A land purchase agreement, also known as a land contract, is a document signed by the parties involved in the sale and purchase of a piece of land. The document records the details of the purchaser and seller, their contact information, and the terms of the deal between the parties. It is an important document that transfers the ownership of the property from one party to the other.
Land purchase agreements are legal documents through which the buyer and seller agree to complete the transaction according to the terms of the agreement. It is similar to a standard real estate sales contract and typically includes details regarding the purchase price, seller financing, and other conditions, disclosures, and contingencies of the deal. The purpose of this document is to clearly state what the seller and purchaser can expect from each other. A purchase and sale agreement can be of different types depending upon the payment plan including a warranty deed, grant deed, bargain and sale deed, and quitclaim deed.
A land contract is used to finalize the deal between the buyer and seller. It may be used whenever a person wants to buy any type of land in the United States. The parties should thoroughly go through the entire document to make sure that there are no discrepancies. A land purchase contract should be used after the parties have concluded the negotiations and are ready to enter into the deal. However, before agreeing to buy a piece of land, the buyer should be aware of the pros and cons of investing in undeveloped land.
Buying a piece of vacant land is a huge investment and requires thorough research. There are some pros and cons attached to buying undeveloped land.
The pros of buying an empty land include:
Buying an empty land is commonly cheaper than buying developed real estate. For instance, a fully developed residential property will probably be more expensive than a piece of undeveloped land which the purchaser might develop himself or herself. The property tax on vacant land is generally lower than the tax on developed property. Buying vacant land can serve as a long-term investment.
Vacant land is purchased by paying in cash. This allows the buyer to have full ownership of the land without having to worry about mortgage payment and interest rates.
Buying undeveloped land gives the purchaser the flexibility and freedom to build the type of property he or she wants. The purchaser may build an office space, family homes, a multifamily community, or any other property depending upon the size of the property and zoning rules in place. Moreover, it is easier to maintain undeveloped land than developed real property.
The cons of buying a piece of vacant land include:
Buying undeveloped land might be cheaper but it typically does not provide an immediate return on investment. The purchaser may also have to pay property tax and improvement costs. However, the purchaser can cover these expenses by selling the rights attached to the land, including gaming rights and mineral rights.
Although buying raw land gives the purchaser flexibility to build whatever he or she wants on the land, the possibilities may be limited due to the existing zoning laws and regulations. Zoning defines what the land can be used for. Zoning also determines how many lots can be developed by the purchaser. This would also affect the return on the buyer’s investment. Even if the purchaser wants to get the zoning restrictions changed, he or she will have to go through official channels which can be time-consuming. Undeveloped land usually requires more approvals and permissions than a developed property.
When a purchaser buys raw land, it becomes his or her responsibility to arrange for utilities including plumbing, gas, and electricity. The purchaser must also decide if he or she will connect the land to municipal utilities. Arranging for utilities can substantially add to the money and time taken to complete the purchaser’s project.
There are multiple ways to finance a deal to purchase land depending upon the financial position of the parties involved. Some ways to finance a land deal include:
Third-Party or Bank Financing
Bank financing or third-party financing is the most common way to finance a real estate deal. In this method, the third party may be a bank, credit union, commercial lender, or any other financial institution, and it provides a loan to the purchaser. These institutions will check the purchaser’s credit rating, building plans, and financial situation before providing financing. There are several loan options available to the purchaser including lender land loans and home equity loans.
In some cases, the seller may provide financing, also known as owner financing, to the purchaser if he or she is unable to obtain financing from other sources. However, seller financing often comes with higher interest rates, a hefty down payment, and a shorter repayment term as the seller may not have an elaborate lending portfolio. This can put more financial burden on the purchaser.
In case the purchaser already has sufficient funds there is no need to obtain financing from an external source. For instance, if the purchaser is willing to pay up entirely in cash, there would be no need for external financing.
Buying land can be a complicated process depending upon the type, size, and location of the land. In many cases, buyers look for legal advice from real estate brokers or attorneys before buying a piece of land. Typical steps involved in the process of buying land are listed below.
Step 1 – Find Your Land
The first step is to find a piece of land that the buyer wants to purchase. The purchaser should first analyze all the pros and cons of buying the land. This includes checking for utilities including water, electricity, and septic systems. Another thing to consider is road access and easements on the land and nearby properties. If the purchaser has to cross someone else’s land to get to his or her land, the purchaser must legally record the easement. Real estate brokers can help the purchaser in taking care of the finer details while finalizing the land.
Step 2 – Make an Offer
Once the land has been finalized, the next step is to make an offer to the seller. Once an offer is made, it is up to the seller to accept or reject it. This marks the beginning of the negotiation between the parties. This process includes negotiations regarding the purchase price, earnest money, financing details, and timeline.
Step 3 – Prepare the Purchase Agreement
After the parties have agreed upon the purchase price and other details of the deal, the next step is to prepare a purchase agreement or land contract. The land contract will record all the details regarding the deal. The parties may exchange several drafts of the purchase contract before finalizing a version that satisfies their needs.
Step 4 – Do Your Due Diligence
One of the most important step of any purchase agreement is the due diligence process. It is the investigation that a person must carry out before entering into an agreement with another party. It becomes especially necessary in real estate deals. The purchaser must conduct a title search to determine if the seller has the title to the property and if there are any claims on the property by researching public records. Another step would be to inspect the property with the help of qualified professionals. It is important to check the zoning and land use regulations with the city, county, or state authorities to make sure that the purchaser is allowed to do what he or she wants to do with the land. For instance, some counties may not allow the purchaser to build anything on land smaller than one acre. The purchaser should also enquire about the property tax applicable on the land. In most cases, property tax on vacant land is cheaper but it may vary depending upon the land’s location.
Step 5 – Sign the Document and Close the Deal
Once the due diligence has been completed and the land contract is ready, the final step is to sign the document and move towards closing the deal. The closing time may depend upon the payment structure of the deal. After the parties have signed the document and closed the deal, the transfer of ownership may be recorded through a deed filed with the Registry of Deeds. The property may be under the seller’s possession till the closing date, but he or she must deliver the property to the purchaser on that date.
The main components to be included in land purchase contracts are listed below.
This would include the names and addresses of the land buyer and land seller. This part usually comes at the beginning of the document.
This includes the name and contact details of the escrow agent including his or her full address. An escrow agent is a person who oversees the negotiation and administration of a real estate transaction and charges an escrow fee for the services. The escrow fee to be paid to the escrow agent shall be shared equally by the parties.
This section describes the property that is being purchased including the size, location, and property condition.
This section includes the total price that is to be paid by the land buyer to the land seller. It also includes the details of the earnest money to be deposited by the buyer with the seller or escrow agent. Earnest money is the money deposited by the buyer to show his or her seriousness in buying the land. If the purchase is completed, this amount is credited to the purchase price. This amount becomes non-refundable after the feasibility expiration date or the closing date, as the case may be. The parties have the option to not deposit any earnest money at all.
Seller carry-back financing happens when the land seller becomes the lender and helps the buyer in financing the deal. In this case, the buyer may deliver a promissory note of a mutually agreed-upon sum to the seller at the time of closing. This may or may not be a mandatory part of the document depending upon the mode of payment and kind of financing.
This part includes the contingencies that the parties may want to include in the deal. The completion of the deal would depend upon the completion of these contingencies. For instance, the buyer might want to include a general feasibility contingency clause that allows the buyer and his or her consultants to conduct various environmental and zoning studies on the land.
This is the date on or by which the title and ownership of the property are transferred to the purchaser by the seller. The purchaser is often required to pay the full purchase price prior to the closing. Similarly, the land seller is obligated to hand over the property to the buyer on or prior to the closing date. There might also be some closing costs including recording fees associated with the transaction which may be shared by the parties.
Other details that might be specified in the agreement include liquidated damages, governing law, and the remedies available to the parties in case of a breach of the agreement. The seller may also make some representations and warranties to the buyer in the contract. If these representations and warranties turn out to be false, the buyer may take legal action. Specific details regarding the property or the seller’s representations and warranties may be included in the exhibits attached to the document. These exhibits attached to the document also form a part of the agreement and the parties are legally bound by the same.
Once all the details of the entire agreement are finalized, and the parties agree to the terms of this agreement, they must sign the document, making it legally binding upon them.
FormsPal’s easy to use and understand land purchase contract can be filled out by following these simple steps:
Mention the Details of the Parties
Mention the details of the parties in the blank space provided in the opening paragraph on the first page of the document. Write the name and mailing address, respectively, of the land buyer in the blank space given before “Buyer” and write the name and mailing address, respectively, of the land seller in the space given before “Seller”.
Mention the Details of the Escrow Agent
Mention the escrow agent’s name and address, respectively, in the blank space provided in Section 1(e) on page 1 of the document.
Mention the Feasibility Expiration Date
Mention the feasibility expiration date, if applicable, in the blank space provided in Section 1(f) on page 1 of the document.
Mention the Size of the Property
After completing the details on page 1 of the document, mention the size of the land, in acres, in the blank space provided in Section 1(h) on page 2 of the document. The legal description of the property can be mentioned in Exhibit A attached to the document.
Mention the Purchase Price
Mention the agreed-upon purchase price in words and numerically in the blank spaces provided in Section 3 on page 2 of the document.
Mention the Earnest Money Deposit
Mention the value of the earnest money deposit, if applicable, in the blank space provided in the first paragraph of Section 3(a) and tick mark the box on the left of the first paragraph. This money must be deposited within 3 business days after the execution of the document. In case there is no earnest money paid, tick mark the box on the left of the second paragraph under Section 3(a).
Mention Seller Carry Back Financing
Mention the amount for which a promissory note will be issued by the buyer to the seller in the blank space provided in the first paragraph of Section 3(c) and choose the option on the left side of the first paragraph. In case there is no seller carry back financing, choose the option on the left side of the second paragraph under Section 3(c).
Mention the Buyer’s Contingencies
If there are no buyer contingencies to be included in the agreement, choose the option on the left side of the first paragraph of Section 4 on page 3 of the document. If the buyer contingencies are included in the agreement, choose the option on the left side of the second paragraph under Section 4.
Mention the Zoning Deadline
The zoning deadline is the date by which the buyer must obtain the required zoning and land use permits. Mention the zoning deadline in the blank space provided under the second paragraph of Section 4(c) of the document and select the option on the left. If the zoning date is the same as the feasibility expiration date, select the box on the left of the first paragraph under section 4(c).
Choose if There Are Any Representations and Warranties of the Seller
If there are no representations and warranties made by the seller, select the option on the left of the first paragraph under Section 9 on page 7 of the document. In case the representation and warranties of the seller as provided under Exhibit B of the document are applicable, select the option on the left of the second paragraph under Section 9.
Mention the Communication Details
Provide the seller’s and the buyer’s contact information where a written notice or any other communication may be sent to them. Mention these details in the blank spaces provided under Section 10 of the document. Mention to who the notice must be addressed to in the space in front of “Attn”, mention the contact number in the space in front of “Telephone No.”, mention the fax number in the space in front of “Fax No.”, and mention the email address in the space in front of “Email”.
Mention the Name of the Broker
Next, mention the name of the broker to whom the seller will pay commission under a separate agreement. The broker’s name must be mentioned in the blank space provided under Section 20 of the agreement.
Mention the Seller’s Details Under Exhibit B
Mention the details of the seller as required under Exhibit B on page 13 of the document if the seller’s representation and warranties are applicable under Section 9 of the document. Mention if the seller is a duly organized organization including a Limited Liability Company, Limited Liability Partnership, Corporation, and Partnership in the first blank space provided under paragraph (a) of Exhibit B. Mention the state in which the seller is incorporated in the second blank space provided under paragraph (a) of Exhibit B. The seller can strike out any of the warranties or representations that do not apply to the deal.
Sign the Document
The parties should sign the document once all the other details have been finalized. The buyer must sign the document in the blank space provided under “Buyer”, and the seller must sign the document in the blank space provided under “Seller”.