The Complete Home Building Guidebook

CHAPTER 3

LAND: LOCATING, CONTRACTING AND DUE DILIGENCE

The first stage of home building is to locate the land parcel or individual lot on which to build a home.

HOW TO FIND A SUITABLE LAND PARCEL OR LOT

• Remember “Location, Location, Location” when seeking the best parcel of land
  • Drive the area looking for:
    • Vacant lots
    • Potential teardowns
    • New subdivisions where lots will be sold to home builders
  • Contact a local real estate agent
  • Search the local multi-listing service
  • Search the internet for land listings
  • Review local tax records and tax maps for current owners
  • Review google earth to find vacant lots

LAND/LOT CONTRACTING

After a suitable land parcel or lot has been located, the home builder/homeowner will need to address the terms and conditions of this purchase with the land/lot seller. The home builder may start off with a non-binding Letter of Intent which will outline the terms and conditions of the purchase or go directly to the purchase contract.

METHODS OF PURCHASING THE LAND/LOT

Once the home builder has identified the property to purchase, a plan of payment must be determined. There are three methods of purchasing the property.

• The home builder pays cash
• The home builder gets a lot loan for 60-65% of the value of the land and then funds the balance
• An investor purchases the land for the home builders and is paid a fee or a percentage of the sales price as additional profit
• The seller of the land can subordinate (takes back secondary financing) all or a portion of the land to the home builder and will charge interest on this loan either paid monthly or accrued to a pre-determined maturity date.

LETTER OF INTENT (LOI)

A Letter of Intent (LOI) is a non-binding agreement that outlines the business terms of the deal. Once this letter is signed by a seller, the purchaser will have his attorney draft a formal purchase agreement. The following is a sample of a Letter of Intent (LOI)

3.1 Letter of Intent

DOCUMENT 3.1

PURCHASE AND SALE AGREEMENT

The formal Purchase Contract is used to document the terms and conditions of the purchase by the Purchaser from the Seller. The following is a sample of a Purchaser and Sale Agreement.

3.2 Purchase and Sale Agreement

DOCUMENT 3.2

LAND DUE DILIGENCE

When reviewing a lot or a parcel of land, the home builder needs to determine if the property is buildable. The due diligence can be broken down into three issues:

• Property issues
• Legal issues
• Marketing issues

PROPERTY ISSUES

The home builder will need to review those issues that pertain to the physical property.

Walk the Land/Lot Parcel

The first item to complete either prior to contracting for the land or at the start of the due diligence (inspection period) is to walk the land. During this process, the home builder should review:

• Does the land have any improvements on it?
• Is the topography of the land, flat, rolling or steep?
• Which way does the property slope?
  • If the lot slopes down from the front to the rear – gives the house a daylight basement
  • If the lot slopes from left to right or right to left – put the basement with daylight on the opposite side of the garage
  • If the lot is flat, dirt will need to be brought in to build up the lot for a basement
• Is there any water on the land or adjacent to the land?
• Is the property in a flood zone?
• Is there any water runoff from adjacent properties?
• Are there signs of rock on the land?
• Are there any signs of poor soil conditions?
• Are there any erosion conditions?
• Which way does the sun shine on the property?
• Are there any dead trees that will need to be removed?
• Is there any trash buried on the property?

Review an Aerial

The home builder should review an aerial of the property to see the various views and how it fits into the neighborhood.

ILLUSTRATION 3.1

AERIAL

3.1 Aerial

Review of the Utilities

The home builder should check with the local utility companies to review the availabilities of the various utilities to the property. It is advisable to get a letter from each of the utility companies.

• Power (Electricity) – Will the power connection be overhead or underground?
• Gas – Is gas available to the property and where is the nearest connection?
• Water – Where is the nearest water connection to the property?
• Sewer – Where is the nearest sewer connection to the property? If no sewer connection is adjacent to the property, the home builder will have to pay to bring sewer to the site at an additional cost. Additionally, the home builder might need to purchase a sewer easement from an adjacent property owner to bring the sewer to this property.
• Telephone – Is there telephone service available to the property?
• Cable TV/Internet – Is there cable TV/Internet service available to the property?

Public Sewer or Septic Tank

If the property is located in an area with no public sewer available, a septic field will be required. The home builder will need to have a percolation test (perc). The perc test will calculate the absorption rate of the soil. The size of the septic tank will be based on the number of bedrooms and baths located within the home. The local health department should be contacted for their rules and regulations.

Flood Plain Maps

Check with the local building department to verify the property is not located in a designated flood plain area.

Soils Testing

In order to make sure that there are no problems with the home’s foundation in the future, the home builder should review the soil conditions. A reputable soils engineer can produce a report that will review the various soil conditions of the parcel. This is money well spent by the home builder if the soils conditions render the property unbuildable.

Rock Testing

Many parcels of land have rock underneath the soil that are not visible. Adjacent property owners should be contacted to see if they had any rock on their property. The rock may be easily ripped by the construction equipment or may have to be removed by using explosives. A firm that specializes in rock studies can handle this work by taking some boring samples underneath where the foundation will be located.

Phase I Report

The home builder should have a Phase I environmental report prepared to determine the past use of the property that may affect the buildability of a new home.

Radon Testing

Soils testing for radon is not usually recommended since it does not give an accurate prediction of how much if any radon will enter the house after construction.

Review Storm Water Management Issues

The home builder should meet with the local storm water management department to review their requirements for storm water. This requirement may include the home builder adding a rain garden or flow wells for water runoff.

Balancing the Dirt on the Site

The home builder should have his civil engineer review the site to determine if the earthwork can be balanced or if dirt needs to be brought to the site or taken from the site.

Access to Lot for Building Materials

The home builder should review the access to the lot. This is important when bringing materials and equipment to the site. Small narrow lots on narrow streets can cause the home builder additional costs when removing or bringing in additional dirt to the site.

Basement vs Slab/Crawl Space Lot

Each lot should be reviewed to determine if it is suitable for a slab/crawl or basement lot. Depending on the home buyer demand for basements, many lots can bring in compactable dirt to create a basement.

LEGAL ISSUES

The home builder should review the property for any potential legal issues that may affect the title of the...