The Acquisition Process When Buying Vacant Land
To consummate any transaction, all you really need is two parties willing to work together. For a small item, like a coffee mug, there’s no need for a purchase contract. However, for a piece of real estate, a purchase contract is the recommended way to go. A good purchase contract accomplishes a few things that help make the transaction go smoothly.
The first thing a good purchase contract does is make both parties think about all of the moving parts involved in the transaction. It’s easy to get wrapped up in the excitement of buying a property and shake hands on a deal without discussing all of the particular details of the purchase such as who will pay closing costs, and who will be taking title.
The second thing a good purchase contract does is it protects both parties involved in the transaction in the event of anything non-standard occurring during the transaction. Most clauses in a purchase contract identify potential issues that have come up somewhere during a transaction, where one party was on the losing side of the deal. Whenever that happens, lawyers like to jump in and create legal language to prevent it from happening again.
In this article, we’ll discuss two primary types of purchase contracts and also how to officially close the transaction.
Purchase Contracts
The first type of contract we’ll discuss is for a cash sale. A cash sale doesn’t necessarily mean that cash is brought to the closing table. That could be the case, but usually, it means that the Seller will receive the funds for the entire purchase price of the property at closing. This could be in the form of cash, wire transfer, check, or perhaps even crypto currency these days. Where the funds come from is a different story. The Buyer may have the full amount to purchase the property in their bank account and will wire the money. Or, a lender such as Fannie Mae or Freddie Mac may be funding the deal. Either way, the Seller will be paid in full at the time of closing.
The second type of contract we’ll discuss is for a terms sale. A terms sale has many other names, such as an installment sale, or a seller financed sale, or an owner carry sale. They all mean the same thing. The Seller of the property is going to allow the Buyer to make payments over time in order to pay for the property. With traditional home sales, this is less common. However, with vacant land sales, it is relatively common practice. The reason for this is because it’s generally harder to get a bank loan for vacant land than it is for a residential home. The name for this type of contract is commonly referred to as a Land Contract. It may be known as another name in certain states, but a Land Contract is most widely known.
Closing the Deal
Closing the deal is the final step in the acquisition process and marks the transfer of ownership from the Seller to the Buyer. When a deal is closed, it means all of the stipulations in the purchase contract have been satisfied. It’s one of the most exciting times for all parties involved, especially the Buyer, because now they can start using the property.
As with the different types of purchases, there are also different ways to close the deal. In this section, we’ll discuss two types of closing. One closing with an escrow company and one closing directly between the Seller and the Buyer.
Closing a deal with an escrow company is very common when buying a home or even a commercial building. Typically, a large sum of money is at stake, there are inspections, appraisals, a bank loan, and various contingencies. All of which could potentially derail the deal and prevent it from happening. In these cases, using an escrow company is a great idea. An escrow company is a third party that holds funds involved in the transaction until each stipulation in the purchase contract has been met. If everything goes according to plan the escrow company will distribute funds to the Seller, and any other parties who are owed fees, and the deal will be closed. However, if there’s an issue with the transaction, the escrow company will use the purchase contract as a set of instructions to distribute the funds. The contract is essentially a big set of “if/then” instructions which the escrow company reads through to figure out how to disburse funds.
In the sale of vacant land, escrow companies are less common. Especially when the purchase is made using a land contract and there is not a significant amount of money changing hands at one point in time. Purchasing vacant land has fewer moving parts than a residential home or commercial building. There usually isn’t an inspection contingency or a loan contingency to deal with and overall it’s a more straightforward transaction. In most cases the Seller and the Buyer will decide not to pay for an escrow company and simply handle the transaction between themselves. This not only saves time, but it can also save a significant amount of money because there are no escrow fees, additional wire transfer fees, notary fees, etc. If both parties work smart, there is typically no cause for concern.
