Land for Love and Money

by Reid Lance Rosenthal

  Each of the volumes of Land for Love and Money will go over these and other points again in different context—they are that important. They need to be repeated. It is natural human propensity to follow form over function when it comes to money. I’ve done it myself, in several cases much to my regret. The workbook for Volume One will contain actual contract clauses and deal structures that can be employed, or mutated and employed, to fit a particular situation (after thorough review by your team!).

  Never forget, every real estate transaction is absolutely unique from every other real estate transaction, ever. It’s like that snapshot you take of the setting sun at 6:02 PM on April 17, 2012: crimson tendrils of clouds fading into indigo as the great yellow orb descends below the horizon. That scene will never be repeated. That second will never again exist exactly as it exists at that moment. This is true for real estate transactions. Every buyer is completely unique. Every seller is completely unique. The situations of each are fluid. Every property is completely unique. The nexus of those elements means that every transaction is different in both small and material respects from every other transaction, even if on the same land. Here are some bullet points, which in my experience are universal in their application to sellers:

  1) Sale price is not important. What’s in your pocket at the end of the day, after tax and all expenses, is what matters.

  2) In almost all instances a bird in the hand is worth two in the bush. If you’re lucky enough to have multiple buyers looking at the property, there are things you and your advisors can do to buy time to get as many offers and the highest contract amount possible. However, if it comes down to maybe getting some more money from “buyer number two,” who is maybe going to submit a contract, that maybe might have the terms and conditions you are looking for, as opposed to signing the contract in hand from “buyer number one” (assuming the buyers are equal in capability), putting your John Henry on the dotted line of the contract in hand is the wisest course of action.

  3) While perhaps true in the go-go days of the hot markets, the assumption that there’s another buyer, and he will be eagerly striding in your door with a wide smile, contract and check in hand if you don’t take the deal on the table, is not a great assumption in the current environment. Remember our ranch seller in Chapter 11.

  4) In today’s volatile world things can change in a second, without warning. Regulations at the state, federal, or local level might materialize and preclude or delay the sale you put off. Macroeconomic or world events, or elections, can frighten buyers, make them pull in their horns, invoke a contingency in the purchase agreement and get their earnest money back. If you are a seller, time is not your ally.

  5) Do not rely on the fact that your bank will work with you on financing extensions or modifications in the current climate. They may want to, but their hands could be tied by regulators. In the worst case, your bank might fail in the lapse of time, in which case any latitude you’ve been counting on in dealing with your property, sale, or some modification of your note will vanish. An acquiring bank frankly doesn’t care about you, your property, the market, the deal, the taxpayers or the buyer. They want their guaranteed profit from the Loss Share Agreement.

  6) No one is going to buy your property without seeing it. No one’s going to bother to come look at it if the price is too high in the multiple listing service in which your broker has it displayed, or in the for sale by owner (FSBO) marketing you are conducting if trying to sell it yourself. Market your property to get a buyer’s boots on the ground. That means realistic pricing. If you ascribe a pie-in-the-sky value you are wasting marketing money and time, and perhaps dissuading a buyer who would otherwise have toured the dirt and bought it.

  7) Whether or not you are represented by a realtor, preassemble a good team. Have the packages for the property in their files—maps, plat, listing agreement, old appraisals if you have one, copies of any leases or agreements that affect the property, a title report with a copy of the title exceptions, tax, revenue and expense statements, and water or other rights. This way your team is in the know, they can hit the ground running and advise you intelligently when you’re negotiating an offer.

  8) Understand your tax situation. There are several gotchas in this regard. A portion of your property may have been depreciated. You will not get capital gains on any portion of the transaction having to do with those types of assets. This is discussed more fully in Chapter 14. Your CPA can tell you the adjusted cost basis in your land and real estate. In the most simplistic terms, this is what you bought it for, less certain transactions which may reduce cost, plus money you’ve put into improvements. That sum (there are other ingredients) is your cost. The amount over that cost will be taxable gain of several varieties.

  Buyer Considerations

  There is some surprising overlap between the needs, wants and goals of both the buyer and the seller. But there are certainly positions unique to a buyer and contrary to what might be best for seller. Welcome to the free market. These matters are also discussed more fully in Chapter 14. But here are some bullet point universal truths that I employ, and which I believe a buyer should keep in mind when looking for, investigating, and purchasing a piece of land or real estate:

  1) I believe the seller is entitled to either price or terms. Softer terms affords you latitude to pay a higher price. Stiff terms—such as all-cash, should result in a price discount.

  2) The cleaner your offer, the more likely you are to get the structural or financial goodies you really want. Sometimes complex offers are unavoidable because the property, or the seller and buyer situations, are complicated. But generally speaking, clean is good. Keep your contingencies to a minimum. If there are some glaring potential problems, consult with your realtor and attorney and perhaps you will want to list them. I prefer simply to list one overriding contingency as a buyer: “After or during buyer’s investigation of the property, if Buyer determines in his absolute and sole discretion that the property, or any portion or aspect thereof, will not work for his intended use of or plan for the property, Buyer may terminate this Agreement by written notice to Seller, and all monies paid, including earnest money, shall be returned to Buyer and neither party shall have any further liability or obligation to the other.” That can save pages. And let’s face it—everybody gets it. Basically, “if I don’t like your property for any reason I am not going to buy it, and I get my money back.”

  3) The “PPPPP” rule. Have a plan put together for this property before the expiration of the contingency period in the contract. It can be rough, it will certainly change, but it is important for you to understand generally at least what you can and want to do with the property, what your goals are, what steps you need to take to achieve those objectives, what the potential results are, and when they are likely to occur.

  4) This point will have to be negotiated between you and the buyer. I highly recommend exculpatory language in the seller financing documents. This means that the seller is looking to the property, and not to you, if things go bad in the future. I think it’s fair in those instances for you to potentially be liable (if your attorney agrees) for any alterations you make to the property that would be adverse to future value as determined by an independent appraiser.

  5) Decide which form of financial contract works best for you. Laws vary state to state concerning mortgages, deeds of trust, and contracts for deed. You must have a local attorney assist you in these matters. Your realtor is not allowed to. Your CPA is not a lawyer. Do not use a lawyer in Florida to draft a purchase and sale agreement for a deal in Minnesota.

  6) When you solidify the financial structure of your offer, how much down, when you want to make payments, if you want to make principal payments or just interest, if the finance will be amortized or not, when the payoff of whatever balance remains will be due, you need to mix the reality of your financial situation with pessimistic assumptions about your future income. These are not realistic assumptions, or optimistic a
ssumptions, but instead your projections should be based on the maxim that what can go wrong will go wrong. Just look at the last four years. Did you expect the wreck when you did deals (whether real estate or otherwise) in 2005, 2006 and 2007? Probably not.

  7) Base your offer, down payment, and the cash going out of your pocket to carry the property on this realistic worst-case assumption. As the Green for Green workbook will demonstrate, there are many ways for you to pay down the obligation, reduce interest carry, or prepay, with prepayments lowering future payments at your discretion. This might benefit you if rainy days come later.

  8) Do not skimp on your due diligence. Turn over those rocks. The larger and more complex the property the longer you need to do a thorough job. Be sure you personally inspect the land and property. Be sure you get copies of any of the documents referenced as exceptions in the title report. Take the time to understand your tax situation, at least projected, over the course of ownership and in the event of disposition, even if your plan is to not sell the property. If you have plans for improvements on the property, intend to transfer portions of it, contemplate future conservation easements, absolutely talk to potential Grantees for the conservation easements, local jurisdictions which will be issuing permits for the improvements, reputable contractors if the plan includes building structures, and neighboring landowners if you’re planning improvements to increase or begin agricultural and livestock production.

  The above is not exhaustive, but is intended to be universal. There will be peculiarities to locations, climate, local and state statures. Whether you are selling or buying, and regardless of size or dollar amount, this transaction is significant on both a financial and personal level. Give it the care, attention, energy and time it deserves.

  I’m often asked to describe the “perfect” buyer/seller transaction. My first response, with a wide grin, is always “all cash–no contingencies.” However, no deal is ever like another one, which makes the query difficult to realistically answer. Given today’s economic conditions and high likelihood of seller finance, a buy/sell which would tickle me on a personal and financial level would be something similar to this:

  A Deal Made in Heaven

  Let’s start with the nonfinancial aspects.

  There has to be at least a modicum of trust between a buyer and the seller. It’s helpful if there is a point or two of commonality. Perhaps they share the same interests. Maybe they’re both ranchers, horsemen, love the beach, are avid hunters, like to fish, or are the same age—some type of common ground is always helpful.

  The transaction should be one in which neither the buyer nor seller is under any duress, that is they must buy or sell. A deal is usually far more smooth and enjoyable if neither of the parties is in a position of having to sign, “or else.”

  A real estate contract and closing breeds a myriad of details and entails a large cast of characters. Each party needs to rely on the other. Each needs to have faith in the members of the opposite team to do what they say, when they say they’re going to do it. And, if a problem arises, both parties need to feel secure in the belief that they will hear about it immediately, and everyone will work in good faith toward a mutually beneficial solution.

  Assuming you have that type of relationship with the folks on the other side of the table, you have the foundation for a satisfying high-energy process. Mutual respect will positively lead to a smoother closing.

  A Note of Caution—Always Trust Your Gut

  Unfortunately, not everyone is honest and there are some folks who excel at putting on a charade. No matter how strong your comfort level is with the people on the other side of the transaction, keep your antennae in the air. Sometimes things are not what you think, or what they appear to be. Reality can be different than what others would have you believe. If, in the breeze of purchase or sale, any red flags run up the flagpole, heed the warning snap of that pennant. Later in this chapter there is a remarkable example of why I inject this note of caution.

  The Perfect Deal

  There is, of course, no such thing as the “perfect deal.” A great deal is when everybody is happy, leaves the closing table with a smile, and wishes they could have gotten a little bit more in this clause or that, but are generally well satisfied. That’s a deal likely to last and be honored over the years. Remember, in a seller financed transaction, the buyer’s and seller’s interaction does not end when you shake hands after the closing. If you are the buyer, you owe money, and if you are seller, you are owed money. The two of you will be doing business for quite some time. All things being equal, the structure of the “perfect deal” (seller financed) would include the following:

  1) Some continuing responsibility by the seller after closing in certain key areas, for instance environmental hazards. I will not purchase property when the seller refuses to represent that there are no environmental problems, and warrant that such representations are correct and agrees that those warranties extend forever past closing, which must be specified. Without a so called “anti-merger clause” any such warranties, along with all others, will merge with closing and be extinguished.

  2) The financial structure of the deal keeps the buyer cash down payment to a reasonable minimum, perhaps between 15% and 25%. There are incentives built into the documents for the buyer to pay faster and earlier than the dates in the agreements. For instance, (and these unique clauses of ours will be included in the Green for Green workbook), the buyer has a right to prepay the amount he owes seller at any time without penalty. If the buyer does prepay, the buyer has the right to subtract those prepayments from future principal and interest payments due under the financing instruments. If John the buyer owes $20,000 each December, and one year he pays $40,000, he can elect to subtract the extra $20,000 he paid early from some future payment. That clause can come in handy during unexpected periods of tight cash flow.

  3) If a buyer has plans to improve the property, those improvements typically enhance the value of the seller’s property, which is the collateral. As a buyer, I want as much cash available as possible to make the improvements and increase the value of the property. As a seller, I’m smiling whenever the buyer spends his money on the land I have as security. In effect, he’s added value and lowered my LTV (loan to value).

  4) Unforeseen events occur. Life happens. A clause in a seller financing instrument, which allows a buyer to make partial releases from the seller’s security interest for the payment of a set amount (agreed upfront in the financing documents), which can be per acre or otherwise, is a good idea. It can save the day for both buyer and seller if events occur outside their control. Protections for the seller are needed for the release clause to be fair. He doesn’t want the rest of his property inaccessible because some third party bought the road. He doesn’t want his property checker-boarded, which would decrease its value and be a nightmare if he ever had to take it back. Release clauses that mandate releases be contiguous to an outer boundary, or contiguous to a previous release, and cannot restrict access to the balance of the property on which the buyer still owes money, are fair. These provisions benefit both parties and usually will get more cash to the seller in a shorter time frame.

  5) The grant of a conservation easement is not effective unless there is subordination by the lender. The easement is a grant in perpetuity, i.e., forever. Therefore it can’t be in a position to get foreclosed out by a lien prior in title. When a foreclosure occurs, everything behind that foreclosed lien is wiped out. Whether or not conservation easements or similar devices are part of the buyer’s plan, it behooves both parties to make allowances for that possibility up front. It is fair for a seller to subordinate to the grant of an easement, but it is also equitable that the seller be protected. The seller should not have to subordinate to an easement that strips all rights to the property. He’s getting no tax benefit. If he ever has to take the property back, he certainly doesn’t want land he cannot resell. By subordinating, the seller is taking on some risk. It’s fa
ir that people be compensated for risk. Perhaps a per acre amount as a subordination fee (which would apply to the note and could even be a prepayment), could be agreed upon up front.

  6) The seller generally certifies that all things of value and all rights appurtenant to the property such as water rights, mineral rights, easement interests, etc., have been delivered to the buyer. Sometimes quite unintentionally, rights are discovered after the fact. The seller’s obligation to promptly transfer those to the buyer is a provision that should survive closing.

  7) Sometimes people get into disagreements. There should be provisions in the documents that require written notice be given by one party to the other long in advance of filing a lawsuit or taking other adversarial action. This way the party who has received a notice has time to correct the problem if it exists, and there’s an opportunity for buyer and seller, or their representatives, to resolve the matter before it becomes an expensive mess.

  8) The parties should agree up front what types of improvements the buyer cannot make without asking the seller’s permission. Most improvements should not warrant any further future interaction. It is far simpler to do the short list of “not allowed” rather than the far more lengthy compilation of what is “ok.” However, if there is an extraordinary undertaking then the purchaser has to request permission from the seller before undertaking the work.

  For example, let’s say Sally is buying twenty acres from Roger. She wants to fence the twenty acres for horses, develop a spring into a small pond, remodel the house, build a barn, put in an arched entryway and similar types of improvements. These are great for both parties. Sally adds value to the property she is purchasing and enjoys that spiritual lift that always comes with giving TLC to your piece of heaven. Roger is thrilled because the value of the property he holds as collateral is escalating—it’s all Sally’s money, and with each improvement his loan position becomes more secure. Now, say five acres of this hypothetical twenty-acre place is in hay production. Sally decides that it would be a terrific investment to take it out of hay and instead, begin a Christmas tree farm. In this case, Roger should have the right to say no. Roger may not want the hay base taken out. This type of improvement could change the nature of the property. If he has to take the property back, he may not want to be watering all those evergreen saplings for the three to six years it takes them to become salable Christmas trees.