It is said that time is money, and when selling developable real estate, taking the risk of giving a buyer time can lead to a higher sales price…or nothing at all.
A while back, I had a client ask me to assist him in establishing market asking prices for a cluster of three industrial zoned lots that had recently received subdivision approval from the Frederick County Planning Commission.
The key focus in setting the prices centered on how much time the owner was willing to give a purchaser, once a lot went under contract. Not having much experience in the business of selling land to business people, my new client faced a bit of a learning curve, which I was happy to guide him over.
As in the case of most sellers, the ideal hassle-free scenario is to place a property on the market and find a non-contingent cash buyer who will close quickly at full price. How often does that happen in an active commercial real estate market with a reasonable amount of available inventory?
Well… the answer is “it depends on the asking price!”
Selling Fast and Slow
The question is: Were the asking prices set to attract a speculator or an end user?
Speculators and investors, who don’t have an immediate use for the property, often seek to buy at lower figures, primarily so as to mitigate against the often-incredible number of risks they are willing to assume. In exchange for assuming those risks, along with a discount in price, they may offer a quick closing.
On the other hand, if a buyer wants to acquire a property for a very specific use, then there is often a willingness on his or her part to pay more in exchange for a reasonable period of time to have as many risks mitigated before the property transfers. These risks come in the form of the governmental approvals and permits needed to allow the buyer to do what he/she plans to do with the property.
These governmental approvals and permits, known as entitlements, can cover a broad spectrum of issues that can be required before a business person can actually make full use of the property. Consider zoning, access to public utilities, storm-water management, passing various adequate public facility tests and paying impact fees, environmental testing, access to public roads, grading, and building permits, just to name a few.
So, here is a paraphrase of a follow-up email I sent my client:
… That being said, while I believe the asking prices I outlined are good to work with, these are based upon traditional contract terms for market valued lots. By this I mean, in order to obtain close to these price points, the vast majority of buyers will be end-users, who have no desire to purchase the land unless they can get the entitlements they need for their intended use of the property.
Therefore, once under contract, these end-users are willing to risk their money to perform the research, planning, design, application and legal fees to discover if they can do what they seek on the site. In return, they will also ask the sellers to take some risk by giving them that time to obtain the entitlements they need.
Unfortunately, in Frederick County, and much more so in other parts of the nation (Montgomery County, Maryland is a good example), the number of requirements and approvals that local governments burden a businessperson with often takes a long time and costs a lot of money before the buyer can be assured that his/her use can be allowed.
This is why it is very typical that a buyer will ask for “study or feasibility” period of time to do the research – anywhere from 60 to 120 days. The second term requested is that a “contingency” period be provided to apply for the necessary entitlements. In most cases, this can be another 180 days to a year. During both of these periods, the buyer is given the right to terminate without penalty.
In a majority of the cases, the buyers will ask for all money to be placed in escrow (deposits at contract) to be refundable, if they choose to terminate during either the study or the contingency period.
It’s highly unusual, too, that a buyer will pay top price and will go along with a requirement for substantial non-refundable deposit money, at the time of contract. However, once the “study period” has lapsed, it is not unusual for a percentage of the escrow to be required as non-refundable. This can also take shape as an additional deposit or in the form of periodic option payments or extension fees, which may or may not be applied to the purchase price.
More often than not, in cases where the buyer is seeking site plan approval for his/her project, he/she will ask for nothing to be non-refundable. That can be a key point of negotiation. But when the buyer seeks more time to obtain grading permits and building plan approvals, this is the time that sellers will ask that a substantial amount of the deposit be forfeitable.
There is no set rule on contingency terms or deposits, as it tends to be customized to the circumstances. But the general rule is that the stronger the track record and creditworthiness of the buyer, the better the purchase price, but in exchange, the buyer will demand more time to get every possible approval he/she can get without having for potentially forfeit any deposit monies if things don’t work out.
At the end of the day, it’s all about who wants the deal more!
Rocky Mackintosh, President of MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland, has been an active member of the Frederick community for over four decades. He has served as chairman of the board of Frederick Memorial Hospital and as a member of the Frederick County Charter Board from 2010 to 2012. He currently serves as chairman of the board of Frederick Mutual Insurance Company. Established in 1843, it is one of the longest enduring businesses in Frederick County.