The Conditional Purchase Contract
Now that you have found your house and land development site you need to make an offer to buy it. The objective is to tie up the property before you spend too much time or money investigating it in great detail. To do this you want to include a due diligence condition in your offer that allows you a period of time to undertake detailed investigations and gives you the option to proceed with the purchase without the seller being able to sell to someone else.
The due diligence clause in the sales and purchase contract will be easier to achieve in a soft market where the seller may be more willing to give a free look period. It is also more common in a commercial transaction (like vacant land or a large property with an alternative use) than in a residential home transaction. In a hot market you may have to compete at auction where you won’t be able to secure any free look period at all. In a tender some developer buyers will write in a conditional due diligence period. Others will purposely bid high to secure the opportunity and still retain the option to pull out if they can’t make the numbers stack.
You have to put a price on your offer so you will be relying on rules of thumb and any detailed analysis you have managed to cobble together without spending too much time or money. For the novice it will be difficult to establish what price you should pay, so most of your due diligence will have to occur before you put a contract on the property. Sure you can put any price down, as you have not committed to the purchase simply by signing a conditional contract; however, it is a dubious strategy to put a high price down in order to secure the contract and then try and go back to the seller and try to reduce the price down. If your due diligence uncovers nothing significantly negative you have no argument to stand on. The seller may also be doing their own due diligence on you at the same time. They may want confirmation that you have access to the funds to settle before committing to providing you with a due diligence period that effectively ties up the property.
As you gain negotiating experience you may want to make purchase agreements more to your advantage by inserting other developer-friendly conditions. One is a conditional period in the contract where you attempt to secure milestones (such as a zoning change) before you are obliged to settle the property. You can put any condition in your offer, but, of course, the seller does not have to accept it. Unless you offer a substantial price premium or the market is depressed you will likely not get away with some of the more aggressive conditions. Unfortunately there is often no shortage of buyers who make decisions on less information, make more aggressive assumptions of where the market is heading or simply have the luxury of lower costs because they build themselves or have a cheap line of credit. When the market is hot, many will happily overpay for a site without significant due diligence and when it is cold, no one else will be interested. Similarly, when the market is hot, finance will be easier and when it is cold, you may never find anyone who will lend.
Nonetheless, there are many ways to structure a deal. Here are some aspirational conditions to consider when negotiating to purchase:
- Long due diligence ‘free look’ period
- Settlement of purchase price based on buyer achieving milestone conditions (like planning consent, presales or individual section titles)
- Minimal deposit or staged deposits
- Low purchase price plus profit share
- Long period to settle/close, or staged payments over time
- Access to the site prior to settlement to undertake invasive due diligence (for example, drilling holes for geotechnical analysis)
- Access to the site prior to settlement to undertake works. This is commonly called builders terms, where you don’t have to pay for the site until you have completed the homes you intend to sell
- Purchase price based on seller achieving milestone conditions (like achieving zoning or individual section titles on behalf of the buyer)
- Purchase price to be discounted if buyer discovers issues between unconditional period and settlement (like ground conditions which cannot yet be quantified).
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