Negotiation knowledge is the most powerful tool when making an offer on a property. Often, real estate developers and property sellers are among the best negotiators. Why? The more information you have about a prospective property, its initial price, how long the seller has owned it, the better offer you can make.
Aside from land characteristics and a lot’s status under zoning, it is vital for buyers to consider the reasons for sale. Whether you’re building a custom home or preparing to complete a large-scale commercial project, thoroughly researching the land and arranging a well-drafted offer will mitigate the risk of unexpected fees, legalities, and restrictions regarding the land, its legal status, and its title.
At the outset of a sale, it’s highly probable that the seller knows more about the land than the prospective buyer. Here, we’re going to discuss the key preparation and negotiation tips to help buyers gather enough knowledge to level the negotiating table, save money, and make the best possible offer.
Appraisals: Know the Value of What You Are Buying
The first step to negotiating is to evaluate the value of the land or property that you are interested in buying. Appraising involves much more than merely previewing property and ballparking a number. First, you need to consider how your project aligns with local zoning laws. Often, municipalities are divided into zones which specify usage requirements and building prohibitions.
Whether a property can be used for residential or commercial purposes, or if there are regulations on lot size, placement, or the height of structures, understanding zoning laws can protect a buyer from adverse, neighboring land uses and prevent costly, post-offer building restrictions.
In the initial appraisal process, a buyer must first establish a rough estimate by researching the financial details of comparable deals, or nearby projects. You can also standardize an estimate by evaluating the market value of nearby homes; deducting costs from land facets that detract from your property’s value, such as proximity to busy roads, wet/elevated land issues, or a lack of utility systems. Deductions can also relate to nearby power lines, poor drainage, contaminated soil, and proximity to high crime neighborhoods and older houses.
Determining the value of a vacant lot, in comparison to a home for sale, is often more challenging. As such, if you’re looking for vacant land to build a custom home, a professional appraiser can help you secure an accurate, market analysis of your property.
A multitude of other demographic components can affect the value of land. For example, the urban or rural community setting that neighbors commercial real estate can alter the value of a property, and local conditions/developments may increase the property’s current estimate from its original buying price years before.
While there’s no guarantee that an estimate, be it a formal appraisal or market analysis, will accurately pinpoint the sale price, land assessments can be a powerful bargaining tool. If an estimate is significantly lower than the seller’s asking price, bringing value-based information to the negotiation table can help buyer’s save money on their final offer.
Determine the Value Before Making an Offer
You’ve identified potential land for your custom home, and begun to appraise the property on your own. Now, reach out to a real estate appraiser or broker to get a market analysis. With the experience and knowledge-base to develop a more precise estimate, these professionals may also be aware of market trends and future developmental plans.
If the appraisers valuation is vastly different from your ballpark estimation, it’s important to figure out why. Large-scale environmental or demographic factors, such as local pollution, may unknowingly impact the property’s value. Consider price variation factors as well; land sold at a “bargain price” two years ago might have spiked in price because of communal developments or population growth. Or perhaps a local business, say a manufacturing plant, is closing down.
Deficits in the local economy may unexpectedly alter the property value. Whether building a custom home or buying a land lot as an investment, identifying concerns for price variation is essential to securing an optimal bargain.
Understanding The Bidding Process
After building a solid foundation for your property’s value, you can start the actual bidding process. Whether you feel comfortable making an offer independently or seek the guidance of a lawyer, many buyers use the real estate agent’s Bid Offer form, or “Vacant Land Offer to Purchase,” to make an initial offer on a property. If the proposal is accepted, complete the agent’s Purchase-and-Sales (P&S) form to outline the terms of the sale formally. Because both of these are binding, legal documents, it is wise to space out their submissions; combining forms can trap a buyer in an obligation to purchase under the seller’s terms in one swoop.
Buyers should also remember that agents hold a fiduciary responsibility to look after the seller’s interests. Therefore, after spelling out the terms of sale in your offer, consider hiring a title company or attorney to complete a title search. By ensuring the title is clean, you can close the deal.
Get Legal Representation for Purchasing Land
When hiring a lawyer, research their prerequisites, client reviews, and experience with property law, and ensure that, when closing, they will be representing the interests of the buyer. The benefits of hiring a legal representative when purchasing land include setting up a proper escrow, protecting money, and creating a structured offer with the right contingencies. Further, you will ensure that you are being warned of any potential threats or hidden costs.
Earnest money, which is used to ensure the seller that the buyer is serious, is also an essential step when purchasing land. Escrow deposits can vary, but should not exceed 1% of the property’s value. If a buyer breaks the contract, the seller will have the right to keep this money; however, contingencies written in your bid offer can protect the buyer from earnest money disputes.
Adding Contingencies To Your Bid
From a sellers perspective, a buyer would ideally trade cash for the property title, but this is tremendously risky. Contingencies are among the most critical elements of any bid, as they allow you to retract your offer if documented conditions are not upheld. For example, if you’re buying a vacant lot that you believe has good soil but are wary of potential insufficiencies, you can add a contingency based on soil quality.
By “studying” land feasibility, and inquiring the seller about property details, a buyer can outline the most prominent contingencies and mitigate risks prior to the sale. Regarding the prior example, if a land survey exposes soil contaminates, you will have an escape hatch and can either back out of the deal or force the conditions of the contingency to be met. For example, the landowner might have to remove the soil or manage contaminants in alignment with remediation waste management procedures.
The information a seller is required to disclose to prospective buyers varies from state-to-state. In the possibility that a buyer overlooks a prominent detail when outlining contingencies and making a bid, broad guarantees ensure that there are no material insufficiencies with the land or title. Ultimately, to accurately address property risks and compose the most applicable contingencies, a buyer should thoroughly evaluate professional land surveys, deed restrictions, and local regulations for building plans.
Make Sure Your Title Is Clear
A “clear title” illustrates that the original property owner not only has the legal right to sell, but that their property is free of encumbrances, such as liens or ownership claims, and that following the sale, the title undoubtedly transfers to the buyer.
Title insurance will further protect the buyer from financial losses if past-title discrepancies arise. In comparing “Buyer’s” and “Lender’s” title insurance, they offer the same protection, although buyer’s policies are typically more expensive than lenders’. Similar to title insurance, a warranty deed guarantees a seller has transferred a clear title and is responsible for paying if buyer ownership is ever challenged. Obtaining “Gap Insurance” protects you from claims during the time the paperwork is approved until it is closed. It is inexpensive but worthwhile.
Conclusion – Patience is a Virtue
While negotiating land offers is often a multifaceted, time-consuming process, thorough research, accurate appraisals, and applicable contingencies can all help level the bargaining field. To reduce both the costs and risks associated with purchasing a plot of land, consider contacting an established real estate consultant, such as Belman Homes.
With experience in listing, selling, and constructing homes, Belman can assist buyers in completing a Comparative Market Analysis (CMA), and provide real-time guidance and insight until a sale is closed. Partnering with a top builder in Wisconsin such as Belman Homes, will help ensure that your custom home or other real estate project is completed efficiently, within budget, and without financial/legal risks.
