Land Transactions
Why Are Escrow Periods So Long?
In most real estate transactions, escrow opens when the purchase agreement is fully executed by both buyer and seller. With home resales, the typical escrow period lasts around 30 days, allowing the buyer to complete inspections and secure the mortgage loan. In land transactions, you might see some escrow periods being 30 – 45 days, but many can last much longer.
The shortest land transactions generally occur when you have graded or improved lots, and the buyer is a large public builder that does not need a third-party equity investor. With graded and improved lots, the due diligence performed by the buyer tends to be a bit simpler since that portion of development risk has already been completed. The due diligence period might last 30 days, with the transaction closing maybe 5 to 15 days later. And it wouldn’t be all that atypical for these improved lot transactions to take 60 days to close.
A somewhat longer escrow might be on a site that has the entitlements obtained but no grading or site improvements. Because each site is unique in terms of grading or its improvements, the builder may need a bit more time to analyze and estimate the site work to be completed after the escrow closing. In these cases, I would say that 45 to 90-day due diligence periods are common, depending on the complexity of the site and project. Add another 5 – 15 days to close escrow after the due diligence period is over, and you are looking at 60 – 120 days for an escrow period.
The longest escrow periods tend to occur when the buyer will be processing and obtaining the entitlements. Because the land value can increase significantly with entitlements, a seller may be willing to accept a multi-year escrow period because of the price increase. The purchase contract is sometimes also referred to as an “option contract”, where the buyer has an option to purchase the property after the entitlements are approved. In local jurisdictions where the entitlement process is a bit more straight-forward, the escrow period might only last from 6 – 12 months. In an anti-development jurisdiction or on a property where the approval is contentious, the entitlement period could easily be 3 to 4 years, thus making for a very long escrow period.
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