Lessons from My Land Purchase
I recently put in my first contract to purchase empty lots. I was a little apprehensive at first being so new to land purchase, but overall the process was a lot easier and more straight forward than buying property. While some parts of the process were the same as buying a property, there were a few differences.
Here are a few similarities and differences I observed.
Purchase Contract: The purchase contract for land is still a lengthy document with a lot of legal lingo. It includes the seller and buyer information, details of the land included in the transaction, and additional inclusions or exclusions of the transaction. In the past, I have typically not paid much attention to the legal description of what I was purchasing and instead made sure the street address was correct. The legal description typically goes something like "Lot 8, Block 7 and 8, Kensington Place, a subdivision of Anytown, MO". I haven't had much use for this before, but it sure became useful this time when looking through city planning documents which used the legal description.
The next section covers Contract Contingencies which are quite different for land purchases, but no less important. The due diligence you need to complete before finalizing the purchase will confirm if your original plans for development are achievable; having contingencies to protect you during this phase are helpful. You will be able to select contingencies covering soil analysis, existence of water meters, building permits, deed restrictions, and homes associations conditions. For this purchase, we also added a contingency for the seller to provide a certified staked survey. This contingency saved me money by not having to pay for a separate survey.
From there, you will see the typical terms of the purchase including the purchase price, earnest money, title company, and financing details. Because I was financing the sale, I still needed to provide a pre-approval letter to submit with my purchase offer. That pre-approval process was the same with the bank as if I were buying a property with a structure already on it, so no surprises there.
Inspections and Due Diligence terms and time window are also finalized in the contract. The inspection process for my land purchase was easy…I didn't have an inspection done. I wasn't going to be putting in a private water source so I didn't need a soil analysis, and because there was nothing on the lots besides some trees, there was nothing to inspect. This is one expense, typically $400-$500 dollars for a property inspection, that I saved on the land purchase. I did perform a healthy amount of due diligence though. Calls to the water department to confirm there was no water meter, a lot of digging into the city's GIS site, and calls to the city planner to confirm zoning took a number of weeks to complete. This was time well spent because I learned that the lots had been down-zoned from multi-family to single-family a year prior, but the city's GIS website had not yet been updated and still showed the higher zoning.
Disclosure: the seller’s disclosure for land purchase looks much different than for a property purchase — which isn’t surprising. When you are buying empty lots there isn’t much up for discussion. What you see is what you get. The form itself is only 5 pages long, but the intent is still the same. A land disclosure form focuses much more on the source of utilities than anything else. Water, gas/electric, and sewage sources/connections are all laid out. The disclosure also outlines the condition of the land itself including soil condition, drainage, and boundary issues. It is in this section you will learn if there any easements on the land which can impact your construction plans, so pay special attention to this part.
The form also highlights any usage rights you or others (i.e. the government) have on the land. Things like gas or oil leases, mineral or water rights, or crop land are disclosed. You will also learn if the land is part of a government farm program.
Lastly, the form will highlight if there are any concerns regarding hazardous conditions or “other matters” to mention such as zoning violations, burial grounds, abandoned wells, and the like. All of which was new for me to see, but makes logical sense given the type of purchase.
Appraisal: the appraisal process for land purchase is much the same as with a property purchase — a licensed appraiser is hired to look at comparable sales in the area. The report looks much the same as a property purchase except for two main differences: 1) it is shorter and 2) it is cheaper. The land appraisal for 3 lots came back at 13 pages compared my recent duplex appraisal which was 32 pages. It was also only $250 for all three lots compared to $575 with my last duplex.
If you are new to the land purchase process, don’t be overly concerned. The general flow is the same as when purchasing property. You will want to read through all the documents and agreements thoroughly though and don’t assume the language is the same. There are necessary differences that you will want to be mindful of before signing.