Tammy Tengs

No, the seller will not accept $0 down

In lieu of requiring buyers to pay all cash, some land sellers choose to offer “owner financing”. The seller accepts a down payment from a buyer of, say, 20% and then the buyer makes monthly payments to the seller over time.

When one of my seller-clients decides to do this, I ask them to specify up front the terms they will consider, i.e., the down payment, interest rate, and number of years. An example is 20% down, 6% interest, 10 years. I put the seller’s terms in black and white in all of my marketing materials. Yet, inevitably, I find that whatever down payment the seller requires, a few buyers will always contact me and ask if the seller will accept a smaller down payment.

Typical conversation with a buyer

This video shows a typical conversation that I will have with buyers. It explains why sellers offering “owner financing” will not accept a small down payment:

http://https://youtu.be/8nr6GICqO88

Additional reasons why sellers will not accept $0 down or a low down

The commission and closing costs are not the only reason sellers will not accept $0 down. The seller might also have liens or back property taxes to pay.

For example, suppose the seller in our $100,000 video example still owes $4000 on a loan tied to the land. In addition, he owes $3000 in a child support lien and $2000 in back property taxes. In order to transfer the land to a buyer “free and clear”, escrow will require the seller to pay those items, along with the commission and closing costs, out of the seller’s proceeds. Even though the seller is paying these items, and the buyer is not paying them, the down payment that the buyer gives the seller has to be sufficient to cover all of the items the seller is responsible for or the seller will have to write a check to escrow in order to close. Land sellers do not want to write checks. They want to receive checks. Getting money in return is kind of the whole point of selling land when you think about it!

Further, when a seller offers to carry the loan, he will naturally have a keen interest in making sure that the buyer will make their monthly payments in full and on time. The higher the down payment, the less likely the buyer will flake out in the future. This is because buyers realize that they will lose their down payment (and the land too) if they don’t pay.

Other sellers have in mind a certain amount of money that they want up front for a particular and immediate use in their life. Maybe they have medical bills to pay. Maybe they’re trying to fund the family’s vacation to Hawaii. Maybe they want to buy another parcel of land. Maybe they want to renovate their kitchen. Maybe they owe money to their drug dealer. Who knows? The point is, some land owners don’t want to sell their land at all unless they can get some threshold dollar amount down from a buyer. If they can’t get at least that amount, they won’t sell at all.

Occasionally “the seller” is actually multiple sellers, each with a percent interest. So, whatever the buyer puts down ends up getting split 2, 5, 8 ways (or whatever) after costs are deducted. The amount each individual seller will end up with at closing is therefore small. The more co-owners there are, the more the required down payment can get ratcheted up.

Advice to buyers

Before buying land, consider saving your money for a while so that you will have a sizeable down payment. Or, find a co-investor. Or purchase a less expensive parcel of land.

If you really want to purchase land with $0 down or a small down, don’t even look at parcels listed by Realtors. This is because, when there is a Realtor involved, the seller will always have to pay the commission out of any down payment that you propose. The math is not going to work out. So, buyers, if you don’t want to put at least 20% down, look only at For Sale by Owner (FSBO) listings where the seller does not have the expense of a commission.

If you have your heart set on a parcel listed by a Realtor, then at least contact the Realtor and ask if the land is “free and clear” of all liens and back taxes. Sometimes the agent will know the answer to this question and sometimes they won’t. Depending on what the agent says, do a “back of the envelope” calculation. Consider things from the perspective of the seller. Add up all the costs you think the seller will have to pay at closing: liens, back taxes, commission, and closing costs. You won’t have the exact numbers, so just estimate. When estimating, keep in mind that commissions are not always 6%. They can be 8%, 10% or anything and the listing agent is unlikely to tell you what commission the seller is paying. The total you come up with is your estimate of the bare minimum down payment the seller might possibly consider. Throw in an additional cushion of several thousand dollars over that sum and that’s the down payment you might propose in your seller-financing offer. If you find that the total exceeds what you want to put down, then don’t even bother submitting an offer. Move on down the road and buy a different parcel.

Suppose that the seller’s total costs, including liens, back taxes, commission, and closing costs, add up to $9642. Buyers, please don’t assume that you can offer the seller $9700 down and he will accept it. The seller is not going to transfer title to you in return for a check for $58 dollars at closing. The seller will want to receive a check for thousands of dollars at closing in order to agree to carry the loan for you. That’s why it’s important to cushion the down payment offer by several thousand dollars over and above the seller’s total costs.

Also, note there are basically two ways the seller can carry the loan. One is with a “trust deed” where title is transferred to the buyer at closing. Escrow records a lien on the land in favor of the seller and the seller and becomes a non-owner and lender just like he is Wells Fargo. The second way is a “land contract” where the seller retains title until the loan is fully paid off. The land contract is sort of like buying a car. After you make all the payments, then you get the pink slip. You don’t get the pink slip (title) up front. I’m not sure about other states, but the trust deed is the most common in California and Oregon, and I have never seen a “land contract” used in these states in my career. However, a “land contract” is the only kind of agreement that is likely to work with $0 down or a low down. This is because sellers are unlikely to want to transfer title to you up front when you are putting no money down. As a buyer, you might try proposing a “land contract” to FSBO sellers instead of a “trust deed”.

Finally, buyers, remember that, in addition to the down payment, you will also be expected to pay your portion of closing costs. Closing costs include the escrow fee and title insurance. These costs are entirely separate from the down payment and are paid to the escrow and title companies, not to the seller and not to the Realtor. Even in the unlikely event that you can convince a seller to accept $0 down, you will still be expected to pay your share of these costs. Purchasing real estate is not free.

Advice to sellers

Offering to “carry the loan” is one way to dramatically increase the odds of selling your land, and for top dollar. The reason is, there are virtually no good bank loans for most kinds of vacant land. Sellers who offer to “carry” do not think of it as a burden. They think of it as an investment that yields a return secured by real estate. Consider whether or not seller-financing is right for you. If you don’t want to carry the loan, that’s totally fine, just know that your buyer-pool will likely be limited to those buyers who have all cash. If you do decide to offer seller-financing as an option, consider requiring at least 20% down.

Conclusion

The notion of a zero-down payment on land is basically a myth. I have never seen a seller accept that in my career. Purchasing land with a low (not $0) down payment might be possible but not when a Realtor is involved in a transaction. Buyers who are seeking seller-financing, and want to consider parcels listed by Realtors, should be prepared to put down at least 20%.

Where to go to learn about building restrictions

by Tammy Tengs

Buyers ask: “are there building restrictions on that land?” That’s an easy one. My answer is always “yes”. Every parcel of land in California and Oregon has building restrictions.

What buyers really want to know is what are those restrictions and who governs those restrictions?

I mean, if you’re going to get in your car and drive somewhere to talk to someone to learn about building restrictions you need to know which government office to go to, right?

Which Office Should You Visit?

The best place to learn about building restrictions is the Planning or Building Department. But should you go to the City? Or the County?

If the parcel is inside an incorporated City, go the City Planning Department or Building Department.
If the parcel is outside an incorporated City, go to the County Planning Department or Building Department.
If the “City” is unincorporated, then it’s not really a City, so go to the County Planning Department or Building Department.

So now you need to figure out if the city is incorporated and, if so, whether the parcel is inside or outside city limits. Maybe you know this already. But if you don’t, read on.

Four Steps to Determine If a Parcel is in the City or the County

Step 1: Look at the Advertised City

Make a note of the advertised address for the land. Usually it will consist of a street name and City name.

Step 2: Figure out if the Advertised City is Incorporated

Not all Cities that appear in real estate advertising are official Cities. A parcel of land might have a City name in the address for marketing or postal purposes but will not be inside the limits of an actual official City. An official City is one that is incorporated and has a City government. To find out if the advertised City is incorporated, do the following:

Type the City name, and state, into Google. If a City.gov site pops up, then it is incorporated. If no City government pops up, then it is not a proper City.
Search Wikipedia on the City name and state. If Wikipedia says it is an unincorporated community or a census-designated place, that means that it is not an incorporated (official) City.

For example, I have a listing for a parcel of land on Territorial Hwy in the Crow area near Eugene Oregon. Here’s what appeared when I typed “Eugene Oregon” into Wikipedia:

And here is the result when I typed nearby “Crow Oregon” into Wikipedia:

As you can see, Eugene is a proper incorporated City in Oregon while Crow is not.

If the City is incorporated, go to step 3. Otherwise, go to step 4.

Step 3: Figure Out if the Parcel of Land is Inside or Outside City Limits

Even when a City is mentioned in an advertisement for the land, and the City is incorporated, this does not necessarily mean the parcel is inside City limits. It’s possible that the mentioned City is just the closest one.

For example, my listing on Territorial Hwy is near Eugene. I entered “Eugene” as the City in the MLS and on all websites where I market land. Eugene is a proper City but that does not necessarily mean the parcel is inside City limits.

For your land you need to figure out if the parcel is inside or outside City limits because that will dictate which planning office you should visit.

Type the City name and state into Google Maps and it will show you the boundaries of the City. Check the map to see if the land is inside or outside those boundaries.

For example, when I type Eugene OR into Google Maps, with no street address, the boundaries for the City of Eugene appear clearly in red:

It is clear from studying this map, that the land I am selling on Territorial Hwy is outside of City boundaries.

Step 4: Go to the Correct Building or Planning Department

If the “City” is not incorporated, then the land will technically be in the County, not the City. There will be no City government and so no City planning department. No “City” will be placing restrictions on the land because the “City” doesn’t really exist. So, go to the County Building or Planning Department for information.

If the City is incorporated, and the property is inside City limits, go to the City offices.

If the City is incorporated, and the property is outside City limits, go to the County offices.

For example, in the case of the land I am selling on Territorial Hwy, that property is outside the limits of the incorporated City of Eugene, in a rural area called Crow, so the buyer would have to go to Lane County offices for information.

Confusing Language

Cities are located inside Counties, which are located inside States, which are located inside the U.S. This nested relationship sometimes causes buyers to overthink it as they try to figure out which office to go to. So, let me clear up some issues:

When Realtors say a parcel is “in the City”, what they mean is that the parcel is inside the limits of an incorporated City. Yes, Cities are geographically nested inside Counties…but forget that. If it’s inside City limits, go to City offices for information.
When Realtors say a parcel is “in the County”, what they mean is that it is outside the limits of an incorporated City or the so-called City is unincorporated. Go to County offices for information.

Realtors Have Considerable Latitude in Choosing the City Name that is Advertised

The computer systems that Realtors use will not allow agents to enter the truth – that a property is technically “in the County” not inside the boundaries of an incorporated City. Menus pop up in the MLS and elsewhere demanding that the Realtor choose a City name gosh darn it!

Keep in mind that Realtors are sales people. So, if the land is in the County, midway between Cities A and B, and if City A has a better reputation or more expensive properties than City B, you can bet the Realtor will market the property as being associated with City A.

In the case of my listing on Territorial Hwy, it is located in a rural area called Crow outside Eugene city limits. So, I am advertising the City as Eugene. That’s because 1) Eugene is the closest proper City, 2) buyers with deep pockets from places like San Francisco have probably never heard of “Crow” Oregon but may have heard of my hometown Eugene (where the 60’s are still alive and well, living on the planet earth), 3) “Crow” is not an incorporated City, and 4) there are more eyeballs searching online in Eugene than in Crow. More exposure means a greater chance of selling the land and at a higher price.

I mean, where do you think the “city” name “BeverIy Hills Adjacent” came from? Realtors, that’s where. I’m just keepin’ it real.

Islands of County Inside City Limits

Sometimes there will be an “island” of County land inside City limits. This is weird because usually Cities are inside Counties, not the reverse. When that happens, go the County Planning Office for land on the “island” and go to the City for all other land inside City limits.

Below is an example of an island of county inside San Bernardino City limits.

Parcels Near a Boundary

I have a listing for 99+ acres just outside of Riverside City in Riverside County California (in escrow). It is “in the County”, adjacent to City limits. The County has imposed rigid zoning on this land. However, there is talk that the City boundary could be expanded. If that happens, the acreage would then be “in the City” and the City could then substitute new zoning rules. For this particular parcel, a change from County zoning to City zoning might be welcome. However, I can imagine other situations where a change from County to City might not be a good thing, e.g., if County building codes are lax and City building codes are stringent. So, if you are considering a parcel near a boundary, bear in mind that boundary can change.

It is also possible for a piece of land to straddle two Counties. In that case, a prudent buyer would gather information from the planning offices for both Counties.

Cities and Counties with the Same Name

The map above shows an island of San Bernardino County inside the City of San Bernardino. The City and County have the same name. This can be a source of confusion for some buyers. Here are some other examples of that:

California:

San Diego City is inside San Diego County
Los Angeles City is inside Los Angeles County
Sacramento City is inside Sacramento County

Oregon:

Baker City is inside Baker County
Tillamook City is inside Tillamook County

So, for example, if a Realtor tells you to “Go down to the Los Angeles Planning Office” to get information, you will need to clarify whether they mean the City of Los Angeles or the County of Los Angeles. They are two different offices in two different locations.

Homeowners Associations Can Impose Restrictions Too

If a parcel is in a Homeowner’s Association (HOA) then, then the HOA might also impose building restrictions through Conditions, Covenants and Restrictions (CC&Rs).

To figure out if there is an HOA and/or CC&Rs, the fastest way is to ask your Realtor. If your Realtor doesn’t know, here are some other tips:

HOAs are most common with clustered housing developments. For example, if the land is in a gated community there will almost certainly be an HOA. On the other hand, if the land is large acreage in a rural area there is probably no HOA. You can usually tell if there is an HOA just by using your eyes, brain, and rules of thumb. But not always.
Find a neighbor out working in their yard or getting groceries out of their car and ask them if there is an HOA.
Search Zillow for nearby houses available for sale or sold. Check to see if the name of a development appears in Zillow ads for homes in the same neighborhood. Developments will have names like “Country Club Estates”, “Hidden Meadows” or “Sunrise Village”. Then go to Google and type in the development name and the abbreviation “HOA” to find contact information for that HOA.
Ask the title company to research whether there is an HOA and/or CC&Rs.

As a buyer, you might assume that of course the seller will have a copy of the CC&Rs in his file so of course, the Realtor can get a copy from the seller. In my experience, however, sellers rarely have the CC&Rs in their files. Remember, this is vacant land, not a house, and many sellers never had plans to build so they are unconcerned with the CC&Rs. Some owners acquired the land by inheritance or bought it at a tax sale, so never had a copy to begin with.

You might also assume that of course the CC&Rs will be posted online. In reality, this is also rare. This may be because HOAs like to charge for a copy of their CC&Rs.

The good news is that after you submit an offer, and the seller accepts it, the escrow officer will order a copy of the CC&Rs from the HOA and provide a copy to you. But how can you get a copy of the CC&Rs before even submitting an offer? You can:

Ask the Realtor for a copy
Ask a neighbor for a copy
Find contact information for the HOA online and ask the HOA for a copy. Pay the required fee.

Bear in mind that that the existence of an HOA does not necessarily mean that there will be severe restrictions on building. Some HOAs just collect a few dollars from all residents for road or gate maintenance and have very few, or no, building restrictions. Occasionally, HOAs may exist on paper but are now basically defunct for all practical purposes. In this instance, if you ask neighbors who is the head of the HOA they will shrug their shoulders and say they don’t know. That’s a good clue that the HOA is inoperative.

My point here is that if you’re someone who doesn’t like HOAs because you imagine a committee telling you that you that your house has to be painted one of the approved shades of beige, or that you can’t build that off-the-grid container home you were planning, remember that not all HOAs are the same. Some are minimalist or non-functioning HOAs.

Summarizing the Above

Use this table to figure out where to go to get information on building restrictions for your parcel:

City incorporated?	Inside City limits?	HOA?	Where to get info
Yes	Yes	No	City
Yes	No	No	County
No	N/A	No	County
Yes	Yes	Yes	City and HOA
Yes	No	Yes	County and HOA
No	N/A	Yes	County and HOA

But Wait, There’s More! Other Entities Can Also Impose Restrictions

Coastal Commission

In some geographic areas, there will be additional entities that also restrict building. One example is the Coastal Commission. The Coastal Commission is a state agency with quasi-judicial regulatory oversight over land use and public access in the coastal zone.

Here is a map of the area covered by the California Coastal Commission.

There is also an Oregon Coastal Management Program and here is their map.

So, if the land you’re considering buying is near the ocean, check to see if it is in the Coastal Commission zone.

Historic District

If the land is in a designated historic district, they can also impose restrictions. Building a new home on your land might be governed by the same strict design guidelines that control the renovation or remodeling of an existing historic buildings within the district.

Ask the Realtor, City Planner or County Planner if there are any other offices that might impose building restrictions on the land you are considering purchasing. Before contacting those offices, check their website for boundary maps to see if the land really is inside their jurisdiction.

Conclusion

It is amazing how many people and offices can tell you what you can and can’t do with your own land. Building restrictions exist on every parcel in California and Oregon. In fact, on some parcels, building is not even allowed. The Realtor and Seller are unlikely to have complete information about building restrictions. To learn what the restrictions are on a given parcel, first research the location of that parcel. Is it in a City? County? HOA? Coastal Commission? Historic District? Then you will have a better idea which office(s) to visit to learn more.

Effect of wildfire on land prices

by Tammy Tengs

Wildfires scorch the landscape and reduce houses to rubble. They destroy community infrastructure and recreational resources. The result is a decline in real estate prices.

How much will real estate prices decrease after a wildfire? Read on.

Reasons Why Real Estate Prices Drop After a Wildfire

The most obvious reason that real estate prices go down is that where there was once house+land, there is now only land. Vacant land with no house usually sells for less than land with a house.

Further, even if you own vacant land that never had a structure on it, the trees and vegetation may be charred. Land with unattractive or no vegetation will sell for less than land with attractive vegetation.

Even if your land was not affected, your neighbor’s land was. All the houses around you are gone; the local market is boarded up; the medical clinic severely damaged; the forest where you used to take your dog for hikes is now a bunch of eerie charred twigs. The state of community infrastructure affects the attractiveness, and therefore the value, of your land.

Lastly, wildfires increase the perception of risk in the minds of buyers. All things being equal, buyers may be reluctant to purchase real estate in areas prone to wildfire.

These factors, and others, combine to cause a reduction in real estate prices.

What Does the Research Say about the Effect of Past Wildfires on Land Values?

Several scientists have examined the effect of historical wildfires on real estate prices. Here is what they found:

Huggett, Murphy and Holmes (2008) examined the 1994 Chelan County wildfires in Washington state and found that real estate prices dropped 13-14% over a one year period afterward.

Mueller, Loomis and Gonzalez-Caban (2007) studied fires in Southern California. They found that repeated forest fires cause houses near fires decreased in value. The first fire reduced house prices by 9.7%, while the second fire reduced house prices by 22.7%.

PricewaterhouseCoopers (2001) performed an analysis of how the Los Alamos, New Mexico real estate market responded to the 2000 Cerro Grande fire. The report showed that after the fire, the average sale price of single-family homes in Los Alamos County declined 3-11%.

Loomis (2004) estimated that house prices in Pine, Colorado decreased by approximately 15% following the Buffalo Creek fire.

Kiel and Matheson (2015) studied the Fourmile-Lefthand Canyon forest fire in Colorado and found a 21.9% decline in sale prices.

The Good News

If I put on my rose-colored glasses and squint real hard, I can come up with some examples of good news regarding the value of real estate after a wildfire.

First, the house that burned to the ground probably had underground utilities. The water pipes are still there buried in the ground; the septic system or sewer pipes are also there; and if you have a well, the vertical casing is still in the dirt even if the above-ground equipment might be damaged. Most vacant land on the market does not have utilities stubbed into the building area because there was never a house. But yours does. Builders love it when utilities are not just “in the street” they are stubbed all the way into where a new structure might be built. The presence of utilities adds considerable value to vacant land.

Second, any structures that are rebuilt in the affected neighborhood will be new, and possibly more valuable, than what was there before. For example, your plot of vacant land may end up next to a brand new 4-bedroom, 3-bath house instead of next to the tired 2-bedroom, 1-bath bungalow built in 1958 that was there before. This may positively affect the value of your lot.

Third, if you own a nearby rental property that was not affected by the fire, you may find that demand for your units will increase. This is due to the many displaced homeowners who now want to rent near the same area where they once owned home. Supply is down and demand is up, so you may be able to increase your rental rates accordingly. (Don’t price-gouge though, it’s not nice).

Fourth, recently I was listing some acreage located 2 miles from the edge of a wildfire. After the fire, I noticed an uptick in interest in this parcel, i.e., more calls and e-mails. This may have been related to displaced families needing to move animals or themselves. Or perhaps buyers were previously looking for land in the wildfire-torn area and now they have shifted their focus to the area just outside of that area. Supply and demand can cause an increase in value just outside the wildfire perimeter.

Fifth, sometimes homeowners who receive a handsome insurance settlement want to rebuild a larger home and need more land to do that. The adjacent owner might be able to sell their land to that person at an inflated price. One example of this occurring is with the Felton Estate. This 14,000-square-foot property was built five years after fire destroyed all the homes on top of Schooner Hill in Oakland California. One owner bought up neighboring land, built a large house in 1996, and recently sold that house for $20.5 million.

Lastly, real estate prices will not be low forever. As time goes on, vegetation will come back, infrastructure will be rebuilt, and buyer’s memories of the fire will fade.

So, to Summarize

After a major wildfire, land prices in the affected area are likely to decrease. Prices decrease for a host of reasons including reduced infrastructure and increased perception of risk. According to the research, land prices after fires have historically decreased between 3 and 23%. However, there are scattered cases where the value of land can remain steady or even increase.

10 reasons land sellers sometimes have so little knowledge about what they’re selling

by Tammy Tengs

Land owners have a legal duty to disclose to buyers all material facts about the land they’re selling. This duty, however, is limited to information the seller is actually aware of. Buyers are sometimes dismayed when they learn that sellers have so little knowledge about their own land.

Here is a typical scenario: A buyer asks me a question like “where are the exact corners?” or “will this property perc for septic?” When I say that I don’t have that information, the buyer says “well, could you ask the seller?”

The thing is, the seller has no idea either.

“How could that be?” the suspicious buyer wonders. “Surely the seller knows everything there is to know about their own land, right?”

Um, no.

The vast majority of sellers are ethical and helpful and will provide the information if they have it. However, there are many reasons why some sellers know little about the land they’re selling. Here are the top ten reasons:

Bought it at a tax sale

Seller Larry is an investor. He buys land at county tax sales at low prices. Then, he “flips” the land a couple of years later at a profit. For parcels under $50,000, Larry does not go to see the land in person. To decide what to buy, he relies on studying satellite maps and other online information sources. As a consequence, when it comes time to sell the land, Larry does not have detailed knowledge about the land he’s selling.

Just the lenders

Seller Seymour did not invest his retirement money in the stock market. Instead, he became a hard money lender because the rates of return were higher. A few years ago, buyer Jane wanted to buy some land and Seymour loaned Jane the money. At that time, Seymour had the land appraised. Unfortunately, after buying the land, Jane lost her job and did not pay Seymour. Seymour foreclosed on Jane and took the land back. Now he wants to sell it and the old appraisal report is the only information Seymour has about the land. Seymour will be happy to disclose the appraisal to new buyers, but that’s all the information he has.

Purchased it for someone else

Sellers Wang and Chen purchased a lot for their daughter Lilly to build a home in California. Wang and Chen live in New York. Although they are the owners, they have not seen the land. A year later, Lilly’s company transferred her to an office in a different state. Lilly moved away from California and so decided not to build. The family now wants to sell the land. It is Wang and Chen, not Lilly, who must list the land for sale with a Realtor and complete the official disclosure forms. This is because they are the legal owners. Sellers Wang and Chen know almost nothing about the land and their disclosures reflect their lack of knowledge.

Live far away

Sellers Brad and Leslie live in the Rocky Mountains of Colorado. They purchased land on the Oregon Coast 10 years ago with the intent of someday building a retirement home there. However, they have now decided to stay in Colorado near their children. Brad and Leslie live hundreds of miles from the land. They bought it on a whim based on the amazing ocean view and have little information about the land beyond happy memories of salt air and seagulls.

The person with detailed knowledge about the land is deceased

Seller Myrtle owns land near Crescent Lake in Oregon. Her husband Fred used to love to take the RV over to Central Oregon to go fishing with his friends. The guys would camp on the land and Fred would dream about someday building a cabin there. Fred was a fastidious person and knew every single detail about the land. Myrtle, on the other hand, preferred the comforts of city life and did not get into detailed discussions about the land with Fred. Fred is now deceased and Myrtle is trying to sell it.

Have not seen the land in decades

Seller Cecil, age 85, purchased 160 acres of desert land 50 years ago. Cecil went to see the land prior to purchasing it. In addition, while on vacation 10 years later, Cecil took a detour to go “visit” his land. At that time, access was via a dirt road and the nearest electric pole was 1 mile away near a small development of new homes. Decades have now passed and he has not seen the land for 40 years. Cecil has no knowledge of whether or not additional development (paved streets, water, electricity, sewer) might have reached his land or not.

Didn’t do their research when they bought it

Seller Omar received a large inheritance 5 years ago. He bought 12 lake-front lots at the time. He chose the parcels based on how pretty the lake looked in the Realtor’s online photos. Omar relied on what the Realtor told him and did not do any independent due diligence on the parcels prior to purchase. Consequently, now that Omar is a seller he is is unable to provide much information to potential buyers.

In the hospital

Seller Thelma hired a listing agent to sell her land. A few months later, when the agent located a buyer, he called Thelma’s home to tell her about the offer only to learn from her family that Thelma was in the hospital. Thelma is scheduled for surgery next week. She is anxious to sell her land so that she can pay her medical and after-care bills. Thelma is of sound mind so, with the assistance of a mobile notary, she is able to sign the offer and escrow documents to sell her land. However, since she is in the hospital, she is not exactly in the position to be looking through her files at home for additional documents.

Never had plans to build

Seller Juan purchased 10 rural acres from a friend for about 50% of its true value. Juan already owns his dream home so he has no plans to build on this land. He bought it strictly as a long-term investment and to help out his friend, who needed fast money. Because Juan never planned to build, and because he bought it at such a bargain price, he did no research on building and has no knowledge about things such as utilities or even whether there is legal access.

No legal duty to research

Seller Tamar owns a view lot in Malibu. Tamar is an orchestral musician and does not have a background in construction. Tamar is represented by a Realtor. Buyer Manuel is considering purchasing Tamar’s lot to build a fabulous architectural house for his family. Manuel has never built a home before. He does not have a contractor or architect yet. Manuel has many questions about whether or not the lot is buildable. He asks Tamar’s Realtor for information about the degree of slope, whether a flat pad can be graded, the minimum square footage for a house, the cost of a water meter, etc. Seller Tamar and her Realtor reply that they do not know the answers to these questions. The Realtor explains to Manuel that the owner is selling dirt and has no duty to research matters related to building. The Realtor helpfully advises buyer Manuel to seek the assistance of a contractor, architect, engineer, or other building professionals to assist him.

What’s a Buyer to Do?

Land buyers should do their own independent due diligence. Here is a partial list of things that land buyers will want to research: Zoning, building restrictions, electricity, water/well, sewer/septic, and legal access.

Buyers sometimes wonder whether the Realtor will get answers to all their questions. Realtors do sometimes have considerable knowledge about the land they’re representing. In fact, Realtors often know more about the land than the sellers do. On the other hand, it is also common for the Realtor to have little information. The Realtor’s ability to provide answers, varies depending on the parcel. So just ask. If the Realtor has answers, the Realtor will be pleased to provide them to you. If the Realtor does not have the information, they can usually be very helpful in advising the buyer where the buyer can go to get answers.

Note however that while the Realtor will happily disclose what they already know about the land, it is not the agent’s role to perform new research, especially on matters related to building.

Further, experienced Realtors have learned that the best way to prevent misunderstandings and lawsuits is for the buyer to get as much information as possible from an official source instead of relying on the Realtor or seller. A wise Realtor will advise a land buyer to roll up their sleeves and get answers “straight from the horse’s mouth”. This means that the buyer, not the Realtor, should phone the utility company to get information on utilities or drive down to the Planning or Building Department to discuss building restrictions.

A great side benefit to a buyer doing their own due diligence, is that they may learn things about the land that they did not even know they had questions about. For example, a buyer who calls the water company to ask about the cost of a water meter, may learn there is no sewer. Or, a buyer who sits down with a City Planner to discuss building setbacks may discover, in the course of conversation, that the mother-in-law unit they were planning is not allowed by the municipality.

As a buyer, you may feel that you don’t have time to do your own independent due diligence. Or maybe you feel it’s not that fun and you just don’t want to do it. I understand completely. However, in that case it is in your best interest to buy a house or condo, not land.

Conclusion

For the reasons described above, it is common for sellers to have little knowledge about the land they’re selling. The careful buyer will seek answers from official sources such as the City, County or utility companies.

Reading the “days on market” tea leaves

by Tammy Tengs

“How many days has that parcel been on the market?” Buyers call and ask me this question all the time. They assume that the longer a parcel has been on the market, the more motivated the owner is to sell. When the “Days on Market” (DOM) are high, buyers think that they can offer a price that is much lower than the listing price and the seller will gladly accept it.

However, as an agent, I know the opposite is often true. A seller whose land has been on the market for 300 days may have turned down offers received at 30 DOM, 100 DOM, and 200 DOM. Land owners like this have demonstrated a low motivation to sell not a high motivation to sell. Sellers with high DOM are often waiting patiently for a buyer to come along who will pay them their target price.

It is my experience that when buyers try to read DOM, it’s like reading tea leaves.

That is, it’s an ancient superstition passed down through the ages. And it’s not all that helpful in figuring out what price a seller will accept for their land.

To separate myth from the reality, I decided to look at actual data. I compared the price difference (the percent difference between the listing price and the selling price) with DOM. If the buyers who call me are correct, the percent “discount” the seller gives the buyer off the listing price should be higher for high DOM and lower for low DOM. Let’s just see if that’s true or not.

Research

I obtained data from the California Regional Multiple Listing Service (CRMLS). This Multiple Listing Service (MLS) system covers much of California. I searched the MLS for the 2000 most recent land sales. For these 2000 sales, I extracted the listing price, selling price, and days on market.

I eliminated four wonky data points. For example, in one case the list price was $17,500 and the broker indicated that it sold for $175,000. While it is not unheard of for land to sell over the asking price, these digits were so similar I assumed that there was a typo and the listing agent just added in an extra 0 when entering the selling price. After eliminating these four weird cases, I ended up with a total of n=1996 land sales.

I calculated: Percent Price Difference = (Listing Price – Selling Price)/Listing Price

In Excel, I performed a statistical linear regression to find y=mx+b, the equation for the line that best fits the data. In this case, Percent Price Difference was y and DOM was x. M is the slope of the line and b is the y-intercept.

The parameter m is of particular interest. The m, produced as a result from the statistical regression, tells us how much Percent Price Difference changes with each additional DOM. If m is a large negative number then the buyers who think DOM is important are right. If m is zero then buyers are wrong.

Results

The following scatterplot shows Percent Price Difference and DOM for all land sales:

Two things jump out at me in this figure. The first is that there were a fair number of parcels (n=144) that sold for over the asking price. Second, 38 parcels were on the market for 3 years or more before selling:

Due to the clustering of points at the left, the scatterplots above, showing all data, are hard to read. So below is a revised figure. The scatterplot below shows a subset of the data for the first 365 days on market and for prices ranging from a reduction of 75% to an increase of 25%:

How do you read this figure? As one example, consider point A. This point reflects a land sale that occurred after 100 days on market. The selling price was approximately 39% less than the listing price. The land sale at Point B also occurred at approximately 100 days on market but this selling price was 0% from the listing price. That is, the seller at Point B sold their parcel for full price.

Points C, D and E occurred at approximately 200 days on market. Point C reflects a parcel of land that sold for approximately 25% less than the listing price. Point D is a sale that also occurred at 200 days on market but this parcel sold at 50% less than the asking price. Finally, point E occurred at the same 200 days on market but it sold at 18% over the asking price.

After performing the statistical linear regression on all data, the resulting equation for the line that best fits the data was:

y = mx + b

Percent Price Difference = m (DOM) + b

Percent Price Difference = -0.0000546341974725283 (DOM) + -0.103314904970139

What does this equation mean? It means that the day a parcel goes on the market (0 DOM), the average seller will accept 10.33% less than the listing price. Further, for every additional day a parcel stays on the market (DOM), that discount changes by -0.00005.

Note that -0.00005 is close to zero. That means that the slope of the best fitting line will be close to zero which would make the line virtually horizontal. The best fitting line is shown in pink in the above figure.

In other words:

At 1 DOM, the average seller may accept a 10.3% reduction in price. (This was calculated as -0.0000546341974725283 (1) + -0.103314904970139)
At 30 DOM, the average seller may accept a 10.5% reduction in price. (This was calculated as -0.0000546341974725283 (30) + -0.103314904970139)
At 90 DOM, the average seller may accept a 10.8% reduction in price. (This was calculated as -0.0000546341974725283 (90) + -0.103314904970139)
At 180 DOM, the average seller may accept a 11.3% reduction in price. (This was calculated as -0.0000546341974725283 (180) + -0.103314904970139)
At 365 DOM, the average seller may accept a 12.3% reduction in price. (This was calculated as -0.0000546341974725283 (365) + -0.103314904970139)

Discussion

Are you a buyer interested in knowing the lowest price a seller will take on a parcel of land? What is their bottom line – that’s what you really want to know, right?

This research shows that the amount of time a parcel has been on the market is a poor indicator of seller flexibility on price. There is almost no relationship between the price a seller will accept and how long their parcel has been on the market.

For example, a parcel listed at $100,000 that’s been on the market 30 days might sell for 5%, 25% or 50% less than the asking price. Or it might even sell for more than the asking price.

On average, a parcel that is sold the day it comes on the market listed at $100,000 will go for 10.33% less than the $100,000 asking price or $89,668. In comparison, a parcel that’s been on the market 180 days might sell for an average of 11.3% less or $88,685. The difference between $89,668 and $88,685 is only $983.

Fortunately, for buyers, there are better ways to figure out how flexible a seller may be on price:

Pick up the phone and call the listing agent and ask. (As a listing agent and fiduciary to the seller, I personally won’t reveal to a buyer how flexible a seller is on price, unless the seller has sent me strong signals that they want me to share their flexibility. However, other listing agents might reveal this information. Try it.)
Ask the listing agent if the seller has received offers that they turned down. What prices were offered but declined? For example, if a parcel is listed at $100,000 and the seller has turned down offers of $80,000 and $85,000, that’s a pretty good indication that the seller will not accept your offer of $82,000. (Again, as a listing agent I may or may not give a buyer this information, depending on whether I think it’s in the seller’s best interest. But other listing agents might. It doesn’t hurt to ask.)
If the parcel recently fell out of escrow, ask the listing agent what price it was in escrow at. While the seller’s motivation to sell may have increased or decreased since they accepted their last offer, the answer will at least tell you what price the seller was willing to accept historically. (As a listing agent, the only time I might reveal this is if the seller was previously in escrow at full price. This is because I want to convey to the new buyer that the previous buyer clearly thought the property was worth full price and, in any case, the seller is unlikely to accept less.)
Float a verbal offer. For example, ask the listing agent to check with the seller on whether they will accept $90,000 on that parcel listed at $100,000. (Personally, I often decline to do this and insist that buyers submit a written signed offer. Listing agents are required by law to present all offers. However, a verbal conversation is not an offer. A true offer is written and signed by the buyer and contains lots of other details such as how the buyer plans to pay for the land, who pays the closing costs, and the closing date. Nevertheless, there are situations where I will present a verbal offer to the seller and other agents may too.)
Submit a written signed offer. Ask your agent or the listing agent to prepare an actual offer on proper forms with all the other details in addition to price. Sign it. Then the listing agent will present it to the seller. A seller who receives a written signed offer is likely to respond, via the listing agent, and tell you whether or not they will accept your price. The seller may counteroffer. Then you’ll have your answer!

Conclusion

This research shows that it is a fallacy that the longer a parcel of land is on the market the more likely a seller will accept a significantly lower price. This is because high Days on Market does not always lead to extreme motivation to sell as buyers assume. High Days on Market could be an indicator of the reverse, low motivation to sell.

Attempting to read the meaning of Days on Market is like reading tea leaves.