3 Questions Landowners Should Ask Before Contracting to Sell to a Developer
For landowners looking to sell acreage or commercial tracts, being approached by a developer can be exciting.
Over the years I have had many landowner-sellers tell me that after the first contact, they felt like their “ship had finally arrived.” However, when it came time to negotiate the purchase and sale contract, that excitement was reduced by the recognition that dealing with a developer is a mixed bag. This is an unfortunate, but universal fact.
Most landowners are engaged in some business other than real property development. I have represented farmers, ranchers, investors and property owners engaged in all manner of other lines of work in selling their properties. Almost all of them were surprised at the complexity of the developer’s offer and proposed contract terms. Several were surprised at how inflexible the developer’s terms seemed.
Hiring a lawyer won’t always result in better negotiating leverage. It will help a landowner selling to a developer better understand the contract terms, and make an informed decision about whether to purse a developer’s offer. At a minimum, landowners selling to a developer should ask the following 3 questions:
Purchase Price: Am I receiving market value for my property?
It is the job of Developers and their consultants to intimately know the markets in which they operate. They have the benefit of information and data about recent and pending transactions in area – some of which is not known to the public or even local realtors. The purchase price offered to a landowner is formulated
Examples of this type of “insider information” include awareness about plans for nearby development by other developers, coming occupants of developing properties (large, recognizable brands such as Walmart, Target, Home Depot, Lowe’s, Best Buy, HEB and CVS almost never acquire real estate in their own names), and the non-public price per land unit (square foot or acre) paid for other properties in your area. Keeping these details confidential gives developer-buyers a distinct edge over sellers who are not engaged in the real estate acquisition and development business full-time.
In fact, a significant number of land sales to developers are not publicly reported. This is because many of these deals are not handled through the Multiple Listing Service. When MLS rules are inapplicable, no sales price reporting requirement exists.
This lack of information about comparative sales data presents a problem for landowners. Without a viable comparative market analysis, landowners (and even their realtors) find it difficult to assess the value of their land (and an agreeable sales price) based on recently sold, similar properties in the immediate area.
Even in the absence of “full information,” there exist strategies for landowners to ensure that they are receiving as near market value as possible under the totality of the circumstances.
2. Is the Earnest Money (However Much or Little) Truly At Risk?
Immediately after a real estate contract is signed, the buyer typically deposits an agreed-upon sum of money with title company. These funds, called “earnest money” demonstrate that the buyer is serious (i.e. “earnest”) about purchasing the property, and are intended to offset the seller’s risk associated with taking the property off of the market while a purchase contract is pending.
Where residential sales are concerned, short timelines typically apply and the disposition of earnest money is straightforward. With the sale of land that will be developed, the timeline is greatly extended and “due diligence” or “inspection” periods frequently last for several months. As more fully described below, developers use this time to evaluate the condition of the property, assess the feasibility of obtaining permits for proposed use, and develop plans and specifications for planned construction.
More importantly, earnest money is typically 100% refundable to a developer-buyer until the inspection period expires. This means that a landowner could have his property tied-up for 6 months or more while the developer performs diligence studies. Then, if the developer-buyer decides to terminate, the earnest money is refunded and the seller retains only a nominal “option fee.” Insult is added to injury when the landowner-seller incurs attorney’s fees or other costs in connection with negotiating the contract.
Some strategies to mitigate this seller loss, include making a portion of the earnest money immediately at-risk (i.e. “hard”) or negotiating a larger option fee.
3. How Long is the Inspection Period and What Will Occur During This Time?
Here’s an example of a typical Inspection Period clause in a land contract:
Beginning on the Effective Date of this Contract and continuing for a period of one-hundred eighty (180) days, Buyer shall have reasonable access to the Property (the “Inspection Period”) in order to allow Buyer and its agents, at Buyer’s sole cost and expense, to inspect the Property and perform and/or obtain any tests, surveys, studies and assessments, including, but not limited to, an environmental assessment involving soil and groundwater borings and/or excavations as determined necessary by Buyer. Buyer agrees to repair any damage to the Property arising from these inspections and to indemnify, defend and hold Seller harmless from and against all claims, costs, demands and expenses, including without limitation, reasonable attorneys’ fees, court costs and other legal expenses, to the extent caused by or arising from the performance of these inspections. In the event Buyer determines in its sole and absolute discretion that the Property is not suitable for Buyer’s intended use within the Inspection Period, Buyer may elect to terminate this Contract by written notice to Seller. If this Contract is terminated pursuant to this paragraph, the Earnest Money shall be refunded to the Buyer, and neither party shall have any further obligations hereunder. In the absence of timely termination notice, this inspection condition shall be deemed satisfied, and Buyer shall be deemed to be satisfied with the physical condition of the Property. Seller agrees to reasonably cooperate with Buyer, at no cost or expense to Seller, regarding Buyer’s inspection of the Property, including, but not limited to, executing any documents related to the environmental testing performed by Buyer.
The paragraph above is full of legalese, but can be distilled down to this: the buyer-developer will use the diligence period to satisfy itself that the property “works” and can be developed for its intended purpose on time and within budget.
Selling the land and maximizing value is the landowner’s primary focus in the sale transaction. For the developer, by contrast, land acquisition is a single component of a larger “project.”
Developers enter each land deal with a budget and schedule in-hand. In addition to the cost of acquiring the land (the “purchase price” paid to the seller), costs and schedules for engineering, utility procurement, permitting and construction factor into overall project feasibility.