April 8, 2021
by Nicholas P. Flint
In response to a number of recent factors, from COVID-19 to riots and higher inner-city crime rates, many states across the country are experiencing a new wave of “urban flight” (see https://www.wsj.com/articles/the-new-urban-flight-11592777032). In Georgia, the suburbs of Atlanta and even rural parts of the state have seen a sharp uptick in demand for existing and new housing, mostly from Atlantans seeking refuge and additional space.
Residential real estate prices are through the roof, and subdivision developers are licking their chops, especially with the relatively large supply of undeveloped land as compared to urban areas. The result: developers cannot buy land and build houses fast enough.
Developers have taken to the streets, approaching landowners and their neighbors often through assemblages of surrounding parcels, flashing high per-acre prices and promises to close quickly. With the demand for raw land being so high, bidding wars among developers have even come into play.
But while many of these buyers are serious players, the sad fact is that many are not, with some tying up land by getting it under contract, then trying to simply sell the contract to a serious developer for a profit. Landowners who are approached by buyers must be wary of this tactic, and thoroughly vet the developer through research, as well as negotiation of a seller-friendly purchase agreement.
Even dealing with a serious developer has potential traps for the unwary seller. For example, developers may push for ways to back out of or delay the deal through closing contingencies tied to rezoning or the receipt of other required governmental approvals.
The biggest issues typically center around a developer paying very little earnest money for an extended due diligence period, with a closing date which is either years down the road or, even worse, unknown. While in an ideal world the closing would go through sooner rather than later, unfortunately a large number of these transactions end up dragging on for years. This means the landowner’s property is left off the market for an extended period of time, all for little to no earnest money, only for the prospect of receiving a high sales price one day down the road.
Fortunately, these issues can easily be negotiated and addressed in a purchase agreement to adequately protect landowners. Requiring non-refundable “milestone” payments, for example, keeps the developer invested in the transaction and eager to close on a faster timeline. Including a drop-dead closing date provides the landowner with some security that the deal will eventually close by a date certain. And requiring the developer to abide by a strict timeline in obtaining its rezoning and in satisfying its other contingencies can reduce the risk that a developer drags out the process or backs out of the transaction.
Nick Flint is an attorney with Flint, Connolly & Walker, LLP who represents clients on a variety of corporate, transactional, and real estate matters. Nick also routinely serves as a general business and legal advisor to his clients, counseling on matters such as corporate governance, executive compensation, regulatory compliance, and commercial contracts.