Family in front of large picture window of new construction home on acre of land.

Buying Land To Build A House: A Guide

Miranda Crace10-Minute Read
UPDATED: May 23, 2023

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As of July 6, 2020, Rocket Mortgage® is no longer accepting USDA loan applications.

If you’re having trouble finding a home that ticks many of the boxes on your wish list, you may be wondering if you’d be better off building a house for yourself. Building a house yourself is one way of getting exactly what you want in your next home. 

Buying land and building a home can get you exactly the home you’re dreaming of – a personal sanctuary designed to meet your particular needs. That might mean an environmentally sustainable home, or a space that accommodates your interests and hobbies.  

Of course, in the real world, your dream is likely to encounter challenges, delays and unforeseen expenses on its way to becoming reality. Let’s take a look at the process, pitfalls and ultimate rewards of buying land to build the house of your dreams.

How To Buy Land In 4 Steps

Buying land to build a house on is not a simple process, and it’s important to understand what state and local laws, zoning and permitting rules could create challenges on the road to developing the property.

Step One: Find Land For Sale

While designing your own oasis may be a dream come true, finding land for sale isn’t as easy as just wandering through a neighborhood looking at for-sale signs. Here are some of our tips for finding the land for your home.

Ask Around

“You’ll find the best opportunities through word of mouth, such as by reaching out to brokers in the community where you’re interested in buying or by networking within community organizations such as the Chamber of Commerce and Rotary Club,” says Kirky Galt, a real estate agent in San Diego.

Community members with a pulse on the local market or a real estate agent who specializes in land will know more about potential upcoming zoning changes and similar happenings that can create opportunities.

Dig For Expired Listings

Another great way to find land for sale is by looking beyond active listings to those that are expired and withdrawn, according to Bruce Ailion, an attorney and REALTOR® with RE/MAX Town and Country in Atlanta. “Often people will buy land or a lot, determine the building process is too difficult and try to sell the property,” he says.

Selling vacant land is often harder than people think. When the listing expires repeatedly, they may give up. This can be an optimal time to approach a landowner about selling.

Drive For Dollars

Ailion also suggests driving to the area where you want to live to scope out vacant property. “Once you identify potential land, find the owner in the tax records and determine if the property can be purchased.”

Ailion has found from experience that this is one of the better ways to approach the search process, as several times he and buyers or home builders have identified every vacant parcel in a given area and contacted the owners with success.

Filter Out Inappropriate Lots

When you purchase land to build a house on, be mindful of the cost of the land and the type of home you’re building. Having an expensive home on a cheap lot or a cheaper home on an expensive lot could affect the overall value of the property.

“You should try to build a home in the size and price range that’s common for the area and make sure there is an appropriate relationship between the price of the home and the value of the land,” says Ailion.

Ailion also suggests a good rule of thumb is to estimate the lot at about 20% – 30% of the finished value of the home. So, for example, if you are expecting a $300,000 construction cost, you should be looking at around a $90,000 land cost.

Ready to talk details?

Connect with local custom home builders on HomeAdvisor.

Step Two: Vet The Property

Just finding a plot of land in a desirable area isn’t enough. You’ll want to do plenty of research to ensure the land will allow you to build what you want in a cost-effective manner.

Here are a few important questions to ask.

How Is The Land Zoned?

Zoning is the local planning authority's determination of how a particular piece of land can be used. Ailion explains that zoning informs your lot use, but also be aware that the size and shape of the structure you want to build must fit within the setback for the property you want.

Building setbacks are restrictions on where you can build a home on the property, such as a designated required distance from the property line or curb. A simple title search can reveal any easements associated with the land that could make building a home more difficult.

“Conduct due diligence before making a binding offer, lest you get stuck with a parcel that’s zoned for something other than residential use, such as industrial or agricultural use,” notes Galt. Zoning decisions entail input from a myriad of sources, from the local zoning board or planning commission to neighborhood members, and it can be tough to change them.

Are There Utility Hookups?

If the property you’re looking at is denoted as “undeveloped land” or “raw land,” it likely will require more of an investment to connect utilities and a larger down payment to mitigate risk to the lender.

Do your due diligence to understand if the utilities you need are available: water, natural gas, sewer, etc. Then, weigh the time and cost to install the following:

  • Water: You’ll want to find out if you need to drill a well, if there’s a private or public water company or a shared well agreement. If none of those options are available, you may need to haul water. Many lenders will not issue loans to people building in areas where water hauling is the only option.
  • Cell service: In rural or forested areas, you’ll want to make sure there’s decent cell and internet service.
  • Power: Investigate beyond a listing that states “nearby power.” These hookups could be “nearby” as in down the road or “nearby” as in a few miles The costs to run the lines will vary widely based on the distance and the fees your municipality and power company charge, so make sure there are no surprises.
  • Sewage: If there is no sewer line available for hook-up, you need to know if the lot will accommodate a septic system. Disposal of wastewater is highly regulated, and you’ll need to be sure your plan meets often-stringent requirements.

How Much Preparation Will The Lot Need?

Clearing and grading land can be a significant cost. finds that most homeowners spend $1,400 – $5,300 to clear the land to prepare for house construction, with costs fluctuating based on how heavily wooded the area is and the location of the property.

Average land grading runs between $1.30 and $2 per square foot, but that will vary based on how much work needs to be done.

In addition, if there are any existing structures that need to be demolished, you’ll need to get an estimate for the work and debris removal. Demolition costs vary based on the size of the structures you need to remove, but you can expect to pay between $3,000 and $25,000.

How Much Time Do You Have?

Another consideration will be your timing. Building a custom home that needs to be designed for the home site is a far bigger proposition than buying a house for sale.

“Going through the permitting process, getting all the utilities to the property, doing surveys, getting bids, getting construction financing and actually getting the house built can take 2 years or more,” notes Wendi Roudybush, a real estate agent with Realty Executives in Prescott, Arizona.

Step Three: Finance Your Land Purchase

Of course, most people aren’t prepared to pay cash for their lot. Instead, they need to take out a loan to finance the purchase. Here are a few financing options that you should discuss with a mortgage advisor to find the one that’s right for you.

Land Loan 

A land loan is used to finance the purchase of land. Land loans are available for land that has not been improved, is not connected to any services and has not been approved for development. 

If the property is undeveloped, or considered “raw land,” a land loan may be your only financing choice. To qualify, you’ll need a large down payment and meet strict credit requirements, because land loans are considered risky. Be prepared to pay more for a land loan.

Lot Loan 

If the property is already connected to utilities, has at least been surveyed and permitted for construction and is zoned for residential use, you may be eligible for a lot loan.

Lenders view lot loans as less risky than land loans. That’s because a raw tract of land can encounter many of the same problems on its way to development that a lot has already solved. 

USDA Rural Housing Site Loan

If your desired plot is in a rural area, consider applying for the government-backed USDA Rural Housing Site Loan. Government-backed loans can often be more accessible than conventional loans.

If you’re a low- or moderate-income home buyer, you might qualify for a USDA land loan, based on your income, credit score, your plans for the site and other qualifications.

If you’re able to pay for the land in cash, that can ease the rest of your financing needs. “In most cases a lender will consider the paid-for lot as the down payment on additional financing since the buyer now has equity in the property,” Roudybush explains.

Construction Loans

A construction loan is a short-term loan, typically a year in duration, that is designed to literally get your project off the ground. To receive one, your lender will need to see your construction plans and budget, which is known as the “story” behind the loan.

The loan will then be paid out in stages that correspond to the construction timetable.

Construction To Permanent Loans

This type of loan builds on the construction loan by becoming a regular mortgage once the house is complete. That means it’s basically two loans in one, which can lower your fees as there is only one closing.

You’ll pay the interest on the balance during the construction phase, pegged to the “prime rate,” then it will become a permanent mortgage like any other, where you can choose a fixed or adjustable-rate mortgage.

Step Four: Prepare To Build

Once you have the land ready, it’s time to make sure your time and investments pay off with a quality home. You’ll need to prepare yourself and your property for construction. These are the essential steps you’ll need to follow if you want to create your dream home the right way.

Hire The Right Professionals

Buying land and building a house can require quite a bit of juggling. You’ll likely want to assemble your team in advance to ensure the best professionals are available to inform the type and size of home you are building. Roudybush points out that finding a good builder can be the proverbial needle in the haystack as many of the best ones are booked out far in advance.

Before hiring anyone, ask for references, check licenses and interview each professional you’re thinking of working with to make sure you’ll work well together. Building a home can be stressful, so you want to ensure that you’ll have a good rapport.

Here are the professionals you should have on board:

  • An Architect: Unless you are purchasing preset plans, you’ll want to work with an architect for a blueprint of the home. The architect is the professional who can transform your vision into reality and incorporate the added features into your custom home that will boost your enjoyment of the home and its resale value. 

    Your architect will prepare the structural drawings that will allow you to get the permits you need.

  • A Contractor: This will be your project manager, who will oversee all aspects of the work. They will be the “big picture” thinker who keeps all the subcontractors on schedule. Your contractor will likely be your main point of contact during the building process. 

    They’ll also be the person who will deliver bad news about cost overruns and project delays, so it’s important that you trust and have a good rapport with your contractor.

  • A Builder: Sometimes your builder and general contractor will be one and the same, depending on their skill sets and the size of the business. When that happens, the builder might have less time to devote to project management and communication with homeowners.

Get The Permits

It’s smart to draft the purchase agreement of the land to include a contingency that you are not required to close until you have a building permit. Ailion explains, “This way you are not required to buy the property if anything prevents you from going forward.”

The contractor or builder should be your go-to person for getting the building permits you’ll need, including electrical and plumbing. They will also be able to help estimate permit costs, which will vary depending on your home size and costs imposed by your specific municipality.

Once they pull the permit, they become the “responsible party” for the work being done. So if it’s the contractor, that means they – not you as the homeowner – are on the hook for making sure that the permitting process was done correctly.

Clear The Land

A topographic map can help you determine the ideal flat areas where you can build your home. Try to find spaces that are already free of rocks or vegetation, as clearing and preparing the land will require an investment of time and labor.

As you plan your build, you’ll also want to consider such features as drainage, sun direction and privacy as you determine the placement of your home.

Building Your Home FAQs

Of course, buying land is only the first step. Once it’s ready, it’s time to start the construction process. 

How much does it cost to build a house?

As you’d expect, the costs of new home construction depends on a variety of factors, including the design, the materials and the cost of labor where you live.

Is it cheaper to buy or build a house?

Again, it’s hard to say whether it’s cheaper to buy or build a house without knowing more about where the house you’re thinking of buying is located and the type of house you’re thinking of building. According to the Federal Reserve, the median U.S. home sales price at the end of June 2022 was $440,300, on average.

On the flip side, the average cost to build a new home is between $112,810 and $450,194, exclusive of the cost to buy land and prepare it for building, according to Home Advisor. Of course, with inflation and skilled labor shortages, it’s harder than ever to predict how much it will cost and how long it will take to build a home.

How do construction loans work?

Another important cost to consider is the cost of financing the land purchase and the cost of a construction loan. These are short-term loans – usually no more than one year – with a balloon payment at the end that’s paid off with the mortgage on the completed home. 

There's also the possibility that you’ll need a bridge loan, if the construction encounters delays and the home is not yet livable.

The Bottom Line: Buying Land And Building Dream Homes Requires Preparation, Patience And An Experienced Lending Partner

As you can see, the process for buying land to build a house is quite extensive and not for the faint of heart. You’ll need the time, money and dedication to follow through with a dream home built specifically for you.

Learn more about how to build a starter house on our blog.

Ready to talk details?

Connect with local custom home builders on HomeAdvisor.

Miranda Crace

Miranda Crace is a Senior Section Editor for the Rocket Companies, bringing a wealth of knowledge about mortgages, personal finance, real estate, and personal loans for over 10 years.