What is Due Diligence?
Due diligence means taking precautions and doing your homework on property before you make the purchase. If you find too many issues with the property — too much potential risk or cost — then you can look for a better parcel of land.
Who is Responsible for Due Diligence?
Vacant land buyers are responsible for conducting their own independent due diligence on any parcel they are considering purchasing.
Won’t the Seller or Agent Just Tell Me Everything I Need to Know About Land?
The answer is no. The seller and agent do not know everything about the land that might interest you.
Further, while sellers and agents have the legal responsibility is to disclose material facts that they are aware of it is not possible for them to disclose facts that they are not aware of.
The seller will complete disclosure forms where they write down everything that they know about the land that they consider a “material fact”. The agent will provide a copy to you. If the seller has relevant documents in their file such as a well report or survey, they will provide those too. In California, but not in other states, the seller will also provide a natural hazard report. This is a report produced by a company such as Property ID or PDQ who charge a small fee, under $100. The report discloses things such as whether the land is in an earthquake fault zone, a flood area, or a location prone to wildfires. The agent will tell you what they know about the land. The title company will provide a report so that you will know if title is clear. Upon request, the title company can also provide a map of plotted easements.
That’s it! That’s all you get!
The information provided by the seller, agents and title company will usually not address everything that you might want to know about the land and may not be sufficient for you to decide whether or not you want to buy the land. The agent and seller will tell you what they already know, but beyond that it is your responsibility to do whatever additional research is needed.
For example, if the corners are unmarked, it is not the seller’s responsibility to mark the corners of the land unless you explicitly wrote a survey into your offer and the seller agreed to do it. It is not your Realtor’s responsibility to perform detailed research on building requirements. It is not the title company’s responsibility to plot easements on adjacent land unless you explicitly ask them to do that.
Dear buyer, you must do your own independent due diligence.
Won’t My Agent Do All This Research For Me?
You agent’s role is to help you by advising you on where to get the information you need as you move down the path of doing your own independent due diligence.
A key point here is that your agent, who has your back, knows that it is in your best interest for you to do your own due diligence. The information you will receive will be more accurate and helpful if you get it straight from the information-provider, not filtered through a Realtor as an intermediary.
Did you ever play the telephone game as a child? Here’s how the game goes: One child whispers a word or phrase to another child. That kid whispers it to the next kid, and so on. At the end of the chain, the last child says the word aloud. It’s funny to see how convoluted the word or phrase becomes.
Don’t play the “telephone game” with your Realtor in the middle. Eliminate the middle-man. Go straight to the electric company, water company, planning office, etc. and let them put the information directly in your ear!
Another benefit of talking to information-providers directly is that you can have an entire conversation with that person. You can ask additional follow-up questions if you need to. You may even learn things “you didn’t know you didn’t know”. For example, when you’re talking to the water company, they may say that yes, district water is available, but sewer is not. Wow, you might think. That was something that didn’t even occur to you to ask because you were assuming that water and sewer always go together! Or, when you’re meeting with the county Planner to discuss the allowability of a mother-in-law apartment next to the house you are planning on the 5 acres, you might discover that the zoning allows you to subdivide and build two houses on two separate 2.5-acre parcels. Wow, that’s awesome, you didn’t know that and it would be a better fit for your family! One question will lead to other questions which will lead to more answers and more insight and the entire conversation will be very helpful to you.
Your Realtor knows that it is in your best interest for you to get information “straight from the horse’s mouth”. That’s why they are telling you to “go direct” to each information-provider get your questions answered.
What if I Don’t Want to Do My Own Due Diligence?
Um, then maybe now is not the right time to be buying land?
Of course, you do have the option of buying land without conducting a thorough evaluation. In rare instances this can make sense. For example, if the land is a $5000, one-acre parcel, in the middle of the desert, and you can see in aerial maps that there are no houses nearby and you’re pretty sure there are no utilities there, and you’re just buying it for investment, not to build, then doing extensive research may not be essential.
When Should I Do My Due Diligence?
Do as much research as you can before even submitting an offer. That way, if you get bad news, you can avoid the time and effort it takes to submit an offer and negotiate with the seller. Plus, you can avoid sending a deposit to escrow.
Another advantage of doing your research before submitting an offer is that if you find something negative, and you want the land anyway, you can use it to negotiate a good price. For example, you can say “Hey seller, I see that your land is priced at $100,000, but I found out that it is in a flood zone and will be more expensive to build, so will you take $80,000?” That kind of thing.
With houses it is common to go into escrow, get an inspection, and then negotiate the price down or get the seller to make repairs. That tactic is exceedingly rare with vacant land and will not be well-received by the seller or listing agent, so I recommend that you not try it, or you might get kicked to the curb. However, it is common and acceptable to negotiate price at the time your offer is submitted so feel free to any use negative information that you find to your advantage up front.
Also, include a contingency period in your offer so that you can continue your research during the escrow period. The clock on your contingency period starts ticking “upon acceptance” which means the date that the last signature appears on the contract. So, for example, if your offer was accepted by the seller on January 1 and you have a 17-day contingency period inside a 30-day escrow period, that means that you will want to complete all due diligence by January 18th.
At the end of the contingency period the Realtor will ask you to “remove your contingencies”. After you remove your contingencies, your deposit is non-refundable. So, for this reason, you will want to be sure to finish all research prior to the end of your due diligence period. This period usually ends well in advance of the escrow closing date, so don’t get those two dates confused.
In What Situations Would It Be Especially Dumb to Skip My Due Diligence?
It’s especially unwise to skip due diligence when: 1) The parcel is expensive, 2) the price is so low it seems “too good to be true”, 3) you want to build on the land, 4) you have a particular use in mind for the land and don’t know if that use is allowed, or 5) you’re not familiar with the area.
What Due Diligence Can I Do at Home in My Pajamas?
Fortunately, a lot of research can be done from the comfort of your sofa!
You can review zoning descriptions on the city/county Planning Department website. You can also get tons of interesting information from the city/county Geographic Information System (GIS). You can email the city/county Planner to ask questions (this works best when the county is small). You can study Google or Bing aerial maps to get a sense of boundaries. You can review the title report, seller’s disclosures, and the natural hazard report that your agent or escrow officer will give you during the escrow period. You can search Google to learn about crime statistics in the area.
You can phone the electric company, water district, local well drillers, and septic providers. You can also try phoning the City or County Planning department to ask questions.
What Due Diligence Would Require Me to Drive Somewhere?
Make sure you go see the land in person. If you can’t do that, e.g., because you’re in another state, hire a service like We Go Look to take additional photos or video.
If the land is in a big city or county, it may be hard to reach someone in the Planning Department by phone or email. In that case, you will have to get in your car and go speak to the Planner in person. Just walk in. Usually no appointment is needed.
What Due Diligence Will Cost Me Money?
Most of it is free. However, if you want to do any of the following, you will have to pay for it:
- Order a perc test for septic
- Hire a well driller to inspect the well
- Have a surveyor mark the corners so that you can understand boundaries
- Order a phase I environmental review (needed only in rare instances, e.g., when buying an abandoned gas station);
- Hire an engineer to investigate developing the land
- Ask a contractor to advise you on whether a parcel is buildable
What Information Do I Need to Have at My Fingertips Before Starting My Research?
Get out a piece of paper. Write down the assessor’s parcel number (APN), also called the tax id number. If there is an actual address, write that down as well. If there is no address (common for vacant land) write down the street the parcel is on plus the nearest cross street. Find out if the parcel is inside city limits or outside city limits so in the county. If it’s in the city, write down the name of the city. If not in an incorporated city, write down the name of the county. If there is a Homeowners Association (HOA), write down the name of the HOA. If you know the name(s) of the current legal owners, write those down as well.
Now you have all the information you will need at your fingertips to identify the parcel to the information-providers that you will speak to. You can start making those calls!
How Do I Even Know If There are Building Restrictions on the Land?
If it’s dirt, there are building restrictions! In other words, every parcel of land has building restrictions:
- Restrictions may be imposed by the City
- Restrictions may be imposed by the County
- Restrictions may be imposed by the Homeowner’s Association
- Restrictions may be imposed by other entities such as the Coastal Commission or Historic District
Who Governs Building Restrictions on the Land?
I answered that in a previous blog post here.
How Can I find Out if Electric or Water Meters Are Already Installed?
The chance that there are meters already installed on vacant land is virtually zero.
The only situation in which I have ever seen an electric meter was in a rural area on land used to park a recreational vehicle (RV) or trailer that someone was staying in.
On vacant, land, I find water meters less than 1% of the time. If there is a water meter, it could be installed, or it could be paid for but not yet installed and “on the shelf” at the water company. To find out, you can call the water company and ask if there is a paid meter.
Your question should really be about how close utilities are to the land and what the cost of getting utilities might be. Read on.
How Can I Research the Availability of Electricity?
Get in your car and drive to the land. Look for the nearest electric wires and poles. Plot their location on a map.
Find out the name of the electric company that covers that area. To do that, Google this: Electric Company <city or county name>.
Phone the electric company and give them the parcel number (APN), address, or whatever they ask for. Inquire about the availability and cost of electricity.
How Can I Research Water?
To find out if district water is available, look around the neighborhood for water meter covers. Also look for fire hydrants. These offer evidence that district water may be available in the street.
If you don’t see evidence of district water, then start looking for evidence of wells. Walk around the land and look for a large round pipe poking up out of the ground. It could be a capped well. From the street, look at the neighbor’s properties to see if you see tiny buildings that could be well houses. Or just ask a neighbor if they have a well.
Based on your preliminary in-person research, if you think there’s district water you will want to phone the water company to ask more questions.
To find out the name of the water company, Google this: Water Company <city or county name>. Phone the water company and give them the parcel number (APN) and/or address, or whatever they ask for. Inquire about the availability of water and the cost of a water meter.
If the neighbors seem to be using wells and there is no well on the land, phone a local well driller to learn more. To find a local well driller Google this: Well driller <city or county name>. When you talk to the driller, or his staff, describe the general location of the land and ask questions about the viability of wells in that area, depth that may be needed, cost, etc. Well drillers are reluctant to offer estimates of depth and cost over the phone because every parcel is different. If they express reluctance, ask for a range or a general sense.
How Can I Research Sewer/Septic?
Just because water is available, this does not mean that sewer is also available. So, when talking to the water company, be sure to ask if sewer is also available in that area.
If sewer is not available, a septic system will be needed for waste. It is very very rare for a septic system to already be installed on vacant land. The only time I have seen that is when there was a house there previously that was demolished or burned down.
You will want to figure out if the land can support a septic system because not all land can do that. To find out if a septic system is viable on your land, a percolation test or “perc test” is needed. Sometimes you will see “perc” spelled “perk”.
To get a rough sense of septic viability without performing an expensive perc test, you can ask neighbors if they had any trouble perc’ing for septic. You can contact a local septic installer to ask if he has ever had a home in this area not perc. Finally, you can visit the county and find out if there is an historic perc test already on file. If a successful perc test has been recorded, ask the County if the test would have to be updated due to age. Also check to see if a failed perc test might have been recorded.
You might want to arrange your own perc test. If you plan to do this, be sure to write your intent into your offer to get the seller’s approval. This is because it involves digging big holes in the ground and you need seller permission to do that. Before submitting an offer to the seller, ask a septic professional how long the perc test will take and what their schedule is. Include the amount of time you need for the perc test in your offer and make your offer contingent on a successful perc test. For example, if the septic professional says it will take 4 weeks to do a perc test then include a 30 day contingency period in your offer.
How Can I Research Zoning?
The first step in researching zoning is to figure out whether a parcel is in the city or the county. This will dictate which Planning Office you go to for zoning information.
Start your zoning research online. Instead of going to the city or county website and poking around there to find the right department, it is faster to just search Google like this: Zoning <city or county name>. The zoning section of the official city or county website should pop up.
If it’s a common city or county name, be sure to also specify the state in your Google search. This is because you don’t want to end up spending an hour looking at a zoning website for Portland Maine when you thought you were looking at the site for Portland Oregon.
To find a zoning map fast, go to Google and type: Zoning map <city or county name>. Sometimes, searching Google Images rather than just basic Google is a more direct way to find a map. This is because a map, after all, is an image.
Another really good way to research zoning is to use one of the free Geographic Information Systems (GIS) provided by most counties and cities. You can enter the parcel number or address into those systems and uncover a wealth of information, including helpful maps and zoning. To find a GIS system for your land search Google like this: GIS <city or county name>. When searching a GIS system using the assessor’s parcel number (APN), a helpful tip is to omit the dashes. For example, do not enter APN 1234-567-89. Instead, enter 123456789. If that doesn’t work try adding zeros at the end, e.g., 1234567890000.
A final way to figure out the zoning is to just to ask the Planning office. Email, call or go in person. Give them the APN. I find that if it’s a small office they will usually be happy to respond to my email requests for information. If they are a large busy office, it will be almost impossible to get an answer by email or phone. In that case, you will have to go in person.
One last tip is to be sure to research both “zoning” and “land use”. They might conflict.
How Can I Research Building Requirements?
If you’re interested in building, the first step is to research zoning to see what kind of structure is allowed, if any. For example, if the zoning allows only single-family homes, then you cannot build a commercial office. Then, get in your car and drive to the City or County offices to learn what you can about building restrictions. If you still have questions, pay a licensed contractor a consulting fee to assist you. Remember, your Realtor is an expert in real estate sales, not building.
How Can I Research Property Boundaries?
Walk around the land near where you think the corners might be. Look in the dirt for markers. Markers might be anything. They could be vertical white PVC pipe, wood sticks poking up out of the ground, unusual piles of rocks, florescent pink tape hanging from a tree, or the remnants of fence or old wood post. Just look for something unusual that looks like it was put there by a human and not by mother nature. Note, however, that humans make mistakes so any corner markers you find may not be accurate.
If you really want the corners marked accurately, hire a surveyor. To find one, go to Google and type in: Surveyor <city or county name>.
How Can I Research Easements on the Land?
Any easements recorded on the land that you are buying will restrict the ways you can use it. One example is a utility easement (no you can’t build your garage under those tall utility wires). Another example is a conservation easement which often blankets the whole parcel, restricting building everywhere on the land (yikes!). If there are easements, they will almost always be mentioned in the title report that will be provided during the escrow period. However, in the title report their location will be described in some gobbledygook way, so if you see easements mentioned, ask the title company for a map of plotted easements so that you can see just where they are.
How Can I Research Access?
Remember, there’s physical access and legal access and they’re not necessarily the same thing.
To research physical access, study aerial maps or get in your car and see if you can drive to the land.
To research legal access, the easiest way is to just order a title report. If the title company says they will insure for title and access, there’s a good chance that there is legal access. If the title company says they will insure title, but will not insure specifically for access, that’s usually because there is no legal access.
Note that easements on the land are different than easements used to access the land. The former will be recorded on the land you are buying while the latter will be recorded on the neighbor’s parcel. Easements recorded on the neighbor’s parcel for ingress/egress to your parcel will not appear in the title report for the parcel you are buying. So, you will want to explicitly ask the title company to research those easements on the neighboring parcel. If the title company discovers an easement to reach the land, ask the title company for a map of plotted easements showing the ingress/egress route.
How Can I Research Environmental Problems or Endangered Species?
If you have concerns about possible environmental pollution you can pay an environmental firm to do a Phase I Environmental Site Assessment. Generally, this is only needed if you are purchasing something like an abandoned gas station, junk yard, auto repair site, or if you see evidence of pollution such as leaking oil drums:
To find a local firm that does environmental assessments, Google: Phase I Environmental <city or county name>.
How Can I Research Neighbors?
Get a crime statistics report for the City or County. To do this, Google: Crime Statistics <city or county name>. You can also research predators living near the land at the Sex Offender Registry.
However, don’t get freaked out thinking that the land is in a bad area because you find a certain number of burglaries and pedophiles. Sorry to be the bearer of bad news but virtually every neighborhood has crime. The best way to realize that is to research the neighborhood you are living in now and you will see what I mean. Evil-doers are everywhere! Bleh!
Another way to research neighbors is to stop and talk to them. Say “hi” to the guy bringing in his groceries or the lady working on her car in the driveway. See if they’re the kind of people you want to have as neighbors.
How Can I Research Local Amenities?
In Google Maps locate the property you are buying. Then click on “nearby”. Several options will pop up such as Restaurants nearby, Hotels nearby, Bars and pubs nearby, etc. Choose one of those or type in what you’re interested in, e.g., grocery stores, hospitals, schools, etc. Google will map them for you.
How Can I Research Climate?
One of my favorite places to research climate is BestPlaces. I like to compare two cities.
What pops up is helpful information for two cities on climate, crime, economy, housing, health, education, people, transportation, religion, voting, jobs, etc.
How Can I Research Real Estate or Rental Prices?
Search Zillow or ApartmentList.
How Can I Research Whether Title is Clean?
During the escrow period, the escrow officer will order a title report. You can review that. The title company will not insure the title unless it is “clean”. So, if they say they will insure, that’s your best indicator of clean title.
If there are blemishes on the title report, the seller will often be able to correct those during the escrow period. So if the preliminary title report is not clear, don’t assume that’s the end of it. Wait to see what the final title report shows after the seller and escrow officer have worked to address any questionable items. As one example, if there is a judgment or lien in the report, the seller can pay that off making it disappear from the title report.
How Can I Avoid Making A Mistake on My Due Diligence?
One way to avoid error is to sit down with your Realtor and develop a list of all the issues that you as a buyer will need to research. That way you won’t forget anything. Another way to minimize error is to get all critical information directly from various information-providers, not second hand from Realtors or sellers. A final way to reduce error is by practicing redundancy: Get the same question answered in multiple different ways, or by several different people. For example, if you are trying to figure out if the land is likely to perc for septic you can: 1) ask a neighbor if they had any trouble with their perc test, 2) check with the county to see if an historic perc test is already a matter of public record, 3) call a local septic installer to ask about the viability of septic in that area, and/or, 4) pay for an actual perc test. That is, do several of these things, not just one.
Story time: One time I phoned a county planning office to ask about the zoning for a parcel I was selling. The planner I spoke to said it was zoned commercial. A few days later I called again to get some clarification on what commercial uses were allowed. I spoke to a different planner. That planner said it was actually zoned residential. So, I went to the planning office in person. The third planner walked me over to a large zoning map hanging on the wall. That map showed that it was zoned commercial along the street and residential in the back. That made sense and I could see from the map that it was the correct answer. Finally! Making several phone calls AND going in person AND looking at maps was the key to getting the right information at the end of the day. Redundancy rules!
What if I Mess Up on My Due Diligence?
One time I had a client who didn’t do any due diligence prior to purchase and then asked to “rescind” a sale after closing escrow.
Um, that’s a “no”.
There is no way to rescind a sale after escrow has closed and a change of ownership has been recorded with the county. Buying real estate is not like shopping in a retail store. You can’t just walk up the return counter with a copy of your receipt and get your money back.
With that said, if, after purchasing land, you decide that you don’t want to own it for any reason, you can always resell it. Just be sure to disclose to the next buyer all material facts, especially negative facts that you may have discovered, as required by law.
It’s All Very Overwhelming. What Strategies Will Make it Easier?
Well, remember all you’re trying to do now is decide if you want to buy the land or not. You’re not going to be building a house next week – that’s in the future. So, focus in on just the mission-critical items, i.e., the things that really affect whether or not you even want to buy the land to begin with.
If you ponder it, you will realize that some things are not mission-critical. For example, do you really need to hire a surveyor to market the exact-exact-exact corners on that 40-acre piece or will studying an aerial map do for now? I mean, if you were to discover that the property line is 10 feet from where you thought it was, would that really affect your decision to purchase? If so, hire a surveyor. If not, it can wait until after you buy the land.
Or if you’re buying an infill lot in a densely populated neighborhood, and you observe a fire hydrant at the nearest intersection, and the neighbor on the left has water, and the neighbor on the right has water, do you really need to research the cost of a water meter right now? After verifying that there is no moratorium on issuing new water meters in that area, you might just put that item on the back burner until you’re ready to build. All you’re trying to do right now is figure out if there are any bad-news-deal-breakers when it comes to purchasing the land. The rest can be put off ‘till later.
If you will think along these lines you might be able to temporarily cross some things off your To Do list and tackle them after you buy the land. For now, focus on the things that affect your decision to buy or not buy.
Summary
When buying land, yes, you truly do have to do your own independent due diligence. Further, there is no “one stop shopping” for all of the information that you might need. No single person will provide all of the answers for you: not the seller, not the Realtor, not the escrow officer, and not the title company. Savvy land buyers will want to make a list, roll up their sleeves, and gather separate pieces of information directly from various information-providers before purchasing a parcel of land.
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