduction from what it was most recently appraised?
Sorry to hear about your situation. Sounds like a true nightmare.
There is old saying: Success has many fathers while failure is an orphan – meaning that, with these types of problems, no one steps up and claims it was their fault. It sounds that there is a lot of fault to pass around – to the seller, the seller’s real estate agent, your real-estate agent, the surveyors, the title company, and so on.
Based on the facts provided, it sounds like you did your homework (“due diligence” in legalese) and reasonably relied on the judgement and integrity of professionals in that process. This includes the real estate agent representing you, your lawyer and the title company. They all are legally responsible to look after your best interests and they failed to do so.
You went the extra mile by having the property surveyed to establish the boundaries with legal certainty, but the surveyor also dropped the ball. This is the most surprising and disturbing aspect of your story. A surveyor’s core function is to establish the physical boundaries of a property. What’s wrong with this picture?
The seller and his representatives are not legally required to look after your best interests, but they still need to abide by legal and professional standards, and it is not clear that they did so. While disclosure laws are on the rise in home sales, the principle of caveat emptor (let the buyer beware) still governs sales of vacant land in many states. Fraud, however, that is, intentionally deceiving a buyer, is still illegal in all states regardless of the specific disclosure laws.
In a situation this complex, it often takes a lawsuit to figure out exactly what happened – or something close to it – through pre-trial “discovery” and court testimony if it gets to that point. The vast majority of lawsuits, however, never get to court. They are settled “out of court” by negotiation between the lawyers, plaintiff, defendant, and their insurance companies, once the issues come to light. At that point, most people prefer the certainty of an agreement over the gamble of spending tens of thousands of dollars and potentially losing the case
If the sellers intentionally mislead everyone here, then he/she has committed fraud, which might involve criminal proceedings as well as civil lawsuit where you can try to recover your losses. If he knew that the land was an unbuildable floodplain and failed to disclose that and/or represented the wrong piece of land in the sale, then you may be able to recover your financial losses or even rescind the transaction. .
If, on the other hand, the seller and everyone else acted in good faith, but “mistakes were made,” then it becomes more difficult to assess blame and decide who (or whose insurance company) should cover your losses. Real-estate agents and surveyors generally carry errors-and-omissions insurance to protect them against claims caused by their negligence. On the face of it, they were all negligent to some extent.
It sounds like the surveyors were working with incorrect records – on the deed, plat map, or whatever documents they had in hand that described the lot. How did these errors enter the public record? Were they verified for accuracy? After all, it is the surveyor who has the last word on establishing the physical boundaries of a property. They are the ones relied on settle property disputes, not cause them.
Since the builder cleared the land based on information you provided, you are probably liable for expenses he incurred. However, you may be able to negotiate a lower price (and hopefully recover this cost from whomever if held liable for sell you the wrong lot).
As for property taxes, the appraiser should assess the lot as unbuildable, lowering its appraised value dramatically. You should explain the situation and request a reappraisal in writing before the next tax bill is generated.
I would definitely contact a lawyer well-versed in real estate litigation (I am not a lawyer). The strength of your case will stem, in part, on the language in the purchase-and-sales agreement and in part on the real estate disclosure laws in your state. In general, these laws are stronger for houses than for vacant land. In all states, however, it is illegal commit fraud by intentionally deceiving the buyer in a real estate transaction.
If you purchased title insurance, the title company may play a role in resolving this if there were a defect in the deed or title that contributed to the confusion over what piece of land, exactly, you were buying.
The legal self-help publisher nolo.com is a good source for commonsense legal advice. You can read about seller fraud at this link.
I wish you the best of luck in resolving this and recovering your losses.
Manuel Salgado says
Should Offer Be Contingent on Perc Test?
I’m in the process of putting an offer on a piece of land. The community around the lot all have wells and septic systems. Considering that, Would it be wise to assume that the lot I’m buying will perk for septic system? I’m not ready to build yet so I don’t want to spend $700 on a perk test until I’m ready. Let me know your thoughts, thanks.
If you are completely confident that the soil and water table are the same on your site as surrounding sites, then you could probably delay the perc test. However, you are taking a risk. For one thing, septic regulations may change over time and become more restrictive. You’ll need to spend the money now or later, so why take the risk?
Personally, I would want an approved perc test in hand before closing on a building lot. Although the test results may expire before you build, in most cases you can renew the approval for a nominal fee. I’d check with the local health department about testing now and building later.
Best of luck with your purchase!
Hey Steve, thank you for the reply. Yes, I spoke with my realtor and will get a perk rest done beforehand. Appreciate your input in helping me make the right decision. Take care,
JOHN TOGNAZZINI says
Should Seller Place Deadline on Closing?
Real Estate Question: I’m involved with a Family LLC Co, with, 2 Acres of Vacant land, been listed many times, and Buyers have Pulled out, with CIty not Accepting Their Plans.
Then later having it relisted, the Listing Agent, is a Family Member of the LLC. The Agent is also the Actual “Buyer”, and using himself as the Real Estate Agent for the “Buyer”.
There is a Contingency, written from the Buyer,
“Close of Escrow Contingency : Close of Escrow is contingent upon the City of ___________ “Conditional Use Permit” approval. This is required for the loan to purchase and for the construction loan.”
There was no Limiting Date Attached?
The General Managers accepted the offer and Signed it!!!
What are your Thoughts of this.
We are in Closing Now. My thoughts are, yes the Buyer can hold the Property for a great amount of time, finding Investors, or to locate another deal to assist him in Closing.
I am neither a lawyer or a real estate agent, so I can just give you my layman’s opinion.
From your description, it sounds like there is no deadline for this deal to close. Perhaps there is language somewhere in the contract giving the buyer “a reasonable time to perform,” or a time-is-of-the-essence clause. Without this, I would agree with your analysis – that the buyer can take as much time as he likes to complete the deal and there’s not much the seller can do to speed things up.
Was this a smart thing to do? If that’s what the buyer demanded and the lot has been difficult to sell, maybe so. Only time will tell.
Even with a deadline on closing, the buyer typically has some leeway to extend the closing if necessary. In general, a seller cannot legally get out of a deal if the buyer has made a reasonable effort to meet the closing deadline, but experienced delays with financing or other due diligence. However, the buyer cannot drag his feet indefinitely, or the seller has the right to cancel the deal. Before cancelling, the seller must generally first give written notice giving the buyer a reasonable amount of time to perform.
For a definitive answer, best to check with an experienced real estate lawyer. Best of luck with your sale!
How to Write Cash Offer on Land Quickly
We are in a time crunch because we’ve been told someone put in a cash offer on this land we are looking at. The seller wants to sell to us because she said she really likes us. I asked a real estate agent to assist me with this land a week ago! I haven’t heard back from her. So I need to put in an offer by tomorrow. Do you happen to have an example of what this offer should look like? Any help at all is appreciated. I enjoyed reading your article. You share some very wise advice and lots of knowledge, thank you for that!
Sounds like you are dealing directly with the seller rather than through an agent. If the seller is not using an agent, then you may have difficulty finding an agent to assist you unless you agree to pay the agent a commission as a buyer’s broker. Otherwise the seller would have to pay the broker and most independent sellers (“for sale by owner”) don’t want to pay anyone a commission.
If you are dealing directly with the seller, a better approach might be to find a real estate lawyer to help you prepare a bid. While you can find “standard” forms on the internet or elsewhere, these may or may not comply with state law and they may omit important issues.
A lawyer will help you protect your earnest money by ensuring that it goes into a proper escrow account, and will help you structure a bid with the critical contingencies (well, septic, zoning, etc.), and a long enough study period to do the necessary research.
If you are competing against a cash offer with few contingencies, then you may have a difficult time making a more attractive offer that provides you with adequate protection. If you are absolutely sure that you want this property at this price, and that it will work for your building project, then you can sweeten your offer with more money or fewer contingencies. However, making an offer quickly without the necessary information and legal protections is foolish.
These situations are a lot like a poker game – with a certain amount of bluffing and a lot of unknowns. For example, you don’t know what is in the other offer or how solid it actually is. You have to balance your interest in the lot with the risks involved in making a rushed offer. If you feel pressured into making an offer before you are ready, this is a big red flag. I would proceed with caution. The seller saying she you she would rather sell to you could be true, or could be just a manipulation. Slow down and take a deep breath. If you lose this property, there will be others.
I have always used a lawyer to help me write offers going directly to a seller and would recommend you do the same. If you don’t have the name of a real estate lawyer, ask your bank or mortgage lender for some names. It will be a couple of hundred dollars well spent.
Best of luck!
Thank you so much for responding so quickly to my comment!! The seller has agreed to an agent and shes working with one and will be paying for my agent as well. You are absolutely right….there will be other opportunities if this one is missed. There are some concerns around the fact that the land is sloping and a creek running down the middle of it. I will have 30 day due diligence to find all info out..flood plains etc. I contacted the real estate agent that i havent heard from for a week for some advice on formulating this offer and she stepped up last minute and provided a form and filled it out electronically. So we will see what the seller decides tomorrow.
Again, thank you so much, sir for contacting me and for all your wise advice!
Rachel Lannister says
A friend of mine has been considering buying farm land, and asked me to get her some good tips and information on the subject. It’s great that you elaborated on how you shouldn’t just go visit the land, but really inspect it and even consider having a professional inspect it. Especially if my friend wants to grow a certain crop on this land, it would be best to make sure that the soil is right and everything is in place to help make this happen. Thanks for the helpful read.
Why Was Offer to Buy Land Posted in Newspaper?
We made a offer on land and it has been accepted. Now we are told that it has to be posted in our local paper for 10 days and now we have to wait to see if there is a upset bid. Is this legal?
If the sale of this land is under order of a court, the law may require public notice and a statutory waiting period to see if there are any legal objections to the sale.
Otherwise, posting an offer in the newspaper is certainly not customary, but probably legal. When you make an offer on a house or piece of land, the seller is generally free to solicit other offers until the buyer has made a deposit and parties have signed a binding purchase agreement (P&S).
This can be very frustrating for a buyer who thinks that they have locked in a sale only to find that the seller is accepting other offers and maybe promoting a bidding war. Real estate laws vary from state to state, so it’s best to check with an attorney as to the best procedure for making an offer.
In most cases, you will be working with a real estate agent who has a legal “fiduciary” duty to protect the interests of the seller. So anything you confide in the broker will probably be communicated to the seller. Best to play your cards close to the vest and get your own lawyer or seller’s broker to look after your interests.
Best of luck – hope the sale works out for you!
Is Letter of Intent Binding?
Hello. I have found a building lot and made an offer which was accepted. However, the seller cannot close for about two months due to some tax issue. They want to provide a “letter of intent” to say they have agreed to my offer, but I don’t feel comfortable with that letter alone. Is that going to count as legally binding or am I just in for a ride? Is there any other way or documentation I could use to legally bind them?
In general, letters of intent are not binding. They simply state that two parties have reached a general agreement and will work in good faith to work out the final terms. At a later date, when final terms are agreed to, both parties would sign a binding “purchase & sales” (P&S) agreement.
Under special circumstances, some courts have enforced letters of intent as binding, but this is not common – and, of course, going to court to enforce this agreement is the last thing you want to do. For that reason, you should not spend money researching a property until you have a signed P&S.
If you are uncertain about what type of agreement you are signing, a quick review by a real estate lawyer is always a good idea. This is a ultimately a legal question and I am not a lawyer.
The P&S is agreement is typically used to control a real estate transaction. It includes all the conditions of the sale for both the buyer and seller. It gives the buyer time to so further study of the land (the Study or Due Diligence Period), states the conditions and contingencies under which the buyer can back out of the sale, and specifies the closing date.
If you are working with a real estate agent, they can provide you with a P&S to sign. You can also obtain one from any real estate attorney. It’s always good idea to have the P&S reviewed by an attorney before you sign it to make sure that it protects your interests – and your earnest money.
Seller Refuses To Refund Earnest Money
We built a home and gave $5,700 in earnest money. We had walk-through today and it has failed the structure and framing city code four times now. Also they didn’t build the fireplace properly and now they don’t want to refund our money. What can we do? Thanks!
Whether or not you can get your earnest money back depends on what contingencies are in the Purchase & Sales (P&S) contract you signed, as well as state law which regulates the escrow accounts in which earnest money is typically held.
I assume you signed a contract with a developer for a custom or semi-custom home and now want to back out of the deal for substandard workmanship. Your contract may not include the type of inspection contingency you typically find in a P&S when buying an existing home. However, since the home you are buying has significant structural, framing, fireplace, and code problems, you cannot be forced to take possession of the home until these things are fixed.
If after multiple attempts to fix these problems, the contractor cannot get it right, you may have a strong case that the builder has breached the contract, giving you the right to cancel the contract and get your money back. You would need to speak with a lawyer about whether this is feasible. In most cases, the earnest money is (and should be) in an escrow account controlled by a real estate agency or a law firm. State law strictly regulates how these escrow accounts are managed giving you the right to place a claim against the account.
It would be simpler if you were buying an already built home from a private seller. In that case, your P&S contract would contain some version of the standard inspection clause, and you should be able to get your earnest money refunded.
I recommend that buyers put a broad escape hatch into any P&S that gives the buyer the right to back out of the sale, or demand repairs, if the inspection reports area “not satisfactory to the buyer at the buyer’s sole discretion.” The buyer has a fixed period of time to hire whatever experts he feels are necessary to inspect the house and property.
In buying an existing home, you may want to hire an engineer, exterminator, septic system contractor, chimney cleaner, or other expert, in addition to the ubiquitous “home inspector” to inspect specific areas of the house or property that you are unsure of.
I have had real estate agents pressure me to sign an agreement, as a buyer, that would let me out of the contract only in the event of a “major structural problem” or similar language. Don’t agree to this unless you are very certain you want the property no matter what. Also make sure that your P&S has a mortgage contingency that refunds your earnest money back if the house does not appraise high enough to obtain a mortgage.
If you are working with a buyer’s broker or a lawyer, they should be negotiating for the return of your earnest money. If you do not have anyone representing your interests, you should contact a local real estate attorney as soon as possible.
See also The Final Check Is Earnest Money Refundable?
Bidding War Strategies & Buyers’ Brokers
I am trying to buy a building lot…
In the past I lived a situation where I did my homework.. made an offer for a house at $270K but then the bidders drove up the price to $330K and I lost. But then when the house was appraised only at $275K that high bidder was given the house for $275K. Wrong behavior was rewarded!
I am in a similar situation now.
I think that I am a bidder in a multiple offer situation on a lot where I want to build a home. I hired the seller’s realtor as my realtor as well. I have some findings based on which I have to make a an offer which is way below the asking price. I am afraid that the other bidders did not do their due diligence and they will drive up the price and I will lose. When they try to build on this lot they will face the hard reality. If they had access to what I have they would also lower their bids. Is there an addendum or contingency I can use with my offer which will clearly obligate the seller to disclose to all bidders my findings? If the Seller takes the position that “he did not know” can I sue after the sale?
Being on the losing end of a bidding war is difficult. I’ve been there on a number of occasions so understand your frustration. Unfortunately, there’s not much you can do to prevent someone from outbidding you. The listing broker works for the seller and it’s his or her job to present all bids to the sellers and help them get the highest qualified bid.
People pay premium prices all the time in bidding wars, prices that are sometimes seem way out of line. Only time will tell whether the high price was justified. A low appraisal by the mortgage lender can sometimes influence the seller to drop the price as you witnessed in the first transaction. On a cash offer, however, the appraisal is less of a concern unless the buyer stipulates that the house must appraise for the amount offered.
There is nothing to stop you from adding the sort of contingency you describe to your offer, but I don’t think any seller would accept such an offer. Sellers are generally obligated to disclose buried toxic waste and other hidden defects that they are aware of but not financial concerns such as development costs. It is clearly the buyer’s responsibility to calculate these costs and factor them into their bid.
Finally, you said that you “hired the seller’s realtor as my realtor as well.” The seller’s real estate agent has a fiduciary responsibility to the seller – not to you, the buyer. Most states now allow an agent to represent both parties – so called “dual agency” – but this is a bad idea, especially for the buyer.
On the face of it, how can one person work in the best interests of two negotiating parties? When a broker is acting as a dual agent,” technically they need to remain neutral and can only work to facilitate the transaction. However, there are inevitable conflicts of interest and either party can end up suing a dual agent for failure to represent them properly. So this is a bad arrangement for agents as well (although they may benefit financially by not having to share the commission). Some real estate companies such as Redfin, prohibit dual agency.
In many cases, buyer’s think they are being represented by an agent who is really working for the seller – the person paying the agent’s commission. Just because a real estate agent is friendly and shows you lots of properties does not mean they are working for you. Unless you specifically sign a buyer’s broker agreement, the agent is working for the seller and is trying to get the seller the highest price.
While agents are now required, in most states, to disclose to the buyer that they are working for the seller, or working as a dual agent, this may be in the fine print and overlooked by a buyer excited at the prospect of making an offer.
By all means, buyers should work with a buyer’s broker, who has a legal obligation to work on the buyer’s behalf. Nowadays, many agents will agree to work this way on a non-exclusive basis and get paid out of the seller’s commission. Some buyer’s brokers want an exclusive contract and some want the buyer to pay their fee, but these types of contracts benefit the broker more than the buyer.
Having an agent representing you as a buyer is especially important in highly competitive markets like the one you are working in. While there is no guaranty that you will prevail in a bidding war, at least you have someone going to bat for you who may be able to provide you with useful information, strategy tips, and direct negotiations that may give you an edge .
Best of luck with your real estate purchase!
Thank you for your response. This time for this particular vacant lot if I am not late I will make my realistic offer by adding some statements to the offer. Those statements should bring the seller back to reality. However, I realize that this does not obligate them to share the reality with other bidders.
In regards to the realtors:
This time I am thinking in the following way: When I was in the market to buy a house my realtor did not add much value other than being there to open the door of a house for me. All research and calculations were done by me. In fact my realtor was in my opinion in my way to talk to the seller’s realtor. My realtor was busy with other clients and I could not have the attention whenever I need to.
From my perspective the buyer pays both realtors seller’s and buyer’s simply because I am the only one who comes to the table with money at closing. Again from my perspective none of them work for me, they work for the seller because if the property sells and if it sells for as high as possible they make money and as high as possible. I think that this would be the case even if I sign an exclusivity agreement with an agent who will be buyer’s agent. So, I don’t trust them. I can do the research and I don’t feel like I depend on them.
So, if I believe that no agent is working for my interests anyway this time I am choosing to work with the seller’s agent for every property I am visiting directly. I am paying the same 6% no matter what. When I have one realtor per property I will have a chance to talk directly to the horse’s mouth. I can do my searches directly with realtor.com which is updated every 15 minutes. I will write my offer and contingencies up with a lawyer, not with a realtor.
We will see what happens.
Thanks for your follow-up. This is a topic I’ve thought about a lot, having worked with a lot of realtors. It’s often hard to figure out who’s zooming whom?
You make a lot of very good points. To a large extent, I have drawn the same conclusions after having worked every which way with real estate agents and sometimes without them (in FSBO transactions). It is complex game with a lot of players often working at cross purposes. The better you understand the dynamics and go into this with your eyes open, the better your chances of success.
In most cases, I have found real estate agents to be hard-working and professional. But you do need to understand their economic incentives to make sense of their actions and advice. My conclusion is that the first priority of all brokers is neither the buyer nor seller, but themselves. Their strongest financial incentive is to complete a sale as quickly as possible, at any reasonable price, but not necessarily the highest price.
To foster a quick sale, brokers have an incentive to price a house a little on the low side. If a house is overpriced, the broker risks having to wait a year to get that price, or losing the listing altogether. On the other hand, an agent may toss out a high number to a potential client to win a listing, or to “test the market,” assuming they will drop the price quickly if there are no takers. Or it may be the seller who comes up with an unrealistically high price and fails to take the advice of his agent. In any event, you can never assume that the asking price was rationally produced.
Selling real estate is kind of a wacky business. One broker can show a buyer 25 houses over two months and make nothing. Another can show a house one time and make several thousand dollars. An exclusive seller’s broker is more-or-less guaranteed that they will get a commission eventually, as long as the house sells within their contract period, but how many hours they have to work to make the sale is still highly variable.
So much of the advice you get from a broker will be advice that will help close the deal – not necessarily get you the highest price as a seller or lowest price as a buyer. Sometimes these currents work for you as a buyer, sometimes against. Here are my thoughts on using your own buyer’s broker vs. the listing broker:
Going Direct to the Listing Agent. For a sophisticated buyer such as yourself, there are real advantages to going to the listing broker. I have often done the same thing. As you point out, you are closer to the seller with fewer intermediaries, and can sometimes glean useful insights into the seller’s situation and priorities. Information about the seller – why they are selling, how motivated they are, their preferred timing , etc. – is golden. This type of information allows you to craft a bid that is very appealing to the seller even though it may not be the highest number. The agent may even help you craft this bid, assuming you are a qualified buyer and your bid is in the ballpark, because the broker wants your bid to be successful. Then they can get paid quickly and move on to the next sale.
Another reason the broker wants your bid to be successful is that they will not need to share the commission with another broker in their firm or an outside firm. This type of “dual agency” is not allowed by every firm or every state. You may be assigned to a different agent at the same real estate office, for example, who may work for you as a non-exclusive buyer’s broker. When working with a listing agent or any seller’s broker, don’t divulge any information that would hurt your cause as the agent is obligated to provide this information to the seller. For example, don’t say that you would be willing to spend an extra $5,000.
In my experience, this approach can break down in a multiple bid situation, or a bidding war. The last time I was in this situation, about three years ago, the listing broker told me that unless I was prepared to make an offer at least $100,000 over the asking price, don’t waste my time. A buyer’s broker might have been able to provide some insight into what was happening behind closed doors, but probably not.
Using a Buyer’s Broker. Cultivating a good relationship with a leading broker can sometimes get you an edge in a highly competitive market where the good properties are going fast and often for more than the asking price.
The main advantage of working with a buyer’s broker is that they can sometimes bring you properties that are brand-new to the market or not yet in MLS, so-called “pocket listings.” These are often very desirable properties that the listing agent shares within their own firm and with a few handpicked outside agents for a few days before officially listing the property.
Or the agent may know of a property about to come on the market and contact the seller pre-sale on your behalf. The buyer’s broker can be your eyes and ears and, as insiders, can help you get an edge. I think this works best if you work with a leading broker in a smaller city or town where the leading agents tend to know just about every property that is coming up for sale, or potentially for sale. You want to be the one they call first when they hear about or see the type of property you are seeking. I have bought a few choice properties this way – at the asking price the day they hit the market or a few days before.
There are different types of buyer’s broker contracts. Just for clarification, I was only suggesting that you sign a non-exclusive buyer’s broker agreement – either for a specific bid or if you find a broker you want to work with on an ongoing basis. They are still paid out of the seller’s commission as a co-broker. I would not agree to pay the agent’s fee out of your pocket unless you feel they bring you enormous value. Also, I would avoid locking yourself into an exclusive buyer’s broker agreement. On the other hand, if you feel that a broker has worked hard for you and you spot a listing yourself, you might contact them to place the bid for you.
Having a signed buyer’s broker agreement is no guarantee that they will act any differently, but will nudge an agent in the right direction. For what it’s worth, they now owe you a fiduciary duty to act on your behalf in any negotiation. I have found this to be helpful by clearly defining the relationship. You can ask more probing questions about the seller, and if you reveal any information like the maximum you are will to spend, they are legally obligated not to reveal this to the seller. A seller’s broker is obligated to do the opposite.
Establishing the Price. It is great that you are doing your own pricing research. Whether a buyer or seller, you have to do your own analysis and should never rely entirely on the advice of an agent. Still the advice of a good, experienced agent working on your behalf can be very useful as they have their finger on the pulse of the market and know what is selling to whom and for how much. As a seller, especially on a FSBO, it is often a good idea to bring in a professional appraiser for a few hundred bucks. Also most real estate agents are willing to stop by and provide a free “market analysis” based on comps – possibly a more realistic number than you get from an appraiser. These are all useful data points in coming up with your own price. In addition, an appraiser’s price can help you justify your number if asked by a buyer: “How did you come up with that price?” Just realize that if you hire two appraisers, you will get two different prices.
Pricing is more art than science, especially in a changing market. The value of a business, stock, house, or any commodity is not just about the present market value, but also its potential future value. People sometimes pay a premium for real estate because they think the market is about to take off, or they see a creative way to add value to a lot or house. Only time will tell if they were right.
Bidding Wars. In a hot market with a bidding war, all normal negotiation rules go out the window. Things happen fast and under pressure, often leading to bad decisions by buyers. Unless you willing to enter the fray and potentially overpay by a large margin, it’s best to just walk away once the bid exceeds what you think the property is worth.
For what it’s worth, I’ve never prevailed in a bidding war — not necessarily a bad thing. A couple of times, I bid the asking price for a building lot and my bid was used by the seller and his broker to motivate another buyer who had long ago walked away. In one of these transactions, I felt lied to by the broker who assured me that my bid had been accepted. The broker told me that the other buyer threatened to sue if the property was sold to me. I briefly considered suing, but then thought better of it. A lawsuit is usually the worst, most stressful and most expensive way to solve anything, so I moved on. There’s always another lot or house if you are patient and persistent.
Best of luck!
vincent Murphy says
Always use a broker that you trust. Make sure you get little things in writing. Specify the type and model number of items you want — for example, Toto one-piece elongated toilet model MS-60… and so on. It’s good not to be surprised.