Need help on an offer for lot

laydeebug72March 28, 2013

Our neighbor has many times expressed interest in selling his land which is next to our home. We have told him that we'd like to buy it. We asked his price and he has said make him an offer.
Just a few details about the property: first of all we are thinking of asking him to finance the deal, we are not able to make a cash offer. It is 1/2 acre, it has an old mobile home on it which is probably not livable, many shingles have come off of the roof and even he has admitted it rains inside, so our offer will not include the mobile home. Other than that it only has 2 very old sheds. There is someone in our town that sells lots, so I called just to get a price on what his going rates are. His lots are 1 acre 32,900 he finances with $5000 down at 12.75%. His area is just a little bit nicer than ours. We are considering offering him 22,000 with $5000 down and 10% interest. Is this a crazy offer too low or too high? I've never done this before so we would have an attorney draw up the deal. I just don't want to insult him by offering too little but I also don't want to pay too much.This is IF he agrees to financing it. Any and all feedback would be greatly appreciated.

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Wow! Generous!

Actually, I think you need to also think about how large your lot and the surrounding lots are in relation to the 1/2 ac lot. Is 1/2 ac the normal in your development? Is 5 ac normal? (ie, how "sellable" is this 1/2 ac lot)?

Second, are you in the US? 10% interest is CRAZY! Interest rates are at historical LOWS and will be for a while. HOW LONG are you asking him to finance? Can you get a personal loan with a bank? Even with a bank or credit union and a personal loan (not even a land loan, which would be even less interest), you'd be looking at a 6 or 7% interest with ok credit. 10% interest, I'd be all over that if I were the seller.

Next, you are offering 22k for 1/2 acre when the 1 acre lots are 32k in a nicer area?

I think you'd do yourself a world of good to consult a REA on your behalf to present an offer to your neighbor.

    Bookmark   March 28, 2013 at 11:58AM
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Are the other lots serviced? (hydro, etc)

Agree that the interest rate is too high. I'm paying 3% (in Canada).

    Bookmark   March 28, 2013 at 1:54PM
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Nah, you don't need a realtor, you just need to do a little footwork and a little math. If you're game for both, here's how I'd approach it:

First of all, real estate is very local, and that goes down to the neighborhood. So see what you can find out about what lots have sold for in your neighborhood (if they have). If you can't find any comps in your neighborhood, you could look at the tax assessment of this spare lot vs. the lot seller's lots and apply a ratio to the prices.

On lot sizes (1/2 acre vs. 1 acre), lots work a little weirdly. A 1 acre lot isn't necessarily worth twice what a 1/2 acre lot. In our neighborhood, 1.5 acre lots go for $70-75K, and I figure our 3.5 acre lot is worth $80-85K. In our case, we're on a lake, and the lakefront footage is about the same for both lots, so there's not a lot of extra value in the non lake frontage acreage.

Then there's info about your neighborhood: is it a bunch of 1/2 acre lots with houses and this is just a lot that never got built? Or is it an outlier of some kind?

Anyway, if you can dig up a few numbers and bring them back here, we can help you make sense of them and come up with a reasonable number to offer.

    Bookmark   March 28, 2013 at 2:00PM
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The other thing is if you plan to build, make sure it is buildable! That is what is the water table, can you put septic in, how far is electricity and also if your state issues titles, make sure it has a clear title with no leans. Also if you plan to take down any buildings, is there asbestos? Do you need permits? Your price does seem high to me but I don't know what land/houses go for in your are. Also, make sure you get the mineral rights. That is a big problem here in ND with all the oil rigs.

    Bookmark   March 28, 2013 at 5:19PM
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Pay for an appraisal. It shouldn't cost more than few hundred dollars.

The appraiser (not the same as real estate assessor setting tax value nor a real estate agent doing a CMA both of which will be different values, for different purposes) will know how to find best comps and explain to you how his appraisal was done. (You may or may not wish to share the results with the seller.)

It's very important to the value (when considering a lot-sized parcel) to know what is currently permissible in terms of putting a house on it. Get clued in, as well, to any pending changes in your local land use regs. Get it directly from planning and zoning officials, not just what everybody "knows". There is also a considerable difference between "raw" lands and lots with subdivision approval, i.e. those with studies done to know water and septic capacity, build-able soils, surveyed boundaries, etc.

As Weedy said, increases in acreage above the minumum need for a house do not scale directly ( i.e. twice as much as the minimum does mean twice as valuable). And twice as big as minumum does NOT always mean a potential to subdivide into two residential lots. There are often other considerations such as overall lot density, shape and frontage when considering dividing a small parcel into two lots even when there appears to be enough acreage to do so..

Be prepared that the seller has heard that "somebody" has gotten X number of thousands per acre for a lot somewhere in your town and is not knowledgeable enough about real estate to know that he can't just multiply his acreage by that figure to come up with a price.

I'll give you an example: several years ago we were interested in buying a 125 acre parcel behind our woodlot, (this parcel has no frontage on the road.) In the priciest section of our town there is a development with paved streets, in-ground utilities, public water and sewer, overlooking a large body of water, and deed-restricted only to large luxury homes on half- acre lots. These lots sell for 100K apiece.

So our neighbor multiplied the 125 acres by 2 and then by 100K, arriving at a potential sale price of $25,000,000. Never mind that the land he was selling is landlocked (has no road frontage, we own entirely around it already) and is mostly on the other side of a very steep ravine that's nearly 300 feet deep. It has NO development potential because of these natural barriers, and is perhaps worth $100/acre for the timber value, but only to us as there is no way to remove the timber without crossing our land.

We begged the guy to get his own agent (who could explain reality to him) but he wanted to save the "commission". So we paid for an appraisal (less than $500 bucks) from the local Farm Credit Agency (they have deep expertise in vacant and timber land). The appraisal turned out to be exactly what I expected ($10-15K) with the timber being the only value, not the land.

Needless to say, he still owns the property, and we still enjoy looking at it and walking on it, for free. Eventually this fellow's executors may have a better grasp on things and a deal can be made. Or not. The seller is older than us by a decade, but we are not young, either.

Sellers who say "make me an offer" are often unrealistic and have never taken the trouble to do the "work" of being a seller - and want to shift that responsibility to you. Keep in mind that a FSBO (sale w/o a realtor) eliminates the commission, so some price concessions ought to be made to take that into account. However going without an agent means some (or both) parties will have more work to do to get the deal closed. Ideally who ever is doing the "work" should benefit from the lack of commission. If the seller is entirely passive, then the buyer should get a good price break to recompense them for the effort to get the docs drawn up, filed, various checks for clear title, survey etc. I'd always have my lawyer read any contract, before signing, no matter what.

Also there is something here in NY called a land contract which is an installment land sale. Be sure you get legal advice about how that works in your state. Be sure you understand who owns (and pays taxes on and is the legally responsible party) during the installment phase. The interest rate you quote seems very high to me. Can you can an unsecured loan from your credit union or bank, or a home equity LOC? Both would seem cheaper for you and give you undisputed legal ownership from the moment of purchase. Land contracts can result, in the event of default, in losing all the equity you have paid in. There maybe income tax benefits, as well, in financing through a bank or a HELOC rather than private debt. I would use installment buying only as the last resort.



    Bookmark   March 28, 2013 at 8:54PM
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Thank you everyone for your expertise. To give a little more info, there are 3 lots same size right off of a state highway, to the right of us is a nice home appx 2200 sq ft. My lot is in the middle we have a 3300 sq ft home in the back of the lot and a 2800 sq ft commercial zoned building in front of our home (used to be a furniture store) and the lot in question ( to the left of us) has a double wide old mobile home that hasn't been occupied in about 4 years. It has a septic tank, electricity and everything so that's not a problem. We have 3 studio apartments (which is part of the home and building. I'd like to use the front part of this lot for additional parking and build a mother in laws suite in the back. Getting a traditional loan is not an option right now. So this lot is pretty much an expansion to our business. Any thoughts?

    Bookmark   March 28, 2013 at 11:55PM
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liriodendron's idea of paying an appraiser is a good one. They'll do the number-crunching better than a realtor.

But you can still look around (or search your county's online records, if they have them) and see what other lots have sold for. Find those most comparable to yours (same area, same kind of neighborhood, etc.) and then adjust if needed for size.

Also, the property assessment could be a place to start with your offer. Even though those are typically less than market value, the buyer may not know that. :-)

    Bookmark   March 29, 2013 at 7:43AM
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