I’m curious if any of you get land perc tested before purchasing? And, if so, under what circumstances do you get the perc test done, and under what circumstances are you comfortable skipping it?
Let’s say, hypothetically, you have a 1-2 acre lot under contract for $10-$15k that comps out for $30k and requires septic. I’m inclined to think that most smaller acreage parcels like this don’t have much value aside from their potential as home sites and consequently wouldn’t be worth much at all if they can’t handle a septic system. It seems that if a property like this fails to perc that its only value might be to a neighbor who wants a larger yard? Compounding this risk is that the landowners with unsuitable soil are going to be the ones most likely to be selling to us at discounted prices. This leads me to think perc tests should be a standard part of due diligence on land like this, but I’m under the impression that very few are getting perc tests done and are flipping this kind of property with little problem.
Does anyone have perspective on how they think through this and assess the downside risk of not perc testing? Anyone ever been burned before by buying a smaller acreage property that didn’t perc? I’ve only been buying larger acreage properties to avoid this problem, but I’d like to start buying smaller acreage properties too. It would be really helpful to hear what the consensus view is on this issue.
@elands my SOP is to sell “as is” (unless I decide to sell to some developer or have some bigger deal/project in my hands, but I’m not at that stage) but if a buyer asks, I’m open to have him/her run all the tests he/she wants: if it percs, I can discount it (or part of it) from the sale price and if it doesn’t, it’s his/her own expense.
@elands this is a great question. One I’ve wrestled with a lot over the years. You’re right, it’s an important piece of information and it’s also quite inconvenient (and sometimes expensive) to get a 100% answer.
I think it’s a question of how much of a discount you’re buying the property for and how much the property would be worth if the property isn’t buildable.
For example, if a property is worth $20,000 (assuming it’s buildable) and I’m buying it for $5,000, and I’m able to see that other houses have been built in the immediate vicinity (which still isn’t indicative of my property… but at least it’s some useful evidence)… worst-case scenario, if it doesn’t end up being buildable, it might still be usable for camping, hunting, or adding to someone’s yard. Suppose it’s still worth $5K - $10K as an rebuildable lot. This would certainly be a bummer, but not the end of the world.
However, if the property is worth $20K and I’m paying $10K for it… now it starts to get more important that I know exactly what I’m buying and what it can be used for. Because I could end up losing money if I’m wrong.
When you’re paying 10% - 20% of market value for a property, you can get away with skipping some due diligence items for the sake of speed, because you’ve got a BIG profit margin there to protect you. But if you’re not able to get that profit margin, then you’ll want to shore up some of those details and not leave so much to chance.
Also, keep in mind, if the seller isn’t able to give you clear evidence that the property has passed a perc test, this is a valid reason for you to negotiate the price even lower, because they’re leaving the risk and cost on your plate. If you buy the property and it can’t perc, you’re the one who will get hurt, not them. Don’t be afraid to make an issue of this as you’re landing on your final offer price.
@Arturo@retipsterseth Thanks for the advice - this has been helpful. Unless I’m getting a deal extremely cheap or there are other possible uses, I’m leaning towards just getting the soil tested prior to purchase on these smaller parcels. Having a successful perc test in hand could even be a slight value-add when reselling it. The major risk is that the seller backs out of the deal after I’ve sunk that money into testing, as there’s little to keep a seller from walking away from a deal when it comes to these small properties (too small to justify specific performance lawsuit, for example). That’s probably just an inherent risk of the business though.
@elands that could be a good approach actually and, differently from what you may think, I believe that a positive perc test may sensibly increase the value of the property (at a cost for you, obviously). If I decided to go down that road, I would probably feel more inclined to run it for lots located in areas where there are few more possibilities for the soil to perc (ex: presence of neighbours) while I would sell “as is” in all other areas. Good luck!
@arturo I am with @elands in not doing it, let the final user determine this as @retipsterseth states if the potential margin is too tight I always pass.
Plus I look at the surrounding lots to get a sense of what can be done. I have bought lots in flood zones, just a great way to get a super low price. If I do not spend a lot I am ok with a higher degree of risk.
@elands if you do decide to get that perc test and you’re worried the seller will flake out before closing, one way to help give your contract some teeth is to pay the seller an earnest money deposit (and be sure to keep a paper trail to prove that they received the money). It doesn’t have to be much, $10 - $100 will do the trick. A purchase agreement becomes a lot more legally enforceable once money has exchanged hands.