Issues related to the purchase of Raw Land.
Buying raw land in the rural countryside presents different considerations than purchasing a home or commercial property in the city or suburbs. Buying raw land with the hope of constructing improvements on that land in the future can be a risky business. Various factors, including legal and business issues, may present challenges to your plans for development of the property, including the following:
(a) Title Issues
(b) Surveying Issues
(c) Land Use Permits
(d) Site Plan Approval
(e) Issuance of Permits
(f) Lot Size and Set Back Issues
(g) Hazardous waste issues
(h) Fire safety issues
(i) Health issues, including water and septic tank systems
(j) Storm water management, stream and wetlands issues
(k) Availability of utilities
(l) Access to property, including type and cost of maintenance
(m) Physical characteristics of the Property, including topography, soil type, drainage and flood issues.
(n) Determining if Roll Back Taxes are due and owing if the use of the Property changes.
Before going forward with the purchase of raw land, you will want to make sure you know what you intend to do with the property once you have acquired it. Will it be used for commercial, residential, recreational or agricultural purposes?
The basic aspects of land include soil, geology, water, and climate. Some of the key desireable features of raw land usually sought are the following:
1. Clean air. Clean air is sometimes viewed as freedom from smog, foul smells from industry or landfills, freedom from noise or traffic, airports and/or neighbors.
2. Water availability. Water availability is essential and is often desired for natural beauty as well as for drinking, bathing, washing, cooking, cleaning, toilet facilities, and watering vegetation. Without question, water availability is a major concern in acquiring raw land.
3. Electricity. Electricity is another necessity that we sometimes take for granted. Will it be expensive to have electricity to your property hooked up? Also, how far away are gas and oil suppliers to your property?
4. Sewage disposal. Twenty-five (25%) Percent of the property in the United States operates on a well and septic system. If you don't have access to public utilities, you need to be sure that your land will support a septic system as well as the required amount of water to operate it.
5. Solid waste disposal. How far away is the nearest landfill? Is there a collection fee involved? You can't burn everything you don't need or want, so how will you dispose of it?
Raw land is unimproved property and therefore has no utilities, sewer, streets or structures and frequently the land must be cleared. The following are a few disadvantages sometimes associated with the ownership of raw land:
1. Usually the land has negative cash flow because it does not generate any income while you are paying for taxes and development cost, and possibly principal and interest in repayment of an acquisition loan.
2. Tax advantages are minimal as land cannot be depreciated.
3. Generally, raw land is considered to be a long term illiquid investment.
4. Risk of loss on resale may occur if you fail to properly evaluate the property and negotiate the purchase price, or if the economy falters after acquisition.
5. It is difficult to obtain conventional financing in developing raw land.
The following are possible benefits or advantages to the ownership of raw land:
1. Land has the potential to experience tremendous appreciation if bought in the way of growth or if a higher and better use can be achieved.
2. Owner financing can frequently be obtained from the Seller at below market interest rates.
3. Subdividing the property can create added value and sometimes provide for immediate returns to the owner.
4. Privacy and pride of ownership can be intangible benefits to the owner.
In connection with the purchase of Raw Land, You will want to have a comprehensive purchase and sale agreement that will address the following legal and/or Business Issues or provide for an adequate due diligence period to all sufficient time to investigate and become educated as to these issues for your protection:
I. ENVIRONMENTAL FACTORS.
Phase One Environmental Assessment provides the buyer with a report of the environmental condition and environmental history of a particular property, focusing on the possible presence of hazardous materials. The report is intended to identify actual and potential problems, such as underground storage tanks and hazardous materials contamination based primarily on a review of historical documentation, regulatory data bases and a walk through inspection of the site. If potential problems are discovered during the course of the Phase One inspection, the report will generally recommend follow-up testing, remediation and additional studies. The Phase One report should be initiated in the early stage of the Due Diligence process for the purchase of the property.
Phase Two is typically done, if necessary, as a follow-up to a Phase One report and involves physical inspections and testings of the property, including core samples, ground water testing, typically focused on specific issues of concern identified in the Phase One report. If the presence of regulated hazardous materials contamination is confirmed by the Phase Two report, further reporting, monitoring, investigation and/or remediation may be necessary.
The presence of wetland conditions can have a significant impact on the operation and development potential of the property. As a result, it is important to check with the appropriate municipalities to determine whether any portion of the property is considered wetlands or shoreline. There may be significant restrictions on the use or development of land in those areas.
You should check with the local planning agency to determine whether any portion of the land is located in a designated Flood Zone. Flood Zone designation can adversly affect the development potential, applicable building standards, and availability of financing, as well as insurance requirements and costs.
II. CODE COMPLIANCE AND PHYSICAL CONDITION.
The purchaser should check whether theproperty has adequate access to and from public streets. If new or additional access is required, you should discuss the matter with the applicable public works department to determine if additional access is possible and the procedure, cost and lead time for establishing the necessary access. You should also investigate to determine whether there are planned road improvements that might affect the property.
The purchaser should check with the applicable utility providers to determine whether the property has adequate service levels available and determine the procedures for entering into any required provider agreements with the appropriate utility providers. If inadequate service exists, or new service is required, you should determine the availability, timing and cost of upgrading the existing utility service, as required for the ownership of the property.
You should determine whether there are any wells (water, oil, gas or monitoring) located on the property. Operating wells may require permits, and inoperative wells may require sealing and/or regulatory closure. If there have been oil and gas wells on the property, there may be soil and/or water contamination in connection with the operation of those wells.
You should inquire of the seller to provide copies of any leases or contracts that affect the property, such as leases to farmers, or to hunters, including hunting clubs to determine the rights and responsibilities of the parties and the term and any monetary benefits to be realized from such leases or contracts.
III. TITLE ISSUES.
The title review process is necessary to determine the condition of the title to be transferred to the purchaser at closing, as well as identifying potential title problems. The purchaser and its attorney will normally work with a title insurance company to review the status of title, resulting in an owner's title insurance policy to be issued at closing. The process of title review and issuance of a title insurance policy would typically include the following factors:
The first step in the title review process is the issuance of a title commitment to the purchaser. The title commitment will be an important indicator of any existing title problems to be addressed. The commitment will provide the purchaser with a list of all current exceptions to title on the property, such as unpaid real estate taxes, existing easements or rights of way, options to purchase, mortgages, judgment liens, and other liens, restrictions and other significant encumbrances.
In connection with the issuance of an owner's title insurance policy, the title insurance company will require an ALTA/ ACSM survey of the property, which is a comprehensive survey of the existing state of the property, which locates the parcel boundaries, any existing improvements, and apparent unrecorded easements affecting the property. An ALTA survey also provides the purchaser with the precise location of utility and other easements and physical encumbrances which are described in the Exceptions Schedules in the title commitment, as well as showing the precise location of any physical improvements located on the property.
Since these types of encumbrances will continue to burden the property being purchased, it is important that the purchaser determine prior to the closing whether it can live with these encumbrances.
In conjunction with the title review, the purchaser should determine what real property taxes and assessments will apply to the property after closing. This may be particularly important if any special assessments apply to the property as a result of being located within a special assessment district.
The purchaser may want to consult with the title insurance company as to the availability of certain endorsements for the property, some of which may be specifically required by the Lender and may incur an additional fee. Examples of endorsements to be considered would include a zoning endorsement insuring that the present use of the property complies with applicable zoning laws, a contiguity endorsement that ensures that the parcels comprising the property, are contiguous and a specific access endorsement insuring that the property has access to and from a public right of way.
IV. REQUIRED APPROVALS AND PERMITS.
The purchaser should determine what permits or licenses will be required in order to operate the property following acquisition. The permits required may include some of the following:
If the proposed use of the property is not expressly permitted under the applicable zoning regulations, you should determine whether a special use permit or variance can be obtained through the applicable municipality.
If the proposed improvements to be constructed do not comply with the applicable building use and restrictions, including height, or setback restrictions, a variance may be required. There may be conditions attached to the issuance of a variance and some municipalities may require a unique hardship to justify the issuance of a variance.
You should determine whether a business license will be required to be issued by the applicable municipality for any business you intend to operate on the property. Certain types of business related permits, including liquor licenses, may have significant application periods.
Some types of signage may be prohibited by law or may require a governmental permit. If there is an existing sign on the property, you should determine whether that signage can be replaced without requiring a new permit.
V. THE MOST FREQUENT EXPENSIVE MISTAKES MADE WHEN BUYING RAW LAND.
Knowing some of the legal and non-legal mistakes to avoid when buying raw land can save you a lot of time and money, and help to avoid problems in the future. The following are mistakes frequently made by raw land purchasers and, accordingly, these factors should be thoroughly considered by potential purchasers prior to making the decision to proceed with such a transaction:
1. Trying to save money by not engaging an emerienced real estate agent. The price of the land is the market price, which includes the fee to be paid to an agent, which includes the fee to be paid by the seller to an agent. Usually the seller will be the one who benefits from not using the real estate agent as the seller will retain more profit rather than reducing the purchase price. Accordingly, as the purchaser you should work with a real estate agent familiar with raw land in the county and state in which the land is located.
2. The failure to confirm the land is zoned properly for the intended use. Make sure the zoning classification for the land allows for the number and height of buildings to be constructed and located on the property. Also, if you plan to have farm animals on the land, make sure that zoning will permit large animals.
3. Confirming availability of utilities to service the land. Be sure to check out sources of utilities intended to service the property. Confirm where the main electrical hook-up is located. You will have to bring the electricity to your property line from wherever it is currently located. The same would apply for natural gas and telephone lines. You will also need to obtain permits for utilities to be brought to your property.
4. Accessability of water to the property line. Confirm the source of water available for servicing your property. Is city water available or will you need to dig a well? Digging a well can cost of thousands of dollars with no guaranty of success. Tying into the city water line will require some expense and a permit. Accordingly, you should make sure you can obtain a permit before you purchase the property, as some municipalities only allow a limited number of water permits to be issued a year.
5. Confirming the quality of available water to the property. If there is a well existing on the property, you will definitely want to test it during the due diligence period. You will also want to confirm the amount of water that can be pumped by the well in an hour.
6. The failure to inspect a septic system. If you are in the country, you will likely be on a septic system. If a septic system is in place already, how old is it? You should have the tank inspected and pumped and confirm the size of the tank.
7. Review any recorded easements affecting the property to identify any other parties who have the legal right to use your land for ingress and egress or, for a variety of other possible purposes. Easements may grant the right of others to use a pond, river, a driveway or road, utilities, fences and other amenities or appurtenances located on your property. Easements will appear in the title insurance commitment you should be obtaining early during the due diligence period of your purchase and sale agreement.
8. Confirm the quality of the soil on your property by conducting a geological report or at least a soil test during the due diligence period. You will want to avoid constructing improvements on the top of bad soil, including asbestos or possibly a garbage dump or an abandoned mine located on the property. Also, you should become aware of any flood zones located on your property, which could affect construction of improvements and insurance premiums.
9. The failure to obtain a survey of the property. In order to determine the legal boundaries of your property, you will need to obtain a current survey of the land. The survey should also reveal the location and dimensions of any easements or rights of way encumbering and affecting your property, as well as the location of any improvements located on the property.
The issues and factors related to purchasing raw land should be provided for or addressed in a properly drawn purchase and sale agreement by, at a minimum, providing adequate time during the due diligence period for the purchaser to make all necessary inquiries and to obtain all necessary information to make a reasoned and prudent decision regarding the closing of the purchase of raw land.
Buying raw land in the rural countryside presents different considerations than purchasing a home or commercial property in the city or suburbs. Doug Brown stands ready to assist clients in challenges that may arise during this process.Contact Us