Signs of Land Buyers Who Aren't Real

When you are selling any kind of real estate, all you want to know is "when will I get my money and what are the odds that I'll get it?" If you've signed a contract with a qualified buyer for your home, you can be fairly certain that you'll walk away from closing with the money in your pocket. When it comes to selling (or reselling) land for development, the chances of your getting your money at all or getting it by a specified point in time are much less certain.

Once you put your land on the market, all sorts of people start to surface and express interest in your property. Naturally, you assume they're buyers. That's where you've made your first mistake because a fair number of these people have absolutely no intention of handing you money for your property. How can you tell if a land buyer is real or not? Here are some tip-offs.

Scenario A -- You sign an offer from a developer who's willing to pay your asking price and you take your property off the market. Buried among the other contingencies in the contract is a right to assign the contract and a provision giving the buyer 6 months to do due diligence. You don't think anything about that because you are thrilled to get your price, so you sit back and wait.

About 2-3 weeks before the end of the due diligence period, the buyer requests an extension for another 6 months, saying that he's delayed getting site information and sketch plans from his engineer. You sign an extension (hey, still getting your price). Shortly before the first anniversary of signing the sale contract, the buyer gives notice that he's terminating the deal. You're thinking about all of those other buyers who didn't have the opportunity to give you offers because you took your property off the market. It's been a whole year and now you don't even have a buyer. Well guess what? You never had a buyer.

What you had was a speculator. Speculators try to find properties they think they can quickly flip (assign) to somebody else for a chunk of change. So they induce sellers to sign purchase contracts and take their properties off the market by offering to pay whatever the seller is asking. Speculators don't spend any time, effort or money doing due diligence. They spend their effort on shopping the property around to see if they can find someone willing to "buy" the contract by paying them an assignment fee on top of the purchase price the flip buyer would pay the land owner. If they can't find a buyer, they get their down money back and walk away from the deal, just as they did with you.

Legitimate land buyers do need to be able to assign the purchase contract to an entity (e.g., partnership, corporation, LLC) they form to take title to the property and develop it. But you never want to give a buyer an unconditional right to assign. Have your attorney change the provision so that the buyer can assign only to an entity in which they have a majority ownership interest. And buyers don't need 6 months to do due diligence (and certainly not 12 months) unless there are extraordinary circumstances.

Scenario B -- You sign an offer from someone who's willing to pay your asking price and you take your property off the market. Buried among the development contingencies in the contract is a provision that allows the buyer to put signage on the property (ostensibly to market the future new homes) without having to close with you first. This ploy is less subtle than the above but could produce equally bad results for you.
Time keeps dragging on and you keep wondering if settlement will ever occur. And the buyer keeps telling you that he can't close with you yet because he still hasn't satisfied all of the contingencies in the purchase contract (subdivision approval, utility permits or whatever). This buyer may be using the signage to attract a flip buyer. Alternatively, he doesn't want to close with you until/unless he's able to get pre-sales (deposits or sale contracts) of the lots. Either way, you could lose. You might have to wait a long time if there are many lots or the buyer is asking too high a price. If a flip buyer doesn't materialize, your deal could die.
You want to keep buyers motivated to get to closing, not delay it. If you allow the buyer's signage on your property without them going to closing, you are only encouraging them to put off the settlement as long as possible. You could even be giving buyers an excuse to terminate the deal when all they really want to do is flip the property.