Today's episode is about the 5 biggest red flags that I see in vacant land contracts. I hope that the tips shared throughout today’s episode provide insight on how you can improve the process on both the buyer and seller’s side of deals.
Welcome back to the She’s Wild Podcast hosted by Nancy Surak! Today's episode is about the 5 biggest red flags that I see in vacant land contracts. I hope that the tips shared throughout today’s episode provide insight on how you can improve the process on both the buyer and seller’s side of deals.
Memorable Moments:
3:07- Contract formatting, spelling, and grammar make a huge difference for sellers that are reviewing contracts for the brokers that are reviewing contracts and for the legal staff that's doing as well.
3:19- When you submit an offer, whether it's in contract or a letter of intent, and you include an absurdly low deposit, that you as the buyer are willing to put forward for earnest money or to deposit money. It's a red flag
5:45- The third red flag, no closing date, and no dates at all associated with performance mechanisms in the contract, is a red flag.
6:26- Using terms like I will close, when I have all permits, I will close when I have all entitlements, I will close when I have all government approvals is problematic. And it's a red flag.
9:12- In Florida, the words Time is of the Essence means that the closing date or the dates in the contract specifically or the days that are noted, have meaning - they actually matter from a legal perspective.
10:51- If a buyer is producing a contract, and they have a section that says, we have the right to assign this contract to whoever we want, at any point in the deal, and we don't need any permission to do that. It's a red flag.
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She’s Wild Sound production by:
Luke Surak, Surak Productions: surakproductions@gmail.com
Nancy Surak00:00
Hello, welcome back to She's Wild, the podcast for Women in Land and Development. I don't typically get on here and talk about my business. You guys know that I interview women in the business. But there are some things that are continuingly popping up on some of my deals. And I thought, You know what, I'm going to share that with folks here. Because if you are a buyer of vacant land, this might help you. And if you happen to be a seller, or you know, a seller, this would also be really good content to share. So this episode is about contracts, vacant land contracts, specifically. And what I'm going to talk about are the biggest red flags that I see in vacant land contracts in my business. And my hope here is to help you, whether you're a buyer or a seller, or you know, one. Help spread the message that these are problematic, and really easy to change, that will help save time in a deal transaction, or that really just should be clarified. Okay, so five major red flags in contracts, that stopped my sellers that stopped me or legal teams in their tracks. Now, I do have to give a legal disclosure, I am not a licensed real estate attorney, or an attorney at all. So this is not legal advice. These are just things that I am seeing, or that I continually see in deals that are problems. Okay, so, number one, number one red flag. When we receive a purchase and sell contract, we a seller, me as the broker, the team as a whole, that is super, super confusing, that appears that it was cut and paste from multiple different documents. It's a big problem. It is a red flag, it makes our side of the transaction and deal sort of like perkupp. We don't know what's accurate, what's not accurate in the contract? If it's confusing, or riddled with mistakes, things like if the subject property that the offer is on or the contract is on is in one county, but a different county is mentioned. That's a problem. It makes my sellers in particular, super, super nervous that they have to watch every single section every single word. Yeah. They should be doing that anyway. But it throws this whole cloud of who is the buyer? Why is our contract so messy? Why is there incorrect information? Why does this feel cut and paste? So if formatting is off, spelling is incorrect. Grammar sections don't seem to kind of flow from one to the next. Take a minute already, if you are a buyer or on a buying team, and make sure that your stuff is pulled together nicely. It makes a huge difference for sellers that are reviewing contracts for the brokers that are reviewing contracts and for the legal staff that's doing as well. Number two, when you submit an offer, whether it's in contract or a letter of intent, and you include an absurdly low deposit, that you as the buyer are willing to put forward for earnest money or to deposit money. It's a red flag. Law, let me explain. In vacant land, at least in Florida, what's normal or acceptable or kind of market rate is a deposit that somewhere between two and 5% of whatever the value of the contract is? So let's say we are negotiating a $5 million deal. If you put down a five to $10,000 deposit, it's frankly laughable. Okay, that is a big red flag for my sellers. And here's why, even though we know in many cases, you're going to be pursuing entitlement work. So you're going to be hiring consultants, engineers, surveyors, contractors, whatever on your team to get the entitlements or the right to build whatever it is that you want to build. Even though we know you're going to be spending money when you do not want to put deposit up. That's a reasonable to have a landowners property technically off the market because you're working on it. And you use an excuse like, all my money is going to be tied up in the entitlement process. I'm gonna have to pay consultants. I don't want to put 50 or 100 grand up it's a red flag my sellers want To know that they're dealing with very serious, very competent buyers. If we're negotiating a five or $10 million deal, you had better be talking a total deposit of, you know, 2% and a minimum, it's, if it's anything less than that, it's a problem. Now, do I negotiate deals with lower deposit amounts every once in a while. But pretty much as a minimum, like, you're not going to go much further than the contract draft if you do not have at least 50 grand down. So stop doing that if you're doing it. Number three, the third red flag, no closing date, and no dates at all associated with performance mechanisms in the contract, is a red flag. What do I mean? Well, we know just like I stated before, we know you're going to be pursuing entitlement work permits, permission sometimes rezoning. There are dates associated with those things. Even if it's a guess, right. Even if you say I need 90 days to go through the rezoning process, or in the 90 days to get my permits, whatever that timeline is, you need to include it in the contract. using terms like I will close, when I have all permits, I will close when I have all entitlements, I will close when I have all government approvals is problematic. And it's a red flag. Let me just state it is very common for me to see this. And we fight like heck, to make sure that we put dates associated with those different hurdles, those different things that you're seeking to get in order to get closer to closing, we're saying tell us the timeline, is that 90 days is that 120 days, you got to put it in the contract. Otherwise, it's a problem contract, it's a problem for the seller. So that is a major red flag. closing dates are something that I fight for, quite frequently, as a broker on my deal. We will add up all those different timelines seeking, you know, approvals seeking rezoning, whatever it is, and we'll arrive at a close no later than x, right, and we want to see an actual date in the contract. Now, again, I'm not an attorney, I go round and round with Attorney sometimes that as long as you have the dates outlined that 3060 90 120 days, you don't need a closing date in the contract. I disagree. And I like to have both because it is double coverage. So if you're a buyer, don't be surprised when this comes out. We get it I as a broker for sellers, I don't want my sellers signed contracts that have closing dates, not well defined, or at least mechanisms by which what they're seeking, that will trigger a closing we have to have the dates either by calendar dates or by the actual date, otherwise, we don't have a deal. Big Red Flag. Okay. Number four, the fourth red flag in the state of Florida, there is a term that we want to see and all of our contracts. And that term, or series of words is called Time is of the Essence in this contract. If time is of the essence is a knot in a contract, it is a major red flag. Why is this a red flag? Okay, so in Florida at least I can't speak to other states. But in Florida. The words Time is of the Essence means that the closing date or the dates in the contract specifically or the days that are noted, have meaning - they actually matter from a legal perspective. If you do not have the clause, Time is of the Essence, at least in the state of Florida. It means that time doesn't matter. And if you have an issue that later you are going to court over that isn't important, really important piece of your contract. So if you do not have that in there, I actually fight for that to be in the contract for my sellers. And I also fight for to be in the contract when I work with buyers, because I think it's an equal protection. Either way, so you want to make sure that time is of the essence is somewhere in your contract. Without it, big red flag.Okay, final, and number five final red flag. Some of you, when you hear me say this might raise an eyebrow, but it is a red flag for many of not all of my sellers, they hate it. When it's in a contract, we always tackle this particular section. So some of you would say, when you hear me say it, and that's not really a red flag. Yeah, it is. Okay. Sections, I talk about full assignability rights associated with the purchase and sale agreement. Meaning if a buyer is producing a contract, and they have a section that says, we have the right to assign this contract to whoever we want, at any point in the deal, and we don't need any permission to do that. It's a red flag. Now, a lot of buyers include it. Because things happen in deals, things happen in companies, things happen in pursuits, changes come up, and it gives them ultimately, the best amount of flexibility in a deal. If for whatever reason, they don't want to close, they can assign the contract to someone else to do so. For my sellers, however, I absolutely hate full assignability contracts. Because they say to me, this feels like a flip deal. This feels like this buyer is going to put the deal under contract and flip the contract to someone else and make a major profit. spared my experience, because I do a lot of work of fraud vetting buyers that this doesn't happen. However, when full assignability is in the contract, it can definitely happen. So here are the things that my sellers like to see. If you want assignability, they want to either ask you for permission, you know, they want to have you ask them for permission. If a deal goes sideways at the end, and they still want to close, or they have a partner that will close or someone that they are associated with, but that maybe they're not partners with, they want you to come back and to be transparent. They want to know what's happening, right. So that's sometimes can get us over that hurdle. The other thing that they love to do, and I love to do as well is hey, you can assign this contract, but only two related entities. It's very, very common in land for one group or an LLC to put the deal under contract with the full intent that a nother legal entity will be made prior to closing that's related. So XYZ company LLC puts it on the deal under contract, they're going to sell the deal or assign the deal. At the end after all the work is done to ABC, D LLC, but they're still under the same holding company. That's okay, but doesn't necessarily need permission. My sellers will say as long as it's related, it's okay. related entities that have similar or the same ownership, JV partners with that particular buyer, business partners with that particular buyer, or other partnerships or other relationships, if the main people in one buying entity remain somehow connected or in the deal going forward, I can usually get my sellers comfortable with that. So full assignability though with like none of that it, we usually fight myself and any attorneys that are involved to really just better to find that section. So in review, if you're doing any of these things in your land acquisition person or you're looking at buying a vacant land or put something under contract, make sure you're not doing these red flags. Make sure that your contract is very clear. Make sure that you have appropriate levels of a deposit 2 to 5%. Make sure that you have dates specified number of calendar days, number of business days and an actual closing date. Make sure you include the term time is of the essence. And by all means if you want the flexibility to assign the contract. So in with language that's going to be much more acceptable to the selling side. That concludes my show for today. Hopefully this was of assistance to someone. If you are a land acquisition person and you're listening to this, and you guys are doing these things. I would definitely suggest that you get with your legal team and you review why and what other things you might be able to do to help tighten this up so that it doesn't become a problem in your deal negotiations. If you guys need any other insight, or if you are an owner of land, and you're listening and you're like, hey, I need some help. I'm always here. You can reach me through LinkedIn or my Instagram. Just shoot me a quick message at Nancy Surak and I'll look forward to hearing from you. I hope this was helpful and I'll see you guys next time.