BUYING A RANCH? HERE’S WHAT YOU NEED TO KNOW.
If you are in the market to buy a farm, ranch, or just a large piece of property, you’re probably already stressing about such things as the purchase price, down payment, interest rates, and financing. While money is obviously important, there are several other considerations you should be aware of before you proceed to closing. This article attempts to highlight some of these issues. Living in the country may be more complicated than you realize, but with a little extra guidance and some due diligence on your part, you can get through closing with confidence that you made the right decision.
Title. Perhaps the single most important issue to consider, other than the purchase price, is the title to the property you are looking to purchase. “Title” refers to ownership of the property. However, “title” also includes anything that affects the legal right to own or use the property, such as mortgages, covenants, easements, and liens. A buyer should always insist that the seller furnish a title insurance policy prior to closing. When title insurance is purchased, a title company searches public records to determine the property’s ownership status. A title policy will identify ownership of the property and any mortgages, exceptions, covenants, encroachments, easements, etc., that are found in the public records. A buyer should closely examine the title policy to understand all of the issues affecting title and make sure there is nothing that may affect the buyer’s intended use or ownership of the property.
For example, a title policy may reveal that the seller does not own all of the property you are attempting to purchase. Similarly, a title policy may reveal an easement or a right belonging to someone else that significantly reduces your interest in the property. Some of those issues are identified later in this article, but a buyer may be disappointed to learn that he or she cannot graze livestock on the property because that right belongs to someone else. Or, perhaps, the buyer learns that an oil and gas company has the right to drill a well in the exact spot where the buyer was thinking of building their dream home. Moreover, the buyer should make absolutely sure that the money to be exchanged will be enough to pay off any mortgages or liens existing on the property.
Typically, under most purchase contracts, a buyer will have the opportunity to investigate and identify any potential title issues during what is call the “due diligence” period. This gives the buyer time to identify any issues with the title that makes them uncomfortable. Purchase contracts often also provide the seller the opportunity to attempt to remove any of these title issues to the buyer’s satisfaction. If title issues cannot be resolved, the buyer will have to decide whether to proceed with the purchase or not. A buyer should always make time to review title to the property to make sure they understand and fully appreciate what he or she is actually purchasing. Some issues are minor and of no consequence; however, other issues may be rather significant. It is always best to learn about these issues beforehand, while they can be addressed, instead of learning about them after-the-fact when you no longer have a choice in the matter.
Inspection. Prior to or during any due diligence period, a buyer may want to consider physically inspecting the property itself. Sometimes not all of the issues affecting property are found in the public records and therefore will not be included in a title policy. For example, not all public roads can be found in the public records. Smaller, lesser known rural roads may have existed for decades, but never found their way into the public records. The public records also will not reveal if the property includes any rivers, streams, creeks, ponds, or reservoirs that you should be aware of. If you are buying a relatively smaller parcel of property, then a physical inspection is a small investment of your time. The larger the property, however, the more difficult it may be to fully inspect every corner or acre to your satisfaction. Even though it may be time consuming, a physical inspection will make sure you are aware of the location and working condition of improvements, such as fences, corrals, wells, and roads. A physical inspection may also reveal whether a neighbor is encroaching on the property.
Although costly, a physical inspection can also be used to identify the potential for contamination of a property by hazardous or toxic materials and to identify other possible environmental constraints on the property. For example, perhaps a portion of the property has been used as a landfill, for buried underground storage tanks, or the site of an oil or industrial spill. In such cases, online tools, such as satellite mapping and aerial photographs, combined with interviews of the current landowners and neighbors, may help you broadly scan the property to determine the likelihood of any contamination of environmental issue.
Access. It is always important to assess whether the property includes legal access. If the property borders or includes a public road, then perhaps access is clear. However, if access is dependent upon passing across a neighbor’s property, then you will need to research whether that is access is guaranteed by a written easement. Never assume your property includes legal access. If your property includes more than one separate parcel, then you should make sure each parcel has its own legal access.
The law does not favor landlocked property. However, if the property lacks legal access, you should not assume that the easiest, or shortest access, will be the legal access. Most states provide a means by which either the county commissioners or the local courts can establish access for you, but those procedures are oftentimes time consuming, costly, and contentious if a neighbor opposes your proposed access. If no access exists, sometimes the existing landowner has a good relationship with the neighbors to get access for you. Either way, make sure you understand whether the property has access before you purchase it, and if not, research the cost and expense associated with gaining access. In the end, the expense of acquiring access may influence the purchase price, or perhaps convince you to look somewhere else.
Water Rights. If your purchase is dependent on water, then you are well advised to research any water rights attached to the property. “Water rights” refer to the legal rights of the landowner to access and use water from a specific source, such as a river, stream, pond, or groundwater well. Generally, water rights can easily be research and confirmed with the local office of the State Engineer. Such records will inform you where or how the water is to be used, how much water you might be entitled to, and how that water is to be delivered (i.e., by well, ditch, or pipeline). These records may also inform you whether these water rights are to be shared with someone else.
If your purchase is dependent on water, whether to water livestock, water crops, or provide water for domestic uses, you should be sure to investigate any infrastructure necessary for the delivery of the water. For example, how old is the well? Is the pump in decent condition? How much will it cost to replace the well or the pump? Where are pipelines buried? Where are ditches located? Do the ditches need to be cleaned? Do ditches cross a neighbor’s property? Are there easements for those ditches?
Some quick research and perhaps a small investigation will provide you enough assurance to know if there is sufficient water available to meet your needs.
Mineral Rights. “Mineral rights” refer to ownership of underground resources, such as oil and natural gas. Understanding ownership of mineral rights is important because mineral rights can be owned separately from the surface lands. Stated another way, someone else may own the mineral rights underneath the property you are purchasing. This raises a number of concerns, including access by third parties and the potential for drilling and exploration of the mineral resources without your permission. In some cases, the mineral rights may even be owned by the federal government.
Unfortunately, it is difficult to research and confirm ownership of the mineral rights. Title companies do not provide this service. In many cases, however, the current landowner has a good sense whether he or she owns the mineral rights. Other evidence, such as an oil and gas lease, can provide insight into ownership. Generally, oil and gas companies do plenty of research into ownership before paying for an oil and gas lease.
Be sure to do some research into ownership of the mineral interests under the property you are purchasing. If the seller owns the mineral rights, then the landowner has much greater control over who accesses the property and under what conditions. However, if the mineral rights are owned by someone else, a buyer will need to weigh the likelihood of mineral development versus the nuisance to their use and occupancy of the property. Again, a buyer may be disappointed to learn – after-the-fact – that an oil and gas company has access to the property and may drill a well anywhere at any time.
Rights Belonging to Others. There are a variety of circumstances in which a third-party may have rights to the property you are purchasing. Generally, the title report will reveal some of these rights, but a buyer should be sure to ask the seller whether any other person has rights to or across the property that are not mentioned in the title report, including any unrecorded easements, leases, or agreements. Some of these rights may include ditch rights, access, oil and gas, grazing, hunting, or wind development. Obviously, it is important to know who else may have rights to the property you want to purchase, including the nature of those rights and how long they last.
State and Federal Grazing Permits. Some ranches may include grazing permits for nearby state and federal lands, especially if those lands are encompassed within the boundaries of the property you are purchasing. You should contact the state office, the Bureau of Land Management, or the Forest Service to inquire about each permit to ensure they are in good standing and can be transferred to you when the purchase is complete. Generally speaking, the transfer of these permits is fairly routine, but each agency may have special requirements that must be met to effectuate these transfers. Prospective purchasers are encouraged to contact each agency and discuss the current status of the permit and the protocol for transfer.
Similarly, if the property encompasses or is adjacent to state or federal lands, you might consider checking on the status of permits belonging to third-parties. Those third-parties may be using the property to move livestock to and from the public lands. It may be helpful to understand how the public lands within the property are being used and how that might impact your intended uses or occupancy of the property.
Growing Crops. If there are crops already growing on the property at the time of sale, you should be sure to discuss with the seller who receives the benefit of the crop when it has fully matured.
USDA Government Programs. There are a variety of government programs administered by the United States Department of Agriculture that pay landowners not to farm their property. Most of these programs bind the landowner for five to ten years and include severe penalties and reimbursement requirements if you breach the terms of the contract. If you are intending to farm the property, you should make sure there is no government contract that prevents you from doing so. If the property is bound by such a contract, you should contact the local office of the Farm Services Agency to determine the status of the contract and if you have any options to remove the property from the program without incurring any penalties.
Surveys. Always ask the seller if he or she has any surveys of the property. If the title report or your inspection reveals some concerns regarding the boundaries of the property, or the location of a structure, you might consider hiring a surveyor and splitting the cost with the seller.
Purchase and Sale Agreement. Every agreement for the purchase or sale of land should be consummated in a written contract. A written contract highlights both parties’ expectations, serves as a guidepost for moving forward, and is binding on both parties. The contract should include deadlines and timeframes for title reports, inspections, deposit of funds, and the closing date. A buyer can also use the contract to force the seller to disclose certain things, like unrecorded easements or agreements, and promise or guarantee that no such agreements actually exist.
Both parties are strongly encouraged to read and understand every part of the contract. For a buyer, the contract can be used to force a seller to sell the property if he or she has changed their mind. The contract can also be used to allow the buyer to opt out in certain situations, if for example, the title report or inspection reveals a situation that makes the buyer uncomfortable. Buyers should beware though, because a contract can also be used to force the buyer to purchase the property or perhaps forfeit their deposit. Negotiating and understanding the contract is perhaps the most complicated, yet most important, part of the journey in buying land. Do not hesitate to contact a local attorney if you need help negotiating or interpreting the contract. Do not ever sign a contract that you do not understand.
Brandon L. Jensen is an Attorney with Falen Law Offices, LLC with a primary focus on property rights, environmental, and natural resources law. Falen Law Offices, LLC, has attorneys licensed to practice law in Colorado, Idaho, Illinois, Montana, Nebraska, New Mexico, North Dakota, South Dakota, and Wyoming. This article should not be understood to state or imply that any lawyers of this law firm are certified as specialists in a particular field of law. Colorado does not certify lawyers as specialists in any field. The Wyoming State Bar does not certify any lawyer as a specialist or expert. Anyone considering a lawyer should independently investigate the lawyer’s credentials and ability, and not rely upon advertisements or self-proclaimed expertise. This article is informational and is not legal advice. Use of this article or contact with this law firm does not create an attorney-client relationship.