Managing Risk When Acquiring Property for New Construction
11-15-2019 – David Munaretto
Purchasing a property whether it is a tear down or vacant land can be daunting if you don’t have a process and know what questions to ask. Don’t worry, we’re here to shed some light on the best practices used by builders to manage risk and make sure that the property is the perfect fit for your dream home.
The most important thing is to have a realistic set of expectations. So let’s start there. The truth is very simple – if you spend money before acquiring the lot, you will be able to manage most of your risks. Unfortunately, many buyers do not make these investments prior to closing on the property, and the result can be disastrous. They simply don’t want to spend money on a property they don’t yet own. But the truth is, you’re better off spending the money early and being able to walk away from a deal that doesn’t meet your needs.
Purchase Contract Best Practices
Your best bet is to stipulate in the contract a “due diligence period” of 30 – 45 days. Your real estate attorney should be able to help put sufficient language in the contract to allow you to engage service providers to evaluate the property. Closing should be contingent on your written confirmation that the property is suitable to your needs at the conclusion of the due diligence period.
What Should You Evaluate?
The more you know, the more prepared you will be, and the more accurate your estimated construction costs will be. Lets look at a list of key due diligence areas and discuss how they get created and why they are valuable to you as the purchaser.
- Boundary Survey. The seller should provide a survey performed by a licensed surveyor. The survey shows the actual boundaries of the property.
- Title Commitment. The title commitment contains, among other things, a list of exceptions. These point to issues such as encroachments (where other properties have encroached on yours, or you have encroached on theirs) which can create issues when you go to build on the property in the future.
- Environmental. A lot of old homes have asbestos and lead based paint. Those are items you should assess so your budget accurately reflects the costs of abatement. Prior to getting a demolition permit, your municipality will likely want a “free and clear” letter from a licensed abatement company. Having an assessment performed will help you appreciate your future costs.
- Municipal Concerns. Every municipality is different, some are as easy as submitting a permit application for demolition of an existing structure. Others have historical preservation committees, architectural review boards, or other review protocols that could affect the viability of your purchase. If you don’t know, use your due diligence time frame to ask questions and better understand the process and whether it may present a risk to your investment. Most of the time these are committees comprised of reasonable people. Better to know up front.
- Infrastructure. Your new property will either be serviced by public infrastructure such as city water and sewer or require onsite systems such as well and septic. In the case of a septic field, you will be well served to have a soil scientist do soil borings and assess whether the property will support a septic system. In the case of public sewer and water there are some key concerns as well – for example if these systems are located on the other side of the street from your new property then your costs will increase as part of connecting into these systems. As part of your preliminary site engineering, an engineering company can help you understand these investments.
- Impact Fees. In many places, when you purchase a vacant lot you will have to pay impact fees to organizations such as the schools and the park districts. If you buy on a lot that has or had a home on it, these fees don’t apply (but you will have demolition costs for removing the existing home).
- Water Detention. While not all municipalities require onsite detention systems to offset the increase in surface coverage created by your new home, some do. These systems protect your property and the neighboring properties as well. Knowing what the requirements are, or working with your engineer to understand these requirements is important, as they affect your overall costs.
- Flood Plains. FEMA publishes an atlas of all flood plains, which is used by insurance companies to determine whether they will require flood insurance. However, from a construction perspective flood plains may add additional costs for waterproofing, flow through foundations, or other approaches to water mitigation.
- Topography. Your surveyor should create a topographical survey that describes the elevation of the property in relation to the properties around it. The topographical survey establishes the existing grade of the property and will be used as part of the detailed engineering that describes how the new home will be built on the lot and how the lot will be regraded to ensure drainage away from the home and adjoining properties. Your surveyor or engineer can provide this service.
- Tree Inventory. The type, size, and quality of trees on your property may have an impact on your ability to build and your budget to build on a lot. Some municipalities have regulations in place describing whether you can remove trees, and a replacement schedule or fee schedule that will affect your overall budget for the new home. While often times your surveyor or engineer will provide this service, you can also engage an arborist. These trees will then need to get noted on the topographical survey, so if you can get both done together its easier.
- Preliminary Engineering. If you used LotNova the way it was intended, you already have a plan in mind for your new lot. An engineering firm can confirm that the home plan will fit on the lot and conform with the zoning regulations for the property. Knowing this up front is a sure fire way to walk into a closing confident that you can build the home of your dreams.
While LotNova helps create a preliminary match between floor plans and lots, there are many important steps you should consider taking before you close. If you are putting a lot under contract, give yourself the opportunity to do your due diligence and make sure the lot is a perfect match for your dream home.
Of course, if you have selected the perfect floor plan and started a dialogue with the builder, your builder should be able to assist you through this process.