Deal Killers: Ten Common Pitfalls in Land Deals
People are constantly asking me why land deals are so special, and why the time and cost required completing them far exceeds that associated with traditional residential or improved commercial property deals. In this report, I will discuss the high points of some of the major roadblocks I’ve encountered while trying to close land deals. Each topic mentioned here deserves, at the very least, its own in-depth treatment, and this report will most likely raise more questions in your mind than it answers. The goal is to make you aware of what my grandfather told me when I was first wading into the land business, “You’ll never know everything about any deal, and if you know that then you’ll be smarter than most of the folks trying to make a living in land.” Making money at the land business is all about knowing how to uncover flaws and wrinkles in a piece of land, and then managing your risk as you move the deal to the closing table.
DISCLAIMER: This report is not intended to provide legal or financial advice. This is not a complete list of areas of inquiry when evaluating a parcel of undeveloped land. Please consult a legal and/or financial professional for guidance. No brokerage relationship is created by this report. Georgia law requires a listing agreement or buyer brokerage agreement to establish a fiduciary relationship with a real estate broker.
‘Clear and Marketable Title’ is the standard requirement in most Purchase and Sale Agreements for land. In practice, this requirement is usually met when a title insurance company issues a title policy on the subject property. Almost every title policy has one or more permitted title exceptions, but it’s the title exceptions that are not permitted that jeopardize many a good land deal.
Right of First Refusal
One common title exception is a ‘Right of First Refusal’ that requires the property owner to notify the holder of the Right if an offer on the property is accepted. The Right holder usually has some amount of time to exercise their Right to purchase the property under the terms of the accepted offer.
The very presence of this Right often poses problems to everybody involved. The Seller may have trouble marketing the property, since any buyer must wait for the Right holder to make a decision before the buyer can purchase the property. The Broker is compromised, because a commission may not be payable if the Right holder decides to purchase the property. The Buyer risks losing money invested in legal work to negotiate the contract, in addition to other due diligence work that the Buyer may need to perform, while the Right holder is weighing his decision.
Another popular restriction involves a multi-party agreement. These types of arrangements go by many names, like residential community covenant, or a commercial joint maintenance agreement, but they usually share several characteristics. Namely, the developer or a group of landowners agree to record a set of restrictions on their property in order to protect and control its use and provide for the upkeep of common elements. The goal is to protect or increase the value for each property owner.
A homeowners association (HOA) that is created with covenants in a residential subdivision is a good example. The HOA might levy dues on the homeowners and use that money to maintain an entrance feature or water detention pond owned by the HOA. It’s important to review these documents carefully because they frequently restrict how lots may be divided or recombined with other lots. They also limit the type and number of units that may be constructed on a lot.
Protective covenants are almost always substantially more restrictive than the zoning code on the property. In Georgia, covenants have expiration provisions, so it’s also important to get competent advice as to whether or not a particular covenant is binding on the land involved in your deal.
Another type of restriction, or covenant, that is less likely to expire is known as a deed restriction. Sometimes a property owner will hold title subject to one or more restrictions listed in the ownership deed itself. These restrictions can be inextricably linked to the land and some may never expire.
Here’s an example that typifies the problem. I looked at a deal several years ago that looked too good to be true. A gentleman called me about listing 10 acres with 1000 feet of road frontage and county water. I checked the zoning code, and it allowed the property to be subdivided into 10 lots. Based on the price the owner was asking, the best way to find a buyer was to market the property as a potential subdivision. During my initial research on the property, I discovered a restriction in the deed that prohibited the property from being divided into less than five acre lots. When we checked further, we found out the restriction could not be removed, and since the seller was unwilling to take less for the property, we decided not to list the property.
Another common restriction on the use of raw land is a conservation easement. There are several types of conservation easements created to reduce the tax burden for the property owner. The Georgia Assembly passed a law that allows counties to offer reduced property taxes to land owners who record ten-year conservation easements on their land to prohibit, among other things, development or sale of the land. These conservation easements may be removed from the property early, but usually with an associated penalty that must be paid to the county.
Another type of conservation easement restricts a portion, or an entire piece of land, against uses like timber harvesting, subdivision, and construction of structures. These conservation easements may be used to reduce the assessed value of the land in order to reduce the property tax burden. In some cases, these conservation easements may be donated to eligible non-profit organizations for an income tax deduction. Usually these easements are more permanent in nature, and may not be removed under any circumstances.
We’ve come a long way in just the past 100 years in terms of the creature comforts we’re accustomed to in our living and working spaces. And people are adding to their list of “basic necessities” all the time, including new items like high-speed Internet access, movies on demand, and access to wireless communications. While some might be able to live without these more recent utilities, you won’t get an occupancy permit without securing access to electricity, water and sewer/septic.
Visually inspecting a piece of land can give you many hints as to what utilities are available . . . If you see fire hydrants on the street, you can bet there’s public water (whether the pressure is sufficient to meet the fire suppression needs of your contemplated development is another issue altogether). Sewer manholes in the streets are a clue that sanitary sewer may be available. The rural electrification project of the 1930’s and afterward pretty much guaranteed access to electricity and telephone for just about every property in Georgia.
Sewer is invariably the utility that creates the most headaches. Basic laws of physics can wreck the best laid plans for sewer access when you discover your final grade elevations don’t allow proper gravity flow along the sewer easement you have a right to access.
Sewer cannot easily be made to follow existing public easements and rights of way like water, electricity, cable and telephone do. This means that private access easements are frequently required to tie into public sewer lines at the correct place. These easements are seldom easy to obtain, and may be very costly depending on the attitude of adjacent property owners toward your planned development.
Another option when a sewer easement may not be obtained, or in areas where sewer is not yet available, is a private septic system. The department of health in the local jurisdiction may provide you with specific guidance as to what types of systems are allowed.
Generally speaking, the department of health will require a Level 3 soil test of the lot plotted on a survey along with areas of steep slope or cut or fill. The health department will review the soil contours and determine which areas of the property will support a septic system, and dictate what type of septic system might be allowed.
Conventional systems usually consist of an underground tank and field lines. The length of the field lines and the size of the tank allowed, will dictate the size of the structure allowed on the lot. Some lots in Georgia have poor soils and require alternative septic systems, which may be an option of last resort since many alternative systems are undesirable. One system resembles several rows of clotheslines draped across the yard that spray the effluent (that’s what comes out of your toilet) across the yard. Nice!
In the earliest days of piped sewer networks in the City of Atlanta, the storm water and sanitary sewers were combined- modeled on the famed, relatively advanced system in Paris. Creeks were piped and storm water runoff mixed with sanitary waste that was dumped directly into a river downstream of the city. The faults with this design are easy to see, but in areas of relatively low population before paved roads and parking lots, it wasn’t a terrible solution.
Times have changed – one study found that 40 parking spaces exist for each car in San Diego. The City of Atlanta’s old combined sewer system still exists in several downtown neighborhoods. A recent lawsuit required the city to create huge underground detention tunnels to hold the runoff so that the sewage treatment plants have time to process it. The added runoff is due to the increased amount of impervious surface in the City.
Today’s state-of-the-art storm water management requires a separate network of storm water sewers and detention ponds that protect against flooding, and, separate surface runoff from sanitary waste. During the design stage of land development, a hydrology study is performed on a piece of land to determine the existing storm water conditions. A design engineer then calculates the added runoff created by removal of vegetation and installation of impervious surfaces such as roads and structures.
The detention pond is designed to hold the increased surge of water runoff, and to meter its release to match the rate at which storm water left the parcel prior to development. Municipal and county governments have responded to the threat of increased flood risk by including impervious surface limits in zoning codes; in some areas taxing parcels based on their amount of impervious surface has also become customary.
Despite our best attempts to prevent additional flooding by requiring detention ponds in most new developments, our building boom has had an important impact on the environment. The Federal Emergency Management Authority (FEMA) creates Flood Insurance Rate Maps (FIRM) that depicts what land lies in flood risk areas. These maps are updated from time to time to reflect changes in flood risks caused by human and natural factors. New reservoirs, increased impervious surface from construction activity, and changes in creek or river courses are representative of these. Maps may be obtained from FEMA directly, or may be available at the county planning offices for you to review.
Perhaps the most important regulation to keep in mind is the stream buffer. The state minimum in Georgia is 25 feet, but local governments have increased this buffer to 50 feet with an additional 25 feet impervious setback. That means that in most metro Atlanta area jurisdictions, streams have an undisturbed buffer of 50 feet from either bank, and an impervious surface buffer or building setback of 75 feet from either bank.
The goal of these stream buffer regulations is to protect the ecosystems in our streams and waterways by preserving the vegetation along stream banks. These act to filter pollutants that otherwise might flow directly into our waterways. These buffers may be expanded in some jurisdictions and especially along waterways within close proximity to potable water reservoirs. The Metropolitan River Protection Act provides for even larger setbacks and impervious surface limits along the Chattahoochee River.
The first thing I do when evaluating a parcel of land is to verify the zoning by sitting down and reading the appropriate zoning ordinance. The zoning ordinance will tell you over several pages most of the limitations on the property that may affect your intended use. The code outlines the minimum lot size and dimensions, along with the types of uses allowed on the property.
Impervious surface limits and height restrictions may also be included. After comparing the zoning code with your intended use, you’ll have a pretty good idea of whether a rezoning or variance petition must be filed. Since this process is usually the lengthiest, it’s good business to get it started as soon as possible.
Some portions of the zoning code can catch you off guard, especially if they only affect very specific circumstances. For instance, the transitional use buffer may require very large building setbacks and/or landscaped buffers between incompatible uses or zoning districts. Lot split requirements may change depending on the zoning of the larger tract or the number of lots involved.
Usually one or more attorneys specialize in zoning cases for your jurisdiction. Seek out referrals from planning and zoning as to which attorneys commonly represent these cases. The cost of an initial consultation may be the best investment you make on the entire land deal.
Depending on the type of roadway your land fronts, you may deal with the local traffic department or the Georgia Department of Transportation (Georgia DOT). State and US highways usually fall under the purview of the Georgia DOT; local streets are within the jurisdiction of the local traffic department but may require Georgia DOT final approval.
The trend over the past two decades has been for fewer and safer driveway entrances. The traffic authorities attempt to accomplish these two goals by requiring driveways to be spaced at certain intervals, and minimum sight distances be met. Driveway spacing may vary from road to road, and between jurisdictions.
If you are considering land that does not have an approved driveway already installed, then it’s important to find out how many and where driveways are allowed on the property. The other constraint on the placement of a driveway entrance is the sight distance it affords in both directions.
The Georgia DOT recently increased the required sight distances, eliminating the possibility for entrances on some properties that could have permitted driveways under the old rules. The required sight distances are proportionate to the speed limit on the road the driveway enters. So a change in the speed limit in front of the property may also affect the owner’s ability to obtain a driveway permit.
One obvious result of the reduction in the number of permitted driveways is the rise in number of shared driveways and joint use and maintenance agreements. These arrangements are especially common in large retail developments, where a number of parcel owners agree to use one common private drive, and furthermore, to jointly maintain the private driveway. We are starting to see residential joint driveways more and more, and expect to see that trend continue. You can save yourself many headaches by determining what driveways are permitted prior to property changing hands or subdividing land.
Soils and Rock
Soil tests were briefly discussed earlier in this report in relation to application for a private septic system. Usually the health department will require a Level 3 soil test for each lot or septic system in order to evaluate the permit application. You may use Level 1 and Level 2 soil tests for preliminary lot layouts and feasibility studies.
While a Level 3 soil test requires many core borings to create a highly accurate soil map for a relatively small area, Levels 1& 2 soil tests create macro soil contours across much larger tracts of land. Level 1 is the least expensive, and provides the lowest resolution, but may be acceptable in early due diligence stages to determine if a tract of land might support a number of septic systems.
Soil borings are not only used to classify soils in determining suitability for private septic systems. Another reason for soil borings is to determine the presence and density of underground rock. You may have learned in a visit to Stone Mountain Park that the mountain extends under seven states. In Georgia, we must be particularly aware of the presence of underground rock on a piece of land. Blasting rock can be a very expensive proposition and can kill more than just marginally profitable land deals.
When I first got started in the land business, I thought that Superfund was just the punch line in a joke that went something like, “Mike your office looks like a superfund cleanup site!” Unfortunately, I’ve come to realize that Superfund is much more serious and potentially costly than a harmless grade school joke.
You must take the prospect of environmental contamination and the clean-up costs that go along with it very seriously. There are several tools at your disposal when trying to determine if contamination exists on the property. The first is an environmental inspection performed by a qualified professional. A Phase I inspection includes a records review, and interviews with the property owner, tenants, and possibly others in the chain of title. A Phase II inspection may include a regimen of on-site testing for potential contaminants identified in Phase I.
Before you run up a bill with an environmental firm, you can do some inspections of your own by walking the property and looking for suspicious looking barrels or junk piles. Ask neighbors about the history of the property – private junkyards or burn piles may be public knowledge in the immediate vicinity of the property.
Also, look for uses on surrounding properties that might be a source of contamination, either intentionally or unintentionally placed on your land under consideration. Don’t take quick explanations at face value – if there used to be a mobile home park on the property, don’t automatically believe that the homes were hauled off. They might just still be there, buried alongside the abandoned septic tanks and heating oil tanks.
Moratoriums (Moratoria is also correct) may be the biggest wild card of all the potential pitfalls that can kill a land deal. A wide range of moratoriums may stall a project. These range from a sewer moratorium, to a zoning moratorium, to building permit caps.
Some moratoriums aren’t even officially moratoriums at all. One example was a project that was held up in the zoning process for almost a year, because the county commission decided each month to table the zoning cases located in a certain sanitary sewage drainage basin. The reason given was that a report on the capacity for the sewage plant in that particular basin was not completed; the commission could not responsibly allow any denser zoning until they knew the capacity of that plant.
A more direct moratorium is when a county or city will not allow any more lots to be platted until the sanitary sewer capacity is increased. A move like this may kill your deal. But look for the silver lining in the long run because platted but undeveloped lots may increase dramatically in value almost overnight once the restriction is lifted.
Since moratoriums are usually political in nature and may originate within various government and bureaucratic organizations, they can be very difficult to predict. You may take several precautions against specific moratoriums, like requiring a recorded plat on a subdivision of property prior to closing the deal, or, you can take it a step further and require a land disturbance permit before a piece of land changes hands.
Attempt to create partnership relations with the local planning department early in your land deal, and maybe you’ll get early warning of a moratorium coming down the pike. Sometimes the seller is understanding of the risks associated with unforeseen moratoriums, and will allow contingencies in the contract to protect the buyer. Many seasoned land pros will simply walk away from a deal if they can’t come to terms that minimize their risk of a deal-killing moratorium.
Usually the first request I receive from a potential buyer is, “Do you have a survey or plat of that property?” Most land transactions rely heavily on the survey. It determines important contract terms, like the purchase price if the tract is bought by the acre, or useable acreage, if portions inside flood plain areas or easements are to be purchased at a reduced price. You must have a working understanding of how to read the different types of surveys, and understand what is shown, and also what is missing.
The most common issue I deal with is acreage errors in older surveys. I recommend that my clients re-survey their property prior to offering it for sale if the current survey was not performed with optical laser equipment. Surveys as late as the 1980’s can rely on antiquated chains and rods to measure distances. These often create unwelcome surprises when the property is resurveyed.
Another added benefit of updating an older survey is the opportunity to correct the parcel’s acreage at the county tax assessor’s office. This provides real savings over time even if the property does not sell. In one instance, we offered a tract for sale by the acre and could not convince the property owner to survey the property prior to placing it on the market. The buyer made the contract contingent upon a new survey at his expense. The new survey revealed ten acres less than the tax assessor’s estimate and the contract price was reduced by a quarter of a million dollars.
Surveys may also bring to light boundary line disputes that arise when old landmarks no longer exist. Many times land was surveyed to “fixed” landmarks like trees, fence posts or even piles of rocks. These landmarks may disappear over time, creating uncertainty about where property corners should be. Also, from time to time surveyors make errors that may lead to boundary line disputes. Since line disputes have the potential to cloud the title to a piece of land and bring a land deal to a grinding halt, it is a wise investment to uncover these issues as soon as possible – preferably before the property is in contract.
Believe it or not, the purchase contract can at times become the biggest obstacle to closing the deal on a tract of land. Poorly crafted or poorly written land contracts are far too common, and their shortcomings usually become evident at the worst possible moment. The Georgia Association of Realtors and the Atlanta Commercial Board of Realtors both provide stock contracts intended to deal with land transactions.
These boilerplate forms have a laundry list of due diligence items, and it’s usually the tendency of an overly cautious buyer’s agent to check as many as possible. This is not a good idea because too much unnecessary contractual due diligence, while protecting the buyer, may in fact bog the deal down and entrap the buyer in a kind of paralysis by analysis. The buyer becomes so caught up in the details required to satisfy the requirements of the contract, that he can’t see the forest for the tree survey. Some amount of risk and uncertainty must be accepted when dealing with raw land.
Another common pitfall is refundable earnest money. I was taught early on that the point of earnest money was to get the buyer sufficiently attached to the land deal that he would be hard pressed to walk away at the first setback, and there are always one or more setbacks in a land deal. Unfortunately, the state-of-the-art in land contracts, and conventional wisdom of the brokerage industry, allows for the oxy-moronic practice of refundable earnest money. I’m guilty of allowing it in a number of my contracts.
The problem is that a contingency contract, where the buyer stands to loose nothing by terminating the deal, is a waste of time for all involved. The buyer is wasting time because he doesn’t really have any skin in the game, and as a result doesn’t have a strong motivation to work through early problems when the finish line seems so far away. The seller wastes valuable marketing time by effectively taking the property off the market while it’s under contract.
At the very least, require the buyer to provide some very specific work product like a topo survey or a soil test in order to get the earnest money refunded. That way you make sure the seller has something to show for the time off market, and that the buyer has to do some concrete and professional due diligence before walking away from the deal.
We have a special section on our website for land Sellers and Buyers to learn more about land transactions. You may even tell us a little about the property you are trying to sell or buy and we’ll contact you directly.
Fitzgerald Land & Commercial Realty
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