by Jim Palmer Jr. – Real Estate Marketplace N.W. Inc.
As a listing agent in the past, I have been troubled when a buyer’s agent included a feasibility contingency on a vacant land purchase just because they wanted their client to have another escape clause. Since a feasibility contingency is really just a “get out of jail free card”, I had resisted that tactic from buyer’s agents unless an appropriate reason for the contingency was expressed in writing and the time frame was short.
Because of recent court rulings in our state concerning water availability, I have done an about-face on that topic! The fact that counties are denying building permits unless water availability can be proven (at a much higher standard than in the past), land sales have come to a virtual standstill. Buyers who were once enthusiastic about developing property and building a new home have become skeptical and downright scared about whether they can now afford that process and even whether they would ever be able to complete a building project. Investors have also tightened their purse strings because of this risk factor. They are cynical about whether they would lose that gamble by purchasing property, spending a bunch of money and still be denied a building permit in the end. That would leave them stuck with a worthless piece of property and a leaner wallet.
My thought process on using a feasibility contingency for purchasing land has changed. I believe that for the reason listed above, a buyer should be sure to include a feasibility contingency with every offer on raw land. In other words the buyer would not be obligated to complete the purchase if they found that the cost would be too great to meet the standard for a building permit (ie, obtaining a suitable legitimate water right). Unless they could eventually obtain written commitments from the county building department they would certainly not want to move further into the buying process.
That contingency strategy would allow them to move forward with choosing a suitable property, but still allow protection from loss if the process went badly. Sure, they may have some costs expended during the research process in the feasibility time frame, but would not have their whole nest egg stuck in limbo in the meantime.
While there are some available properties that already meet the standard for a building permit, those are few and far between and will soon dry up because of increasing demand. Buyers will be forced to become more aggressive, more patient and more educated, but can minimize their risk with a feasibility contingency.