What Contingencies Do You Want When Purchasing Raw Land?

‍Buying land can be a tricky process with contracts. For the contract, the buyer must take many things into considerations, including making contingencies.

The contract portion of buying land can be a little scary. Keeping your contract without wasting money and still getting the land you desire is part of the reason why contingencies are available.

While you can make a contingency for just about anything, the most common contingencies for are land finance, septic system availability tests, zoning regulations, and suitable water. These are just some of the options one can pick from, though a realtor or real estate lawyer can help.

What is a contingency and why would you need one? How do you break a contract with a contingency? What other options are available for contingency?

We've done lots of research, and bought some land ourselves. We'll discuss the idea of contingencies and which ones might be useful for your situation.

‍What is a contingency for land?

Just a refresher here: A contingency is a stipulation named in a contract that gives the buyer or seller the ability to back out of a contract. The buyer can make an offer with the contingency that they will purchase the land, and include in the contract that the deal will only take place if the buyer is able to secure financing. The contingency also typically includes a clause that allows the buyer to receive a fund for any earnest money put toward the land. Contingencies are most often discussed between the buyer's realtor or real estate lawyer before sending the contract over to the seller's realtor and lawyer.

What contingencies should I use with buying raw land?

There are many contingencies you can use to ensure the land you wish to buy makes your intentions for the land possible – it's also a matter of choosing which ones make the seller want to accept your offer, especially if other offers are available.

Here are some of the most common contingencies:

Financing

Many raw land purchases need financing from a bank in order to be completed. If the buyer cannot for some reason obtain financing, a finance contingency can allow them to walk away from the deal. The buyer can also specify that the deal doesn't work even if finance issues are their fault, including being financing irresponsible during the buying process.

Finance contingencies don't quite work if the buyer is paying cash.

Appraisal value

This is more of a contingency with the lending bank, but the buyer can ask that the appraisal value be at least the purchase price of the land. Along with environmental testing, this is one number and result that the buyer and seller don't have much control over – however, it is possible for the seller to lower the price of land in an effort to match the appraisal. To counter this, the buyer could also request an appeal to an appraisal.

Perc test

Without getting into a lot of detail about the process, raw land that will be used to build a home or commercial property must pass a “perc test” or percolation test for the purpose of sewage. Failing to pass a perc test can require more expensive alternatives to bring sewage away from a building, which some buyers will steer clear from.

Well water

Some properties are purchased without the presence of city or municipal water. A buyer may ask to have the well water tested to make sure it is suitable for cooking, drinking, and cleaning, before buying the property.

Survey

The buyer could ask for a survey to be done (or the bank could ask) to ensure that the property boundaries are well defined, and that any easements or neighbor encroachments are known about before purchase.

Zoning

Zoning – or the government regulation of land usage, can be complicated. The buyer can ask that the city ensures that the property can be used for what the user wishes to purchase it for, whether it is residential, commercial, farming, or anything else.

To be fair, zoning is usually reasonably clear based on the realtor's knowledge of the location and use of the land. One factor that might throw this off is the desire to change how land is zoned, which is dependent upon local government.

Buildings

The buyer can ask the city to ensure that they can be issued a building permit for the structure they want to build, which includes zoning. A buyer might have a specific structure in mind that has the potential to violate local ordinances, so they'll want to check with the city government to ensure that the thing they wish to build is allowed by the city.

Hazardous materials

Does the property have anything in the soil that could be toxic, ranging from lead to chemicals? The buyer can ask to perform a test that detects the presence of these kinds of things. Hazardous materials, ranging from excessive lead in the soil to asbestos in an abandoned building can be rather expensive to clean up and hard to detect or know about at first glance.

What should a buyer do if the land doesn't pass the contingency?

The buyer could ask the seller to fix the contingency first. This is less common as it takes time, for example, for a seller to fix their well.

Otherwise, the buyer needs only demonstrate that the contingency was not passed by showing documentation proving so, and give that to the realtor or lawyer they are working with.

Can I make a contingent free offer?

You can, though we wouldn't suggest doing so. You'll likely find something that you want to check regarding the raw land – and the bank probably will too, in regards to making sure it meets your expectations.

How much time do I have for contingencies?

You can decide this when you have a realtor or lawyer start the contract. Give yourself ample time to do all the inspections and tests you want. You'll also want time to decide if a broken contingency is worth the time to break the contract. Note that in some wordings, allowing the time for a contingency to lapse means you can no longer use that contingency.

What if I don't respond on time to cancel a contract with a broken contingency?

Depends. Talk with your realtor or lawyer. It is possible that, at worst, you could lose any earnest money you put down with the contract. Otherwise, especially in a situation where finance isn't coming together, that you can't exactly be forced to buy land with money you don't have.

Can I make up a contingency?

You can name just about anything legally provable as a contingency. There is a problem with this method though. In a competitive market, a weird contingency might not help you when there are multiple offers on the table. The seller will probably want to accept the easiest offer to take – even if it isn't for the most money.

Does a broken contingency mean the contract is over?

This is more up to the buyer and seller. If a contingency has a problem, the realtors or lawyers for their respective sides can instead discuss what each side would like to do. Issues like a lack of financing can be handled by switching banks. Examples of these issues can be rather specific, but both sides certainly have the opportunity to make things right before cancelling a contract.

What happens with earnest money?

Earnest money is a check or deposit made to an escrow account, often through a legal firm, broker, or title company. The seller doesn't actually receive this money unless a contingency is broken that allows them to keep it, or the property sells to the person who gave the earnest money – in which case the amount is deducted from the sale of the land.

The seller also has the option to return earnest money to the buyer out of a goodwill gesture.