What is Due Diligence?

Due diligence means doing your homework on the property before you buy.

Who Handles Due Diligence?

Vacant land buyers are responsible for conducting their own independent due diligence.

Won’t the Seller or Agent Tell Me Everything I Need to Know About Land?

The answer is no. The seller and agent do not have all the information that might interest you. Sellers and agents are legally responsible for disclosing facts they are aware of. But they can’t disclose facts they are unaware of.

So, what kind of information will you get?

The seller will complete disclosure forms. They will write down everything they know about the land they consider a “material fact.” The agent will give a copy to you. If the seller has relevant documents, such as an engineering report or survey, they will also provide those.

In California, the seller will also provide a natural hazard report. The report discloses things like whether the land is in an area prone to earthquakes, floods, or wildfires. Companies such as Property ID or PDQ generate these reports from publicly available information. They charge a small fee, usually under $100.

The agent will tell you what they know about the land. The title company will provide a report so that you will know if the 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, agent, and title company will not be enough.

The agent and seller will tell you what they know. But, beyond that, it is your responsibility as a buyer to research other matters on your own.

For example, the seller may not know the precise location of corners of the land. If it’s not in the agreement, it is not the seller’s responsibility to mark the corners for you. If you want to know where the corners are, it is your responsibility as a buyer to pay for a survey. It’s not the seller’s responsibility to provide a well report. If she has one, she will give it to you. But if she doesn’t, you must arrange and pay for it yourself.

It is not your Realtor’s responsibility to determine if you can build a second unit on the parcel. You must study the zoning description or speak to a city or county Planner to see if zoning allows a second unit. It is not your Realtor’s responsibility to research the cost of a water meter. You must call the water company if you want to know that.

Dear buyer, you must do your own independent due diligence.

Won’t My Agent Do All This Research For Me?

No. Your agent’s role is to help you by advising you on where to get the information you need as you conduct your independent due diligence.

A key point here is that your agent, who has your back, knows it is in your best interest for you to do your due diligence. Any information you receive will be more accurate and helpful if you get it straight from the information provider. Information filtered through your Realtor will be less reliable. In fact, information filtered through any human intermediary will be less reliable.

Did you ever play the telephone game as a child? Here’s how the game goes: One child whispers a sentence to another child. That kid whispers it to the next kid, and so on. The last child at the end of the chain says the sentence aloud. It’s funny to see how convoluted it becomes.

Don’t play the “telephone game” with your Realtor in the middle. Cut out the middleman. Go straight to the electric company, water company, planning department, etc. Let them put the information directly in your ear!

Another benefit of talking to information providers is that you can ask follow-up questions and have a complete conversation. You may even learn things “you didn’t know you didn’t know.” For example, when talking to the water company, they may tell you that district water is available, but sewer is not. Wow, you might think. You were assuming water and sewer always go together! Now you’re aware that’s not the case. Or, suppose you ask the city Planner whether the zoning would allow an accessory dwelling unit in addition to a house. The Planner says yes and mentions that the zoning will allow you to subdivide the land and build two homes. Wow, that’s awesome. You didn’t know that, and it would fit your family better! One question will lead to answers, more questions, and more insight. The entire conversation will be very helpful to you.

Your Realtor knows it is in your best interest to get information “straight from the horse’s mouth.” That’s why your Realtor encourages you to “go direct” to each information provider to ask questions.

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 a thorough evaluation. In rare instances, this can make sense. For example, extensive research may be optional if the property is a $5,000 parcel in the middle of the desert.

But it’s especially unwise to skip due diligence when:

• The parcel is expensive,
• The price is so low it seems “too good to be true,”
• You want to build on the land,
• You have a particular use in mind for the land and don’t know if the city or county allows that use or
• You’re not familiar with the area.

When Should I Do My Due Diligence?

Do as much research as you can before even submitting an offer. If you get deal-breaking bad news, you can walk away. This will save you the time and effort associated with submitting an offer and negotiating with the seller. Plus, you can avoid sending a deposit to escrow.

Another benefit of researching before submitting your offer is that you can use any negative information you discover to negotiate a better price. For example, you can say, “Hey seller, I see that the price on your land is $100,000, but I found out it is in a flood zone. Building will be more expensive, so will you take $80,000?” That kind of thing.

With houses, it is common for buyers to go into escrow, get an inspection, and then ask the seller to make repairs. If the seller declines, buyers often ask for a price reduction.

That tactic is rare with vacant land. It may work for due diligence items that the buyer could not have been aware of in advance. For example, if you paid for a perc test during escrow and learned that the land requires a more expensive engineered system, the seller might give you a price reduction.  However, if you try to negotiate the price down during the escrow period based on negative information that was publicly available to you before submitting an offer, such as zoning or property taxes, that will not be well-received. I recommend that you not try it, or you might get kicked to the curb.

But it is common and acceptable to negotiate the price when you submit your offer. Use negative information that you find to your advantage up front.

Include a contingency period in your offer. This will give you a way out if you discover something bad during escrow. The contingency period is sometimes called the due diligence period. The clock on the contingency period starts ticking “upon acceptance”. The acceptance date is when the last signature appears on the contract.

For example, suppose you sign and submit your offer on June 1st, and the seller signs and accepts it on June 3rd. Your agreement states you have a 17-day contingency period inside a 30-day escrow. You should complete your research by June 20th. At the end of the contingency period, the Realtor will ask you to “remove your contingencies .” In California, after you remove your contingencies, your deposit is non-refundable. So, for this reason, you should finish all research before your due diligence period ends. The contingency period usually ends well before the escrow closing date. So don’t get those two dates confused.

Will I Have to Go Somewhere to Do My Due Diligence?

You can do a lot of research at home in your pajamas!

You can review zoning descriptions on the city/county Planning Department website. Most provide an online Geographic Information System (GIS) with tons of information. You can email the city/county Planner to ask questions (this works best when the city/county is small). You can study aerial maps to get a sense of boundaries. You can review the title report, seller’s disclosures, and the natural hazard report. You can learn about crime statistics and weather in the area. You can phone the electric company, water district, well drillers, and septic providers.

Certain things are best done in person. Obviously, it’s best to 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 photos or videos.

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 must get in your car and go speak to the Planner in person. Usually, you won’t need an appointment. Walk in.

Will Due Diligence Cost Me Money?

Most of it is free. But, if you want to do any of the following, you will have to pay for it:

• Arrange a perc test for septic.
• Ask 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.
• Hire an engineer to investigate developing the land.
• Retain a contractor to tell you whether a parcel is buildable.

No, the seller is not responsible for paying for these items unless agreed to in the contract. Sometimes, you can negotiate with the seller to pay half. But most of the time, sellers decline.

Buyers, it’s your due diligence, not the seller’s, so you must pay for it yourself.

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). The APN is sometimes 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 property is inside or outside city limits in the county. If it’s in an incorporated city, write down the name of the city. If it’s outside of an incorporated city, write down 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 that you have identifying information ready, you can start making those calls!

How Do I Even Know If There are Building Restrictions on the Land?

That’s easy. If it’s dirt, there are building restrictions! In other words, every parcel of land in California has building restrictions.

Who Governs Building Restrictions on the Land?

Restrictions may come from the following:

• City
• County
• Homeowner’s Association
• Other entities, such as the Coastal Commission or Historic District

If the land is within the limits of an incorporated city, then building restrictions are set by the city. If it’s outside city limits or in an unincorporated area, then restrictions are set by the county.

To determine if a city is incorporated or unincorporated, search the city name and state in Wikipedia. If unincorporated, go to the county. If incorporated, search Google maps to see if the land is inside or outside city limits. Type the city name and state into Google maps, and Google will show you the city’s boundaries. If inside, go to the city. If outside, go to the county.

Are There Electric and Water Meters Already Installed?

The chance of finding installed meters on vacant land is close to zero. I have only seen installed meters when someone lived in an RV on the property.

Even when there is no installed water meter, it could be that a previous owner already paid for it. We refer to that as “on the shelf” at the water company. To find out, you can call the water company and ask if there is a paid meter.

Since the odds of a meter is less than 1%, what you should be researching is whether utilities are available. Note that “available” does not mean that utilities are on the land running to the building site. Usually, the best-case scenario is that you find utilities “in the street.”

How Can I Research Whether Electricity is In the Street?

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 determine if district water is available, look for fire hydrants. Also, look for water meter covers. These offer evidence that water may be in the street.

If you don’t see evidence of district water, start looking for evidence of wells. Is there a tiny storage unit on the land? It might house well equipment. Walk around the land and look for a large round pipe poking up from the ground. It could be a capped well. From the street, look at the neighbor’s properties to see if they have tiny buildings that could house a well. Ask a neighbor if they have a well. If the neighbor has a well, this area likely has no district water available.

Based on your in-person research, phone the water district to verify. 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 neighbors use wells and there is no well on the land, you must drill a well when you are ready to build. Phone a local well driller. Ask about the cost of drilling a well. To find a local well driller, Google this: well driller <city or county name>. If they express reluctance to offer estimates over the phone, ask for a range or a general sense.

How Can I Research Sewer/Septic?

Even though water is available, this does not mean that sewer is also available. So, when talking to the water company, ask if public sewer is in that area. If sewer is unavailable, you will need a septic system for waste. Like water and electric meters, a septic system on vacant land is rare. The only time I have seen that is when a house was there before, demolished or burned down. If there is a septic, you will want to get it inspected by a septic professional.

Not all land can support a septic system. To determine if a septic system is viable on your land, you can order a percolation test or “perc test .” Sometimes, you will see “perc” spelled “perk.”

If you want to do a perc test during the escrow period, write this intent into your offer to get the seller’s approval. It involves digging big holes in the ground, so you will need the seller’s permission to do that.

Before submitting an offer, ask a septic professional how long the perc test will take. Also, ask what their schedule is. Then, include the time you need for the perc test in your original offer. You want to avoid writing a 20-day contingency period into your offer only to discover later that it will take 60 days to get a perc test. Make your offer contingent on a successful perc test.

Perc tests cost money. To get a rough sense of septic viability without performing a perc test, talk to the neighbors. Ask if they had any trouble getting a successful perc test. You can contact a local septic installer to ask if he has ever had a home in this area fail a perc test. Finally, you can visit the county and find out if a historic perc test result is already on file. If the county has a record of a successful perc test, ask the county if the test would need updating due to age. If it’s a failed perc test, that’s important to know.

How Can I Research Zoning?

The first step in researching zoning is determining whether a parcel is in the city or the county. The location 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 spending precious time poking around to find the correct department, it is faster to search Google like this: zoning <city or county name>. The zoning section of the official city or county website should pop up.

If the land is in a city or county with a common name, specify the state in your Google search. You don’t want to spend an hour looking for zoning on the Portland, Maine, website when the land is in Portland, Oregon!

Also, specify in your search whether you want the planning department for the city or county. This is to help Google distinguish between:

· Los Angeles city and Los Angeles county,

· Riverside city and Riverside county, or

· Fresno city and Fresno county.

To find a zoning map fast, go to Google and enter: zoning map <city or county name>. Sometimes, searching Google Images is a more direct way to find a map because a map, after all, is an image. Another good way to research zoning is to use the free Geographic Information Systems (GIS) provided by most counties and cities. You can search the GIS system using the parcel number or address and uncover a wealth of information. This information will include helpful maps and zoning. To find a GIS system for your land, search Google like this: GIS zoning <city or county name>. Include “zoning” in this search string because the city or county might have many GIS systems. Some will have zoning information. Some won’t.

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, add zeros at the end, e.g., 1234567890000. Try one zero at the end, then two zeros, then three, then four. If that doesn’t work, add a zero to the beginning, e.g., 0123456789. If that doesn’t work, enter the address for the parcel. If none, enter the neighbor’s address.

A final way to figure out the zoning is to ask the planning office. Email, call, or go in person. Give them the APN. They will usually respond to email requests for information when it’s a small office. If it’s 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. Before going in person, be sure you’re going to the correct office. If the land is in the city, go to the city. If the land is outside city limits, go to the county.

Buyers often make certain assumptions about the relevance of zoning. For example, they might assume that if zoning is residential, and allows a house, then some trusted entity has verified that a house is definitely buildable on that property. Not true. Building requires many things not covered by zoning. These include acceptable slope, water, and access for ingress and egress. Zoning does not take these factors into account. A parcel can have residential zoning and yet a building a house is not practical.

One last tip is to research both “zoning” and “land use.” They might conflict, and it’s good to know both.

How Can I Research Building Requirements?

If you’re interested in building, the first step is to research zoning. The zoning will tell you what kind of structure the zoning permits, if any. For example, if the zoning allows only homes, you cannot build a commercial office. If the zoning allows only one home, you cannot build two. Then, get in your car and drive to the city or county offices to learn what you can about building restrictions. If applicable, also check with other entities that have rules about what you can build. Examples include the HOA, Coastal Commission, etc. If you still have questions, pay a licensed contractor a consulting fee to advise you.

Remember, your Realtor is an expert in real estate sales, not building. Realtors will sell you the dirt, but building on the dirt is a whole separate thing.

How Can I Research the Homeowner’s Association?

If there are conditions, covenants, and restrictions (CC&Rs), the title company will provide them. Bear in mind that there could be CC&Rs even if there is no HOA.

The agent, or the escrow officer, will also order HOA financials, architectural standards, bylaws, etc. You will receive these during the escrow period.

For some reason, these documents are rarely available online. Maybe that’s because HOAs like to charge for them.

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:

• vertical white PVC pipes
• wood sticks poking up out of the ground
• unusual piles of rocks
• florescent pink tape hanging from a tree or
• remnants of fence or old wood post.

Search for something unnatural that looks like a human put it there. But remember that humans make mistakes, so any markers you find may not be accurate. If you want the corners marked accurately, the only option is to hire a surveyor. To find one, go to Google and enter: surveyor <city or county name>.

Free GIS systems will also show you boundaries layered over aerial maps. I use paid software from LandId. Note that all computer-generated maps are inaccurate. The boundary lines can be off by 1, 10, or 30 feet. This is why you may see lines going through roofs and swimming pools. Don’t fret that the neighbor is encroaching on your land. It’s likely a computer error. Use these maps as an approximation only.

How Can I Research Easements on the Land?

Easements recorded on the land you are buying will restrict how you can use it. One example is a utility easement (no, you can’t build your garage under those tall utility wires).

If there are easements on the land, they will almost always appear in the title report you will receive during the escrow period. But, in the title report, the location of the easement will appear in some gobbledygook way. So, if you see easements mentioned, ask the title company for a map of plotted easements. That way, you can see their location and judge how they might impact your building plans.

Occasionally, there is a conservation easement blanketing the whole parcel, preventing building anywhere on the land (yikes!). There is a National Conservation Easement Database where you can look up them up online.

How Can I Research Access?

In California, it’s not uncommon for parcels to lack access. The property is landlocked. Also, physical access and legal access are different. A parcel might have one, both, or neither.

To research physical access, study aerial maps or get in your car and see if you can drive to the land.

The easiest way to evaluate legal access is to order a title report. If the title company says they will insure for title and access, then it’s likely the parcel has legal access. But what if the title company says they will insure the title but will not insure the access? That is usually because there is no legal access. There, you have your answer!

When there is no road going to the land, there may be an easement for access. Note also that easements on the land differ from easements used to access the land. The former are recorded on the property you are buying, while the latter will be recorded on the neighbor’s parcel. Easements recorded on land you are buying will not help you get from the road to the land. Easements recorded on the neighbor’s property for ingress/egress to your parcel may not appear in the title report because the report is specific to the property you are buying. So, you may want to ask the title company to research easements for access recorded on the neighboring property. If the title company discovers an easement for ingress/egress, ask them for a map of plotted easements showing the route.

How Can I Research Environmental Problems or Endangered Species?

If you have concerns about possible environmental pollution, you can pay for a Phase I Environmental Site Assessment. Generally, this is only needed when the land hosted 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, Google: Phase I Environmental <city or county name>.

And while we’re on the topic of nature, did you know that there are rules about removing certain trees in California? If there are oak trees or joshua trees on the land, look into that. If they are right where you want to build, that could be an issue.

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.

But don’t freak out and conclude that the land is in a sketchy area just because you find a certain number of burglaries and pedophiles. Sorry to be the bearer of bad news, but almost every neighborhood has crime. The best way to realize that is to research the community you live in now, and you will see what I mean. Evil-doers are everywhere! Bleh!

Another way to learn more about the 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, search for the property you are buying. If there is no address, because it’s vacant land, enter the address of a home down the street. Then click on “nearby”. Several options will pop up, such as Restaurants nearby, Hotels nearby, Bars and pubs nearby, etc. Choose one or enter what interests you, 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. The site offers helpful information for two cities on weather, crime, economy, housing, health, education, people, transportation, religion, voting, jobs, etc.

How Can I Research Real Estate or Rental Prices?

Search Zillow or ApartmentList. There are no Zillow-generated Zestimates for vacant land (thankfully). So, search for similar properties for sale and properties that have sold. When checking prices, remember that the most important reason a property is for sale, and not sold, is that it is over-priced.

How Can I Research Whether the Title is Clean?

As a buyer, you do not need to research the title. Leave it to the professionals, the title officer.

During the escrow period, the title company will investigate the chain of title. They will produce 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 the title, that’s your best indicator that it is in good shape.

If there are blemishes on the title report, the seller can often correct those during the escrow period. So, if the preliminary title report says the title is not clean, don’t assume that’s the end. Wait for the final title report after the seller and escrow officer have worked to address questionable items. For example, if there is a judgment or lien, the seller can arrange to pay that off. Then, it will disappear from the title report, and you will not be responsible for the lien.

How Can I Avoid Making Mistakes on My Due Diligence?

One way to avoid errors is to get with your Realtor and create a list. The list will include all items you, the buyer, must research. Also, put on the list where you can go to research each item. By creating a list, you will be less likely to forget something,

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 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:

• Ask a neighbor if they had any trouble with their perc test,
• Check with the county to see if a historic perc test is already a matter of public record,
• Call a local septic installer to ask about the viability of septic in that area and/or
• Pay for an actual perc test.

That is, do several of these things, not just one.

Storytime: I once phoned a county planning office to ask about the zoning for a parcel I was selling. The Planner I spoke to said the zoning was commercial. A few days later, I called again to get some clarification on what commercial uses were allowed, e.g., office, restaurant, or what? I talked 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 on the wall. That map showed commercial zoning along the street and residential zoning in the back. 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 accurate information at the end of the day. Redundancy rules!

What if I Mess Up on My Due Diligence?

Once, I was selling a piece of land, and the buyer received all seller and agent disclosures but did zero additional due diligence before buying. He then asked to “rescind” the 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 is recorded with the county.

Buying real estate is different from shopping in a retail store. You can’t 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. But be sure to disclose all material facts to the next buyer, especially any adverse ones you discover. The law requires this.

It’s All Very Overwhelming. What Strategies Will Make it Easier?

Remember, all you’re trying to do now is decide if you want to buy the land. You won’t be building a house next week — that’s in the future. So, focus on the mission-critical items, i.e., the things that affect whether you want to buy it. If you think about it, you will realize that some things are not critical right now.

For example, do you really need a surveyor to mark the exact-exact-exact corners on those 40 acres? Or will studying boundaries in an aerial map do for now? If you discovered that the property line is 10 feet from where you thought it was, would that affect your buying decision? If so, hire a surveyor. If not, it can wait until after you buy the land.

Or, suppose you’re buying a lot in a densely populated urban neighborhood. You observe a fire hydrant at the nearest intersection. The house on the left of the lot has water, and the one on the right has water. In this situation, do you 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 put that item on the back burner until you’re ready to build. All you’re trying to do right now is trying to figure out if there are any bad-news-deal-breakers. You can put off the rest ‘till later.

If you think along these lines, you can cross some things off your immediate To-do list. Resolve to tackle them after you buy the land. For now, focus on those key items that affect your buying decision.

Summary

When purchasing land, yes, you do have to do your independent due diligence. Further, there is no “one-stop shopping” for all the information you need. No single person will provide all the answers for you.

Not the seller.

Not the Realtor.

Not the escrow officer.

Not the title company.

Savvy buyers will want to make a list, roll up their sleeves, and do their own research before buying land.