If you are looking to buy land, you probably have a purpose in mind: You know how you want to use the land and the type of land you need. Even before the closing documents are signed, you start making plans for converting it from its current state into your vision of the perfect use.
However, those plans may be derailed by a variety of obstacles, if you miss the critical first step in the land-buying process — to buy the correct site. That’s the advice of Dr. Charles Gilliland, of the Texas A&M University Real Estate Center.
“Buyers typically base their decisions on a set of assumptions about the future,” says Gilliland. “Buoyed on a tide of emotion, the careless buyer may fail to foresee potential threats, until after the deal has closed.”
A careful buyer identifies his or her assumptions upfront, Gilliland explains. Doing so forces the buyer to think about the assumptions and the “what if’s” involved. These can be as mundane as assuming unfettered access to the land, or as specific as anticipating that a particular well can provide sufficient water for irrigation.
The buyer should review each important aspect of the property related to the assumptions, collect information and ask key questions. Then, he or she can determine if there’s anything to worry about, or if the site should be eliminated from consideration.
No buyer can completely avoid taking a risk when purchasing land. However, a savvy buyer using a systematic process can increase the probability of taking the right risk, according to Gilliland.
To reduce your risk when buying land, Gilliland recommends gathering as much information as possible about the property. “A buyer should approach the land-buying process with a plan to systematically evaluate each candidate property,” he says. The process should involve these steps:
- Specify desired characteristics and property rights.
- Locate suitable properties that meet those criteria.
- Choose a target property and estimate its value.
- Complete the transaction.
Choose the Right Site
8 Factors That Can Help Determine the Property That’s Right for You
By Dr. Charles Gilliland
Land investment represents a substantial financial commitment. Therefore, when buyers think they have found the right site, they should consider the following factors before making an offer.
1. Focus on Specific Locations
To locate the right property, begin by specifying a list of particular property attributes. Clearly define the major land use you envision pursuing and specify the physical characteristics needed to support that use. Soil types, topography, hydrology, access and numerous other features determine the possible uses of each site. Location determines these physical features and defines a tract’s appeal within the context of surrounding properties. More than any other single influence, location shapes potential for specific uses of a property.
2. Understand Property Rights
Property characteristics define potential physical uses, while property rights define legal ownership. Combined, the two create conditions supporting a market value for the land. Both physical characteristics and property rights will have a critical influence on the choice of property and price negotiations. Potential buyers should identify both physical attributes and detractions, and view the property as if they intend to resell it. If an attribute unimportant to the buyer would likely repel other potential buyers, the impact should be considered before closing the transaction.
Property rights issues encompass everything from verifying ownership to identifying easements and land use restrictions. Because they specify the potential legal uses of the land, available property rights may be more important than physical features.
3. Lease Provisions
Initially, an existing grazing or farming lease may seem insignificant. Most agricultural leases run for short periods, and many are renewed annually. However, lease provisions may exert a decided influence on the purchase process when they specify a right-of-first-refusal. Specifically, the buyer may discover that his or her time and other resources invested in locating the property and negotiating the terms only set the price for the tenant. It might be prudent to pass on properties with a right-of-first-refusal lease or at least investigate the tenant’s appetite for the land.
4. Undivided Interests
Difficulties can arise when several individuals own undivided interests. Although it does not automatically guarantee problems, undivided interests complicate the negotiation process, especially when not all owners wish to sell. Purchasing such property may present a negotiating challenge.
5. Mineral Rights
Mineral ownership can be important for land buyers, especially when less than half of the minerals transfer with the ownership. Mineral owners dominate over surface owners. This means that a mineral owner, or the lessee, can enter the property to extract the minerals, without obtaining permission from the landowner. Furthermore, if the current owner has executed a lease with a producer, that lease remains in force, even if the minerals transfer with the surface. A potential buyer should not purchase property without inquiring about the possibility of mineral exploration.
6. Restrictive Covenants
Some land titles contain restrictive covenants that constrain use. Restrictive covenants are sometimes called deed restrictions, and they typically attempt to ensure a minimum level of land use, such as requiring an owner to build a home with a specified minimum floor area. Most problems with restrictive covenants occur when a buyer is uninformed. The solution is to identify possible restrictions before the transaction is completed. Both buyer and seller then can take these into account.
7. Environmental Regulations
Environmental regulations may signal potential problems for landowners. Consequently, buyers should identify possible issues prior to closing the deal. Endangered species regulations or the presence of wetlands can limit land-use options. In addition, the presence of hazardous substances may create an onerous liability for anyone taking title to land.
Federal law protects designated endangered species and requires the preservation of their habitat. Owners of land harboring an endangered creature likely will find severe restrictions on land use. In some cases, restrictions have halted most human activity in endangered species habitat.
No one can predict whether a particular property may become the home of an endangered species, as more plants and animals continue to be identified as endangered. However, it is helpful for the buyer to be aware of existing endangered species habitat and to know about threatened species that may acquire endangered status in the future.
8. Property Taxes
The appraisal method used to determine taxes is yet another potential stumbling block that could affect price negotiations. In Texas, for instance, if the current owner has been taxed under the Texas open-space provision, the liability for a potential rollback tax passes to the new owner.
Open-space treatment depends on establishing a record of past and continuing land use for agriculture or timber production. Providing wildlife habitat qualifies as an agricultural use under certain conditions. When the land receives open-space treatment, property tax liability depends on agricultural-use value rather than market value.
Generally, open-space status results in a substantial tax reduction. However, in Texas, when land use changes, the Texas Property Tax Code imposes an additional tax equal to the difference between taxes based on market value and taxes based on use value for the past five years. The rollback also includes interest on the taxes.
Frequently, open-space tax treatment creates no difficulties, but potential problems emerge when the seller has benefited from reduced taxes and a buyer adopts a non-qualifying land use soon after purchase.
Changing the use triggers the rollback and imposes a tax lien on the land for the rollback tax plus interest. Although the seller receives the benefit, the land buyer typically assumes this added tax burden. The Texas Real Estate Commission’s promulgated form for Texas land sales contains language to specify circumstances in which the seller is liable for the tax, as well as conditions where the buyer assumes the burden.
Word of Advice
Buyers who are unfamiliar with properties in their target area, property values or the legal documents involved should gather facts and seek help from competent legal and rural real estate professionals before completing a transaction.
Dr. Charles Gilliland is a research economist with the Real Estate Center at Texas A&M University’s Mays Business School.