Editor’s Note: The Edge is serializing an as yet unpublished book by Great Barrington attorney David M. Lazan. Here is the seventh of eight installments: Buying Land and Building a Home. Previous installments were Introduction and Chapter One: Real Estate Agents and Lawyers; The Purchase and Sales Agreement; Title,Title Insurance,Plot Plans and Surveys; Financing Real Estate;The Closing; and Condominiums. The next and final installment will cover The Massachusetts Homestead Act; Nominee Trusts and Short Sales.
Chapter Seven: Buying Land and Building a Home
Buying undeveloped land in Berkshire County requires careful investigation and, in almost every instance, the assistance of several experienced professionals.
Because there are thirty-two towns in Berkshire County, each with its own zoning laws, building code, health department, police department, fire department, planning board, zoning board of appeals and board of selectman or mayor, the importance of a thorough and careful investigation before committing to purchase land to build a home is apparent.
Also, because Massachusetts has an abundance of laws enacted to protect its natural resources, their impact on development plans must be carefully assessed prior to committing to purchase property.
A. Construction Contingency
When construction is contemplated, whether you are buying land on which to construct a new home or buying an existing home on which to build an addition, the Purchase and Sale Agreement should contain a contingency allowing the Buyer to terminate the transaction if the proposed project is, in the Buyer’s discretion, not feasible. The contingency should also provide sufficient time for the Buyer to meet with an architect and/or a contractor and show them the property. By making a contract subject to such a contingency, a Buyer can determine what town and state zoning/building requirements may be involved, whether the geography of the property is suitable for the contemplated construction and what may be expected in terms of cost.
Many property owners in the Berkshires have relied on builders to design additions or homes. Often, a property owner finds plans in a magazine or sees a home that they like, describes it to their builder and relies on the builder to produce building plans as part of their building contract. On the other hand, some people would not consider building a home or adding to it without hiring an architect. Architects typically have a broad knowledge of design and construction as well as the ability to provide alternatives and options one might never have considered. Additionally, architects can guide owners through the design and construction process, which can result in a better designed, more efficient and more valuable home.
In many areas in Berkshire County, The terrain can pose a challenge to building. As a result, I often recommend that Buyers obtain an excavator’s opinion as to what it will take to clear a building site, install a road, blast out a hillside or bring in fill that may be necessary to prepare a site for construction. If access will be limited and expensive during winter due to a steep grade, that information may influence a Buyer to find another building site. An excavating contractor should also be able to give you an idea of the costs involved in installing a septic system if one will be required.
I also recommend that people contemplating construction consult with a builder before they commit to the purchase of a particular property. More often than not, people buy property only to find the cost of building, because of accessibility, location or terrain far exceeds the amount they anticipated or that the property cannot be developed in the manner contemplated. An experienced builder should be able to provide an idea of cost as well as feasibility. Often, we have found costs in Berkshire County differ substantially from those in other parts of the state and country. Having a sense in advance of the possible range of costs can avoid unpleasant surprises in the futur
B. The “Buildable Lot”
To be “buildable”, a property must be of a sufficient size and have sufficient frontage and access to meet the requirements of the applicable zoning regulations of the municipality in which it is located.
Sometimes, a title review may reveal that, although a property appears to meet zoning requirements, the property may in fact not be buildable due to “infectious invalidity,” a condition resulting from the fact that it has been owned by an adjacent property owner and, as a result, its build-ability compromised. Natural limitations as well as those created by either government or individuals may prohibit or hinder development or add to its expense.
Wetlands located on or near a property, including streams, vernal pools and rivers may limit construction or require that construction not occur within a certain distance from their border. Protected species habitats, both fauna and flora, can eliminate or impact the ability to develop a property. If the property is within a Natural Heritage Endangered Species area, a permit may be needed before development may take place. In areas where the Scenic Mountain Act has been enacted, building may be prohibited above certain elevations in order to protect our ridgelines and the deterioration of our mountains.
As I have indicated earlier, various other professionals such as engineers, contractors, excavators and wetlands specialists may need to be engaged to determine whether the land is suitable for the structure intended to be built.
Finally, if the area warrants it, a Buyer should consider having an environmental audit performed to determine the existence or likelihood of existence of hazardous waste and contamination resulting from a use of the property or an adjacent property. This will be especially true where the property is located near an outdoor shooting range, gas station, dry cleaner or business using contaminants or where there may be underground fuel tanks, buried oil containers, abandoned vehicles or toxic chemicals, such as lead, that have been disposed of on the property.
If a property is served by a municipal or private water source, than generally speaking, obtaining potable water should not be a problem. However, if the property is to be served by well water, not only is the cost of drilling a well a factor that needs to be considered, but in addition, a Buyer should realize that in the Berkshires, wells are rarely drilled until after a property has been purchased. What this means is that the determination of whether water is available and at what cost (as the depth of the well typically determines its cost) is an open question. Fortunately, rarely is water not found. On a few occasions, I have had clients who have had wells drilled prior to closing on the purchase of land.
D. Percolation Tests and Septic System Design
Should municipal sewer not be available to the property being considered by a prospective Buyer, a determination must be made as to whether a septic system can be installed which will meet the requirements of state and local health regulations. For this reason, an acceptable percolation test should almost always be a condition in a purchase and sale agreement when purchasing land to build on.
To make this determination, an engineer must be hired to evaluate the land and to design a system that would be appropriate for the property. Once hired, the engineer schedules a percolation or “perc” test. The perc test measures the rate at which water is absorbed into the ground and determines whether the soil is suitable for a septic system.
Based on the results of the perc test, the size of the property, and the number of bedrooms to be created in the home being built, the engineer designs a septic system, which must be approved by the local board of health. New septic systems, at the time of this writing, can range from approximately $15,000 to $40,000. The type of system designed, the size of the lot, the number of bedrooms, the engineering fees, the requested variances, the type of soil and the proximity of the system to water, all contribute to the cost of the system.
In my experience, I find that it is generally a mistake to sign the form of contract or proposal offered by a contractor. They are often written by the contractor’s lawyer for the protection of the contractor. They are not written to protect the owner. I know this as a fact, having represented many local contractors.
A good contract from the owner’s viewpoint, will provide, among other things, a well-defined scope of work, protection against hidden costs, time limits, procedures for verifying payments to subcontractors, payment schedules, retaining of funds until completion, inspections, warranty protections, insurance requirements, payment and performance bonding requirements (if desired) and either sanctions for breach of the construction contract by the contractor or the owner’s ability to terminate in such a case. Real estate lawyers are familiar with these provisions and should make sure they are, where necessary, part of your construction contract. Additionally, there are frequently other provisions that an owner may desire, such as the ability to bring in other contractors to perform specialty work or the right to approve subcontractors.
F. The Construction Loan
There may be significant consequences to selecting the wrong type of construction financing. At minimum, the wrong financing package can cost you several thousand dollars in extra closing costs.
Although lenders typically offer construction-only financing, such loans are not generally your best option. They’re fine for builders who will be selling the house after its construction, but they’re risky for those who then have to obtain a permanent mortgage once the construction is completed.
If you’re building a home that you intend to occupy, most of our local lenders offer a combination “construction-permanent” loan. Most of these loans provide for the payment of interest only on funds borrowed during the construction phase and then, after the completion of construction, payments that will allow the amortization of the loan over a fixed period. The interest rate may be set or adjustable depending upon your agreement with the lender.