Property Development Due Diligence – Steps To Doing It Right

Property development due diligence involves many steps. When done correctly the risk involved with land development are greatly reduced and the odds for profit are increased considerably.The first step before signing your contract with the Seller is to clearly negotiate all terms that you require. If you and the seller understand all that is expected of both parties, in particular during the due diligence period, you will avoid potential problems down the road. This is where your attorney comes into place. I highly recommend hiring an experienced real estate attorney that is familiar with negotiating land purchase contracts and working with developers. Purchasing land is risky and it is best to minimize your risk from the onset. Typically land purchase contracts go through numerous negotiations and revisions. It is much more difficult after the contract has been signed to get the parties to agree to contract amendments, although contract amendments and addendum are prepared quite frequently based upon inspection report findings and other events that occur during the due diligence period.Requesting in the contract that the seller provide inspection reports or other documents you require during the due diligence period is crucial in evaluating whether you are able to achieve your development goals with this particular piece of property. Be sure to provide a time period for the due diligence that all parties must comply with. 30 to 60 days is the minimum due diligence period for the buyer to conduct his due diligence but 120 days or longer is not uncommon with complicated acquisitions or parcels that require rezoning or are contingent on permit approvals.There are many factors that you should consider which influence purchasing unimproved land. Since purchasing raw land has risks, I suggest you keep in mind the following (Please Note: Much of this information was gathered from the website Property Development Source):1. Title Issues.Are there any clouds on the title? In other words, does the seller have clear title to the property? Review of all title reports and underlying documents affecting the property is crucial. Having a real estate attorney review the documentation on your behalf is recommended whether you are a novice or experienced investor/developer. However, you should review the documents yourself too. Ask questions if you do not understand something or it looks odd to you. The main concern is to make sure the seller does in fact have legal and clear title so that you will not have any legal issues later on. Title insurance protects you in this regard, but you do not want to have to be litigating title issues when they can be discovered early on before you close the deal.2. Survey Issues.Are there any encroachments from adjoining properties on your land or vice a versa? Encroachments could be neighboring buildings, utilities, easements, fences, water, etc. Are the property boundaries clearly marked and surveyed? If there are encroachments, you and the seller will need to be able to resolve the issues prior to closing. Some issues may not be able to be resolved or resolved in a timely manner and you must decide if you still want to purchase the land despite the unresolved issue. You may need the seller to obtain what is called an easement from an adjoining property. An easement is a written document allowing one party use of another party’s water, road, utility lines, parking spaces, driveway, etc. An easement is typically drawn up by the seller’s attorney and reviewed by your attorney. Title companies will exclude encroachment issues from your coverage so it is important to resolve these issues immediately.3. Land Use Approvals.Zoning regulations, site plan approvals, building permit and approvals, lot size, setback issues, fire safety issues, environmental and health issues such as sewer, septic disposal, storm water management, streams, rivers, wetlands, etc. Recommend obtaining an environmental report to determine if there are any problems with chemicals, pesticides, pollution, etc.4. Availability and Access of Utilities.Access to utilities, water, electricity, gas and sewer/septic systems, telephone, cable and internet is another concern that needs to be investigated. If access is not readily available, it can be costly to get basic utilities to the site.5. Accessibility of roads.Are there roads already in place or will you need to build them? You also need to consider the cost of maintaining the roads.6. Topography, drainage and flood zones.Recommend obtaining a soils report and geology report. Is the property in a flood zone? There are designations of flood zones areas and insurance availability is conditioned upon what flood or fire zone properties are located in. Slope issues, stability.During the due diligence period, the seller must provide you with certain past or current reports that he has in his possession such as geology, soils reports, environmental reports. It is best to request these in your contract so that all parties are clear about what they need to deliver to each other. Depending on how old the reports are you can then decide if you want to rely on the seller’s reports or obtain new ones. Also, be sure your contract states the seller will assist with any permitting or regulatory actions that may be required during due diligence. (Often local permitting agencies won’t release information or accept rezoning or permit applications without the present owner’s signature. This clause in the contract states the seller will sign these type of documents as needed.)It is also important to remember that the seller cannot legally sell the land to someone else. He can take back-up offers, however. A back-up offer is another offer contingent upon the first offering not going through and the first buyer canceling the deal. It is totally legal and ethical for a seller to take backup offers and this practice is done frequently in a seller’s market [where demand is high and inventory of available properties is low]. The seller cannot legally disclose to the second backup buyer the purchase price or terms of your offer unless all parties agree to the disclosure nor can he disclose to you the amount of the backup offer and terms without the other party’s consent.By doing your due diligence you minimize your risk. It is impossible to anticipate every source of delay or risk. Conducting due diligence will cost you money and time. The customary way of conducting due diligence is to hire professionals to assist you. Attorneys, surveyors, engineers, environmental experts, zoning and land use specialists who will review documents, do inspections and make inquiries on your behalf during the due diligence inspection periods negotiated between you and the seller in your purchase contract.

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