10 Common Pitfalls in Land Transactions

By
Real Estate Broker/Owner with Fitzgerald Realty, Inc.

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.   . . . (go to http://www.fitzgeraldland.com/dpage.php?docID=8 for the complete report)

Comments (23)

Greg Steffens
Mountain Country Realty - Lake Arrowhead, CA

Welcome to Active Rain and congrats on your first post.  Be sure to spend some time looking around at what and how others are blogging here.  It is a great education and lots of fun.  Looks like you're off to a great start...keep it up!

Aug 29, 2008 10:33 AM
Kevin Wood,
Keller Williams Southern Arizona - Tucson, AZ
Tucson, AZ Realtor

Mike,

Thank you for sharing your perspective. I wish you the best of luck with your future blogging. This is an awesome place to learn and grow.

Aug 29, 2008 11:28 AM
Bill Kennedy
Keller Williams Realty - Greenville, SC
Homes For Sale Greenville SC

Welcome to active rain! This is a great place for learning as well as sharing.  Join some groups, check out some blogs, and most important, write often!  Write about whatever's on your mind.  Good luck!

Aug 29, 2008 01:35 PM
Susan McQuaide
Keller Williams - Simpsonville, SC

Welcome to Active! I hope you find this site as informational and entertaining as I have!

Aug 29, 2008 01:37 PM
Keith Elliott Jr
KEIRE Realty Group - Manassas, VA
Principal Broker/Owner

Hello Mike,

Welcome to Active Rain and congrats on your first post! The opportunities to learn and network are incredible here. Best of luck to you!

-Keith

Aug 29, 2008 03:34 PM
Benjamin Clark
Homebuyer Representation, Inc. - Salt Lake City, UT
Buyer's Agent - Certified Negotiation Expert

Welcome to Active Rain! For some tips on how to get started here, check out my blog entry at ActiveRain Fast-Start Tips for Quick and Easy Points
Happy blogging and good luck!

Aug 29, 2008 04:59 PM
Sasha Miletic - Windsor Real Estate
RE/MAX Preferred Realty Ltd. - Windsor, ON

Hi Mike, Welcome to AR, Be a Blogholic and start writing your own blog soon on AR. All the best for your RE business. This is the right place for customers, friends, realtionships etc.

Best - Sash 

PS: FREE blog traffic strategy video...Hope this will help you... click here

Aug 29, 2008 11:34 PM
Kirk Westervelt
Van West Realty - Greenville, SC Realtor -Short Sale Expert! - Greenville, SC
Kirk Westervelt, Broker In Charge, Van West Realty - CDPE - Short Sale Agent - Home for Sale - Greenville, Simpsonvil...

Hi, welcome to Active Rain! I hope to see more of your blogs in the future. Learn from others, share your knowledge and experiences and enjoy yourself! Take care! ---Kirk.

Aug 30, 2008 01:56 AM
Bob & Carolin Benjamin
Benjamin Realty LLC - Gold Canyon, AZ
East Phoenix Arizona Homes

You are right -- land deals can be more complex and convoluted and it requires someone who truly understands how to handle them to best deal with the transactions.

Aug 30, 2008 03:54 AM
Roland Woodworth
eXp Realty - Clarksville, TN
eXp Realty

Mike: All great information... Thanks for taking the time to post

Aug 30, 2008 04:20 AM
Aventura | Bal Harbour | Sunny Isles Beach | REALTOR® 786-229-7999
SIB REALTY, Llc // WaterWayRealty.com - Sunny Isles, FL

Thanks for the information. There are many issues when it comes to the sale of vacant property. Land use, a variety of covenants and restrictions, etc.

Always seek competent legal advice.

Aug 30, 2008 04:23 AM
Greg Adelman
Midwest Home Center - Saint Croix Falls, WI

Thanks for the tips Mike.  We tell people we are not attoneys but we still need to understand the basics.

Aug 30, 2008 04:31 AM
Maxine Phillips
Naples, FL

Mike:  I didn't realize this was your first post to AR until I read the previous comments.  Congratulations on the feature.

Aug 30, 2008 05:06 AM
Ginger Ryals
Prudential C Dan Joyner and Young Realtors - Spartanburg, SC

Welcome to Active Rain!! This is a great site to network and share ideas!! Have fun with it!!

Aug 30, 2008 05:43 AM
Diane Bell, Hilton Head Real Estate, Bluffton
Charter 1 Real Estate, Hilton Head, Bluffton, SC - Hilton Head Island, SC

Thanks for a good review of land sales---I haven't done any this year with homes being so much more reasonable.  Welcome to AR  too!

Aug 30, 2008 09:00 AM
Judi Downing Real Estate Properties in Charlotte & Union Co
Keller Williams Realty - Indian Trail, NC

Thank you for the information. I am working a land deal right now.

Aug 30, 2008 09:18 AM
Jacques Mountain
Dream Home Inspections/203K Consultant - Fayetteville, GA
Inspector/203K Consultant

I don't know much about land deals, thanks for the info!!

Aug 30, 2008 04:20 PM
Shane OnullGorman
Eau Claire Realty, Inc. - Eau Claire, WI
Eau Claire Wisconsin, Real Estate Agent & Realtor- Buy or Sell

I was just told a few weeks ago "this is going to be an easy paycheck for you!"

Since then I have spent 3-4 nights each week working an extra 2-4 hours on top of my usualy 10-12 hour day seeing this through!

Easy money... no such thing.

Aug 30, 2008 04:22 PM
Nance Burdette
Keller Williams Realty Partners - Spartanburg, SC

Congratulations on signing on as a new member of ActiveRain. Being a new member myself going on my third week and only posting a few blogs so far I truly see the awsome advantage that this truly can be; and only the beginning of a healthy and wealthy relationship of abundant professionals. Everyone has been so very kind. Hope to see your blogs in the future.   Best of Luck to all of us,  Nance

Aug 30, 2008 04:27 PM
Jean Terry
Keller Williams Realty Spartanburg, S.C. - Spartanburg, SC

Hi andwelcome toActive Rain,a great site to network, share and learn.

Good Luck

Aug 30, 2008 04:30 PM