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.

Title Issues

‘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.

Protective Covenants

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.

Deed Restriction

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.   . . . (fill out the form below to receive the entire report Free of Charge!)