Knowing the limitations of undeveloped land to the private Deed and zoning

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Mar 26, 2011 Amy Haase

Zoning And Deed Restrictions And Land Developement - Photo by Sebastian Ballard

Undeveloped land on the surface may seem like the most simple form of real estate transactions, due to the lack of improvements and buildings to inspect and worry about hidden defects. Surprisingly, land is often considered by most in the real estate industry as the most complex and difficult form of purchase, for many reasons. A real estate agent versed in land transactions is a good idea to avoid the multitude of diverse and surprising pitfalls that can strike an unsuspecting future home owner or investor.

Why Land Is Considered The Most Complex Real Estate Transaction

An important concept in real estate and planning is "the highest and best use". A single property of land can have many different improvements that will greatly vary in the usefulness and value. Land is tricky as it can be categorized as residential, industrial, commercial, or retail. The best use is the most profitably economical, reasonable single use of the land that is legally permissible, physically possible, and economically feasible. Complex financial analysis protocols have been developed to help determine the best use based on a multitude of factors.

How Do Public Zoning Ordinances and Private Restrictions Affect The Future Use Of A Piece Of Property?

Land use restrictions fall under two classifications: private and public. The public restrictions include zoning ordinances regulated by the local commissioners and planned development. Zoning is considered a material fact that limits the use of the property, and should be normally listed with the property by the listing agent. If there are any questions about a specific use of land related to the current zoning ordinance, usually the county or city building inspector that enforces those regulations are a good source of information to decide if a specific use will be allowed. Also, extra-territorial jurisdictions (ETJ's) can impact zoning in unexpected ways, this is a situation where local ordinances of a town or city may extend into a 1-3 mile radius outside the official limits and impact projects. If a piece of property is enticing to a buyer, but is currently on the border of two types of zoning, or would need a rezoning consideration to allow a specific needed use of the land, often times a contingency clause is added into a contract to purchase. This clause will require the successful rezoning for a specifically listed usage of the property for the deal to go to completion.

Private restrictions include deed restrictions and restrictive covenants (for example, by home owner associations). If the local public zoning regulations differ from the private regulations in effect, the more restrictive private restrictions usually trump decisions. This can have a significant impact on particular details such as architectural and exterior decisions and project costs. Any listing agent should provide copies of the deed restrictions and restrictive covenants that impact a piece of property upon request, but careful title searches and surveys must be completed by the buyer ahead of time to avoid hidden sources of private restrictions that the current land owner may not be aware of.

Private restrictions are harder to find as they are not codified, but rather usually found in the registrar of deeds in what is called the "chain of title" for the property (the list of chronological owners and exchanges of a property over time). These private restrictions can often times be more restrictive and unpredictable, due to the fact that the purpose of the restrictions are not to protect and serve public health, safety and welfare as public zoning rules aim to accomplish. If a private limitation is discovered that seems a major hindrance and seems unreasonable, at times the rules can be changed by a public body action, but only by the private owners affected by the regulation (i.e. neighbors for instance).

Overall, a wise decision is to have a contingency clause in an offer to purchase that states the clear condition upon the specific land use desired by the owner being permissible under zoning ordinances AND private use restrictions.

Importance Of A Survey To A Potential Buyer Of Undeveloped Land For Sale

A property survey is an essential process for many reasons- to examine the deed and compare the true acreage and boundaries to what is listed will protect the future buyer. The presence of utility easements (land that cannot be developed on due to power lines/rights of way for other uses), topography, shape, legal or practical site access, presence of waterways, soil characteristics, and transitional setbacks (land along road frontage/ busy highways that cannot be developed on due to predicted future widening of the road) can all greatly impact the usability and "net acreage" that a buyer can actually build upon. Often times a purchase price is based on the "net acreage" as a more fair comparison tool for a buyer to calculate usable land compared to the upfront investment.

Environmental, Watershed, and Other Land-Use Regulations And Ordinances

In addition to zoning, private restrictions, best use, and survey concerns, here is a following miscellaneous list of items that impact land development:

• Subdivision Ordinances- county/municipal rules of the development of a neighborhood including lot size/density, access and street width, sidewalk and other transportation/utility improvements that are applied differently under various zoning classifications (not to be confused with home owner associations rules, these are public planning characteristics of the neighborhood by the controlling municipality)
• Sign ordinances- regulations regarding sign placement, type, size that can be important to transactions more of a commercial nature- to avoid a competitive lot covering a buyer's sign from viewing in the future
• Watershed regulations- state efforts to protect the drinking supply that affects the ratios of land that can be covered by buildings and parking lots to the overall lot size, a costly consideration when a large building on a smaller lot is considered (also known as "impervious surface area" ratios that affect absorption and runoff of water)
• Tree Ordinances- regulating the amount of planting, removal, and trimming of trees to avoid fines
• Wetland presence or existence on the land (doesn't have to be "wet" to possibly be classified)
• ADA regulations (Americans with Disabilities Act)- affects rules about accessibility in construction plans
• Presence of hazardous substances or underground storage tanks
• Status of sewer approval and accessibility (often a big hiccup in rapidly developing areas)
• Local Rules Such as the Mountain Ridge Protection Law and the NC Coastal Area Management Acts that impact various regions of North Carolina real estate transactions
• Phase I Environmental Assessment- usually performed by a buyer during due diligence period to determine if any future environmental issues with a property

Overall Strategy To Evaluating And Purchasing Land

The leading concern with buying undeveloped land is ensuring that a future owner will be able to use the property for a specifically intended use without substantial delay or financial hardship. Although the size or appearance of a lot may be initially enticing for a buyer, hidden problems with zoning limitations or private restrictions, or other environmental concerns can create a stopping point. A buyer would be prudent to enlist the help of an experienced real estate agent in land transactions, especially if the land is considered for commercial use. Even residential owners should be cautious, and carefully chose a good surveyor, complete a quality title search and obtain title insurance, and do a visible walking evaluation preferably with the surveyor and current owner. Land overall is the most complicated type of real estate product type and should not be taken lightly.

Sources:

• 2011-2012 North Carolina Real Estate Manual, published by the N.C Real Estate Commission, Chapter 19
• REX7109 Post-licensing Course in Selected Topics In Real Estate, Sandra Martin Instructor, CPCC, classroom commercial real estate topics

Copyright Amy Haase. Contact the author to obtain permission for republication.

Private financing needed for the loans of the Agency; Growing demand in the trading sector; Investor updates Gone Wild; Reverse Mortgage Foreclosures

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Scott Garrett, the chairman of the House Financial Services subcommittee
on capital markets and government-sponsored enterprises said that the
U.S. government needs to end its role in the mortgage market as it
decides the future of Fannie Mae and Freddie Mac. "Let me stress and be
very clear where I stand: I am firmly committed to a purely private U.S. mortgage market
over time, free of any government subsidies or guarantees," Garrett
said today in Orlando at the American Securitization Forum trade group's
annual conference. He added that lawmakers should scale back the
government's role in the market before implementing any broad reforms,
and that F&F should be forced to shrink their mortgage portfolios
more quickly and lower the size of loans they buy from the current limit
of as much as $729,750, and the agencies should be brought onto the
federal budget, which would create political pressure on lawmakers to
act more quickly.  FULL STORY

In addition, Martin Hughes, CEO of Redwood Trust,
said that the U.S. government will have to reduce its competitive role
in the mortgage market to entice private investors to return, even if it
means higher borrowing costs in the transition. Folks who follow such
matters know that Redwood has pretty much been the sole issuer of
private mortgage-backed bonds in recent years. He stated that private
lending would increase if the government reduced the size of loans it
guarantees. No matter what, it will be interesting: Fannie Mae purchased
$87.6 billion of mortgages in December and $855 billion in 2010. Fannie
Mae accounts for 54% of the market share and Freddie Mac accounts for
26%.  MND thinks it's wise to start with APPROVE/INELIGIBLES

We've had fourteen bank closures so far this year, the latest being three were announced on Friday. Gone are American Trust Bank (GA, and now part of Renasant Bank of MS), North Georgia Bank (GA, now part of BankSouth also of GA), and Community First Bank (IL, now part of Northbrook Bank and Trust also of IL).

On the opposite end of things, one company seeking to expand is mortgage banker & broker V.I.P. Mortgage. The lender is relatively new, with no legacy issues, has a FHA full eagle status, and is actively looking for both individual retail LOs and entire branches. Its headquarters are in Arizona, but it is licensed in 8 states. V.I.P. has an interesting pricing strategy, offering "raw" pricing direct from large investors with no margins. If you know someone interested, they should contact Tom Kerby at tkerby@vipmtginc.com.

Hey, not only is mortgage originator pay being examined, but let's not forget bank executives. The FDIC is expected to propose that top management at banks with more than $50 billion in assets have 50% of their bonuses deferred for 3 years in order to better match risk and reward.

How can a reverse mortgage lead to foreclosure? The FHA has stated that "pressure to collect unpaid taxes and insurance from homeowners with reverse mortgages could lead to an increase in foreclosures on senior citizens." That would certainly be a PR mess, and the Gray Panthers would be out in force: nationwide, per HUD, there are over 670,000 reverse mortgages including 68,660 in Florida. READ MORE

Check out the MBA's page for the latest stats on the $110 billion of commercial and multifamily mortgages originated during 2010. It is an increase of 36% from 2009, with life insurance companies being the leading source of funding. "Fannie Mae, Freddie Mac and FHA/Ginnie Mae also saw strong volumes, with increases in production." 

How is the commercial sector doing? Wells Fargo reports that, "Rising demand for commercial properties has greatly relieved fears about how the impending mountain of maturing commercial real estate loans will be refinanced. Operating fundamentals continued to improve during the fourth quarter for all property types. Sales have continued to increase and the prices of commercial properties sold from the NCREIF database, as measured by the MIT Center for Real Estate, rose 19 percent in 2010. The rise in sales prices marks the second largest gain ever for this series and is likely being driven by a surge in demand for marquee properties in key gateways cities such as New York, Washington, D.C. and Boston. The overall environment has improved much less. Fortunately, the credit environment is opening up, and with property fundamentals continuing to improve, the recovery should strengthen and broaden in 2011.

Investors gone wild?

Recently BB&T has posted an update to its guidelines which applies to its FHA, VA & Non-Conforming product lines, Mortgage Services III tweaked its FHA/VA/USDA product lines, Flagstar Correspondent changed its guidelines for its FNMA DU Refi Plus product, Affiliated Mortgage changed many guidelines, and Franklin American sent a bulletin out to clients focused on "Third Party Invoices," Updated Truth in Lending Disclosure (use the new form!).

Beazer Homes USA saw its closings drop 42%, which in turn resulted in a loss for the latest quarter of nearly $49 million. This compares to a profit a year ago of $48 million. Homebuilding gross margin, excluding writedowns and abandonments, fell to 10.7% from 12.5% on lower revenue on fixed indirect construction costs and interest expense, and its cancellation rate increased to 32.1% from 27%. New orders fell 24%. Closings dropped in each of the company's three regions, falling 45% in the West and 41% and 44%, respectively, in the East and Southeast.

Fannie Mae recently updated its selling guide to reflect changes regarding community land trusts and non-standard payment collection options, and to include a number of other miscellaneous updates and clarifications. It is best to read the BULLETIN directly detailing the changes.

Last week Bank of America announced that it was suspending buy down loans until more guidance was provided by the Federal Reserve Board. Plaza Home Mortgage has done the same, citing the new summary table confusion as part of the Regulation Z and the Truth In Lending Act (TILA) that is effective with new applications on or after January 30. Focusing on the summary table, "Plaza Home Mortgage, Inc. has determined that the guidance does not address how loans with temporary buydowns need to be disclosed," and the company is also suspending temporary buydowns on all products until the FRB and our Investors provide additional guidance.

Caliber Funding will "no longer accept Business Partner GFEs that list less than 10 business days from the Date of GFE in the Important Dates Line 2 field. In the past, Caliber accepted Business Partner GFEs that showed less than 10 business days by correcting the date on the Caliber GFE."

In its retail channel, Wells Fargo reduced its minimum FICO's for FHA loans to below 600. Direct Mortgage Wholesale has done something similar by reducing its minimum FHA FICO to 580 for purchase and rate & term refinance loans. There are other requirements, of course, including 90% maximum LTV, no gift funds, etc. (As it turns out, Direct also goes to 125% LTV/CLTVs on non-owners as well.)

In Illinois Mortgage banker Woodfield Planning Corp. was purchased by Wintrust Financial Corporation. Last year Woodfield funded nearly $200 million of loans, mostly in the Chicago area.

Ameriprise Bank has teamed up with CMG Financial Services to launch the Ameriprise Home Ownership Accelerator loan product. "This new home financing option replaces a traditional mortgage with a combination of a home equity line of credit and a checking account which together can help a borrower use idle cash to reduce interest costs and pay off the loan balance years early. The Accelerator works by syncing (the salary and the home mortgage payment), since homeowners deposit their paychecks into a checking account which is linked to a home equity line of credit. Cash left in the account at the end of each day is swept into the line of credit, driving down the principal balance on their loan and subsequently lowering the amount of interest owed."

Possible rumors and innuendos from various e-mails...

"BofA contracted with PHH to do their mortgages for the Private Banking sector, adding to PHH's stable along with Charles Schwab's mortgage operations." "GMAC is back in wholesale in this area." "Bank of America is going to shut down correspondent, wholesale, and retail mortgage operations." (It turns out this last bit of gossip refers only to their reverse mortgage operation, not to its entire operation.)

MBS volume was pretty slow yesterday. ("Pretty slow" is a technical trading term.) Braver Stern Securities noted yesterday that with the increase in interest rates, and the 10-year Treasury note breaking out of its recent 3.25%-3.50% trading range, "this move has significant implications for mortgage rates and prepayment speeds. Many investors were able to tighten their margins as volumes dropped and to gain market share, but this can only go on for a limited period. So at this point consumers are truly feeling the increase. Rate sheet mortgages are now sitting around 5%, and no-point loans are around 5.25%. Braver Sterns points out that a large block of existing mortgages are now out of the refinancing window, and that prepayments should drop in the coming months or at least until some originators make a push to get some of these loans refinanced before HARP expires in June. "Should HARP not be extended many of these borrowers (especially 2006-2007 production) will have a harder time refinancing due to LTV constraints."

A cowboy, who is visiting Wyoming from Montana, walks into a bar and orders three mugs of Bud. He sits in the back of the room, drinking a sip out of each one in turn. When he finishes them, he comes back to the bar and orders three more.

The bartender approaches and tells the cowboy, "You know, a mug goes flat after I draw it. It would taste better if you bought one at a time."

The cowboy replies, "Well, you see, I have two brothers. One is in Arizona, the other is in Colorado. When we all left our home in Montana, we promised that we'd drink this way to remember the days when we drank together. So I'm drinking one beer for each of my brothers and one for myself."

The bartender admits that this is a nice custom and leaves it there. The cowboy becomes a regular in the bar and always drinks the same way. He orders three mugs and drinks them in turn.

One day, he comes in and only orders two mugs. All the regulars take notice and fall silent. When he comes back to the bar for the second round, the bartender says, "I don't want to intrude on your grief, but I wanted to offer my condolences on your loss."

The cowboy looks quite puzzled for a moment, then a light dawns in his eyes and he laughs.

"Oh, no, everybody's just fine," he explains, "it's just that my wife and I joined the Baptist Church and I had to quit drinking. Hasn't affected my brothers, though."