Negotiating a contract to purchase vacant land can be intimidating. Many of the things you’ll need to think about– like the condition of the soil, presence of hazardous materials, or whether the area is zoned for the uses to which you want to put it – have already been taken care of when buying an existing house. Nonetheless, with a good punchlist of concerns to address and a fair amount of care and perseverance, you’ll avoid the major hazards of acquiring an undeveloped parcel of land.
Your purchase agreement with the land seller will be an important part of this preparation and due diligence. By incorporating appropriate language, you’ll help assure that the terms of the sale are fair and that you are receiving what you expect.
Here are the main concerns you’ll want your purchase agreement to cover. Whether you or the seller prepares the first draft depends partly on custom in your state, but regardless of who begins the process, be sure to assert your rightful voice in negotiating the language and terms.
Although some terms of the contract will likely be boilerplate (primarily comprehensible by lawyers), others will contain information that you can and should examine carefully:
Description of premises. Sounds obvious, but it’s not. The seller’s deed should contain a good description of the land. If it’s vague or doesn’t match any plans you’ve already seen, consider making the purchase conditional on an engineered survey that shows a minimum number of acres. If you’re using bank financing, the bank may insist on a survey in any event.
Price. Negotiate the lowest possible price and make sure that the description of the price (often numbers and words both) is consistent and accurate.
Deposit. You’ll want the deposit required of you upfront to be as low as possible. A small deposit frees up cash for other needs, like an engineered survey or soils tests, and reduces the amount you may have to forfeit in the event of a breach of the agreement.
Seller financing. If the seller is providing financing (commonly referred to as seller financing or purchase money financing), your agreement should specify the amount, the applicable interest rate, the terms of repayment, mortgage terms, whether the seller has a right to accelerate (claim the entire amount due if you miss a payment), and all terms and conditions that will apply in the event that you fail to make the payments or otherwise default. It’s common to append a draft of the purchase money note and mortgage that are substantially in the form of the purchase money note and mortgage you will be asked to sign at the closing.
Improvements. Are there improvements on the vacant land, like wells or stone walls? Your agreement should require that the seller maintain them until the closing in the same condition as they are when you sign the agreement.
Good title. You want to be able to claim ownership of the land once you pay for it! Your agreement should require the seller to deliver good title to the land at the closing (subject to any known easements and rights of others to use or cross over it).
Closing date, and possibility for extensions. Your agreement should specific the date on which the seller will give you a deed to the land and you will complete your payment. Make provision for extending the closing date in case it becomes necessary. Sometimes, buyers need more time to meet the agreement’s conditions – for example, completing soils tests.
Right to inspect. Your right as a buyer to inspect the land immediately prior to purchase is an essential term of any agreement. Better yet, see if you can negotiate the right to enter onto the land at any time prior to the closing for any reason, during normal business hours.
Seller cooperation. The seller should be required to help you get the information you need in order to close the deal. He or she should also provide you with any engineering that already been done or is in the seller’s possession.
Specific performance and/or liquidated damages. What happens if the seller refuses to go forward? Your agreement should provide for specific performance – the seller must act as promised, barring physical impossibility, if you show up at the closing with check in hand. On the other hand, if you can’t go forward, the agreement should specify that your damages are limited to the amount of the deposit.
Typical land purchase agreements have all sorts of conditions built into them. Those provide you with reasonable assurance that you’re getting what you bargained for. Land purchase agreements can be conditioned on: bank financing on terms and conditions that are acceptable to you; testing for hazardous materials; testing for soils and ground water levels that will support a septic system, if there is no public sewer available; compliance with local and state zoning and subdivision rules and regulations; the right to survey any wetlands and other protected areas on the land; access to a public road; and any other site-specific condition that, if not met, will make the land unusable for building your home. Some buyers require that the seller pay for and deliver a fully engineered and approved septic system permit prior to the closing.
If, in order to meet a condition, work is required – for example, soils testing – that calls for professional help, takes time and involves some expense, your agreement should specify who will do the work, how much time will be allowed to complete the work, and who will pay for it.
Identify all of the real estate brokers who are entitled to a fee, specify how much they will be paid (most likely, a percentage of the purchase price), and state when they will be paid (assuming that title is conveyed at the closing).
Most agreements to purchase land contain representations and warranties made by the seller. If a representation and warranty is found to be false prior to or at the closing, you can walk away without penalty. The seller is often asked to represent that he or she has the authority and power to enter the transaction, that there are no existing violations of applicable law concerning the land, that no liens affect the property, and that no pending proceedings might interfere with your purchase and eventual use of the land.
Representations can, by their terms, continue in force after the closing; make sure that your agreement specifies which ones will survive the delivery of the deed to the land.
Only after you and the seller have agreed on all terms of the agreement and signed it are you formally in contract to purchase the vacant land.