Why Land Sellers Need Due Diligence Too

Due diligence is usually discussed from the buyer’s perspective.

Before buying land, a buyer may investigate zoning, soils, wetlands, access, utilities, title, subdivision potential, and other issues to determine whether the property can be used as intended.

For owners selling land with development potential, some level of investigation before going to market can be just as important, even if the objective is different.

A seller usually does not need to eliminate every uncertainty or prove that a property is developable. In many cases, doing so would require expensive engineering that is better left to the eventual buyer.

Instead, seller-side due diligence is about understanding the property well enough to make informed decisions before the buyer begins their own investigation.

Key considerations include:

• What can realistically be done with the land?
• What issues are likely to matter to buyers?
• Which assumptions have been verified?
• Which uncertainties could materially affect value?
• And which questions are worth answering before the property goes to market?

The answers to these questions can affect pricing, marketing, negotiation, and the probability of a closed sale.

The Buyer Is Going to Investigate the Property Anyway

If you’re selling development land in Northern Virginia, a sophisticated buyer is unlikely to take your assumptions at face value.

The buyer may investigate:

• Zoning and subdivision potential
• Prior subdivision history
• Soils and septic feasibility
• Wetlands, streams, floodplain, and buffers
• Road frontage and access
• Easements and title matters
• Water and sewer availability
• Stormwater requirements
• Topography
• Development costs
• Local approval requirements
• Comparable lot and home sales

Depending on the size and complexity of the transaction, the buyer may involve engineers, surveyors, attorneys, environmental consultants, soils professionals, builders, and other specialists.

In other words, the buyer will examine many of the important characteristics of your property whether you investigate them beforehand or not.

The question is whether you want the buyer to be the first person in the transaction to understand them.

The Problems You Don’t Know About Can Affect Your Negotiating Position

Imagine listing a property based on the assumption that it can be divided into five lots.

A developer agrees to your price and puts the property under contract.

During due diligence, the developer determines that wetlands interfere with the preferred road alignment, one portion of the property has poor soils, and the infrastructure required to create five lots is substantially more expensive than anticipated.

The developer comes back and asks for a significant price reduction.

Now the seller has a problem.

Maybe the buyer’s analysis is correct, maybe another design would solve the problem, or maybe another developer would view the property differently.

But the buyer now has engineers and other consultants to support his position while the seller has little more than the original assumption that five lots were possible.

This creates an information imbalance at exactly the wrong point in the transaction. The seller has already invested time in the buyer, the property has been off the market, and the scheduled closing may be approaching.

Sellers can avoid outcomes like this by investing in seller-side due diligence before offer their land for sale.

Seller Due Diligence Doesn’t Mean Fully Engineering the Property

If a property has subdivision potential, the seller does not necessarily need to spend tens or hundreds of thousands of dollars producing construction plans, obtaining subdivision approval, or resolving every technical issue before listing.

Rather, the purpose of preliminary seller due diligence is generally to identify the issues that could materially change the property’s value or the selling strategy.

For example, there may be a big difference between knowing:

“The property definitely supports five approved lots.”

and:

“Based on zoning, acreage, existing soils information, access, and a preliminary review of environmental constraints, a five-lot concept appears viable.”

The first conclusion may require substantial technical work, while the second may be enough to make an informed decision about pricing and marketing.

A good pre-listing process should therefore ask, “How much certainty do we need before selling?”

Start With the Issues Most Likely to Change the Outcome

Seller-side due diligence should be proportional to the property.

A straightforward recorded building lot may require relatively little investigation.

A 50-acre property being marketed for subdivision may require considerably more.

The key is identifying the issues that could change the property’s highest-value strategy.

Zoning and Subdivision Potential

Consider these questions related to zoning and division potential:

• What does the current zoning permit?
• Does the acreage support additional lots?
• Are there density, frontage, open-space, or other requirements that affect yield?
• Has the property previously been subdivided in a way that affects its remaining development rights?

A seller does not need a fully engineered subdivision plan, but marketing a property based on development potential that does not exist can create problems later.

Soils and Septic

For properties without public sewer, soils can materially affect both buildability and subdivision yield.

Existing soils information may be sufficient to establish a reasonable level of confidence. In other situations, limited preliminary testing may be beneficial.

The important thing is understanding what has actually been established.

A decades-old soil study, an informal opinion, and an approved drainfield are not the same thing.

Environmental Constraints

Wetlands, streams, floodplain, resource protection areas, buffers, and other environmental features do not always make land undevelopable, but their location can matter enormously.

A relatively small wetland in the path of the only practical road alignment can have a greater effect on value than a much larger wetland located in a portion of the property that was never likely to be developed.

Preliminary environmental information can sometimes identify these risks before a buyer tries to leverage them against the seller.

Access

A property may have legal access without having practical access.

Road frontage, entrance locations, sight distance, private easements, road standards, and required improvements can all affect feasibility.

This becomes especially important when the property’s value depends on creating additional lots.

Utilities and Infrastructure

The presence of nearby water or sewer does not guarantee that connection is simple or inexpensive.

Likewise, a rural property that can use wells and septic systems still needs enough suitable area to accommodate them within the proposed development layout.

Infrastructure questions are often less about whether something is theoretically possible and more about what it will cost.

Due Diligence Can Help You Price the Property More Intelligently

One reason land is difficult to price is that development potential can create enormous differences in value.

A property that can support six lots may sound valuable, but what if creating those lots requires an expensive road, stormwater facilities, substantial grading, alternative septic systems, and several years of approvals?

A developer has to subtract those costs—as well as time, risk, financing, and required profit—from the eventual value of the finished lots.

This is why a seller’s estimate based on acreage or finished-lot prices can differ significantly from a developer’s residual land value.

Pre-listing due diligence helps narrow the gap between theoretical potential and financially viable outcomes.

Different developers can still arrive at different conclusions, but the seller is less likely to establish an asking price that will not hold up as developers pursue due diligence.

It Can Also Tell You What Not to Spend Money On

Due diligence is not valuable only because it identifies work that should be completed, but also because it can prevent unnecessary work.

A landowner might assume that obtaining subdivision approval before selling will increase the property’s value, but before spending heavily on engineering, it is worth asking whether builders actually want the lots being designed and whether the additional sale price is likely to justify the cost, time, and risk of obtaining those approvals.

Similarly, an owner may consider ordering every conceivable study before listing.

However, if a particular uncertainty is unlikely to change the buyer universe, pricing strategy, or decision to sell, there may be little reason for the seller to pay to resolve it.

Good seller due diligence is selective. The goal is to invest only where better information can improve a decision.

Better Information Can Change How the Property Is Marketed

Pre-listing investigation can also affect who should be targeted as a buyer.

An owner might think a property as an obvious subdivision opportunity, but further analysis could reveal major infrastructure requirements that make subdivision financially infeasible.   

The best buyer may not be a subdivision developer, but someone who wants to use the property in its existing state.

Another property may appear to be a conventional rural acreage sale until preliminary research reveals meaningful development rights or future land-use potential. Such a property may deserve exposure to an entirely different buyer pool.

Still another property may have environmental characteristics that make it valuable from a conservation or mitigation perspective.

This is why understanding the property should generally come before deciding how to market it.

Seller Due Diligence Can Make Buyer Due Diligence More Productive

A seller who has organized relevant information can also make the transaction easier for serious buyers to evaluate.

Depending on the property, a useful pre-listing file might include existing:

• Surveys and plats
• Soil studies
• Septic records
• Well information
• Environmental reports
• Easements
• Engineering plans
• Subdivision records
• Utility correspondence
• Zoning information
• Prior development concepts

The seller doesn’t have to guarantee the conclusions contained in old reports or represent that every document remains current.

However, providing organized information can help qualified buyers understand the opportunity more quickly and identify the issues that require additional work or investigation. It can reduce the likelihood of the buyer turning up an important existing document for the first time halfway through the study period.  

What Should Be Left for the Buyer?

Generally, the seller should consider investigating an issue before listing when the answer could materially affect:

• Whether the property should be sold
• How it should be priced
• Which buyer should be targeted
• How it should be marketed
• Whether additional seller investment is justified
• The seller’s negotiating position

Questions that require extensive technical work but are unlikely to change those decisions can often be left to the buyer.

For example, a seller may need enough information to establish that a subdivision concept is plausible without paying for the final engineering necessary to obtain approval.

A developer intending to build the project can complete that work during its own due-diligence and entitlement process.

The appropriate dividing line depends on the property, the likely buyer, and the seller’s objectives.

The Seller and Buyer Are Doing Due Diligence for Different Reasons

A buyer conducts due diligence to determine whether he should buy the property and can use it for his intended purpose.

A seller’s pre-listing due diligence should ask, “What am I actually selling, what is likely to affect its value, and what should I know before I negotiate with someone who may investigate the property more thoroughly than I have?

The seller does not need to duplicate the buyer’s investigation, but entering into a development land sale with little understanding of zoning, feasibility, and constraints can leave the seller dependent on the buyer for information about the seller’s own property.

Know What the Buyer Is Likely to Find Before They Find It

Not every landowner needs a lengthy feasibility study before selling.

Some properties are straightforward, and others have enough existing information that little additional investigation is necessary.

However, when a property’s value depends on subdivision, development, rezoning, or other future potential, going to market without first examining the major assumptions creates unnecessary risk. A Pre-Listing Strategic Land Assessment can help identify the property’s development potential, major constraints, likely buyer universe, and the questions worth answering before the property goes to market.