What To Look For When Buying Land To Build A House
Miranda CraceJuly 12, 2019
As of July 6, 2020, Quicken Loans is no longer accepting USDA loan applications.
Have you always dreamed of escaping your unruly neighbors, the restrictions of your homeowners association or the hubbub of city life? If so, building your dream home on your own plot of land could be the best option for you.
Here’s everything you need to know about what to look for when buying land to build a house.
Finding 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. Of course, you can keep an eye on land listings via aggregate sites like Realtor.com or Zillow, but those usually aren't the best deals, says Kirky Galt, a real estate agent in San Diego.
“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,” he says.
Community members with a pulse on the local market or an agent who specializes in land will know more about potential upcoming zoning changes and similar happenings that can create opportunities.
Another great way to find land for sale is by looking beyond active listings to those that are expired and withdrawn, says Bruce Ailion, an attorney and REALTOR® with RE/MAX Town and Country in Atlanta.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.
But they might find that selling it is harder than they thought. Then the listing expires several times, they and the agent give up, and they ultimately let it sit until someone approaches them about selling.
He suggests driving 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.”
He has found from experience that this is one of the better ways to approach the search process, as several times he and buyers or builders have identified every vacant parcel in a given area and contacted the owners with success.
When you buy land to build a house on, be wary of buying a cheap lot and then putting an expensive home on it, which may diminish the value of the construction improvements, or purchasing an expensive lot and putting a cheap or small home on it, which will damage the value of the land, says Ailion.
“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.”
He suggests a good rule of thumb is to estimate the lot at about 20% to 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.
Questions To Ask When Buying Land To Build A House
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 four important questions to ask.
How Is It Zoned?
The first thing to do before buying land to build a house is to check the zoning, which is the local planning authority's determination of how a particular piece of land can be used.
“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 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, says Ailion.
Setbacks are restrictions on where on a property a home can be built, such as a designated required distance from the property line or curb.
And don’t be lured into thinking you can get property at a great price that will then be rezoned for the use you want. Zoning decisions entail input from myriad sources, from the local zoning board or planning commission to neighborhood members, and it can be tough to change.
Are There Utility Hookups?
Check to see if the utilities you need are available: water, natural gas, sewer, etc. For example, if there is no sewer, you need to know if the lot will accommodate a septic tank.
Water is a big one, says Wendi Roudybush, a real estate agent with Realty Executives in Prescott, Arizona. 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, or if you’ll need to haul water.
She notes that many lenders will not lend to people building in hauled water areas.
In rural or forest areas, you’ll also want to make sure there’s decent cell and internet service, she adds.
If utility connections aren’t present, part of your due diligence should be finding out what it will cost to run them to your property. A vague statement like “State utilities are nearby” isn’t necessarily enough.
These hookups could be “nearby” as in down the road or “nearby” as in a mile or two away. The costs to run the lines will vary widely based on the distance as well as the fees your municipality and power company charge, so make sure there are no surprises.
How Much Preparation Will The Lot Need?
Clearing and grading land can be a significant cost. HomeAdvisor.com finds that most homeowners spend between $1,250 and $4,200 to clear the land to prepare for house construction, with costs fluctuating based on how heavily wooded the area is and the location.
Average land grading runs between $0.47 and $2.28 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.
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 purchasing a house for sale, notes Roudybush.
“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 two years or more,” she says.
Financing Your Land Purchase
Of course, most people aren’t prepared to pay cash for their lot. Here are a few financing instruments that you should discuss with a mortgage advisor to find the one that’s right for you.
Land Or Lot Loan
Depending on the infrastructure already on your lot, you will need either a “land loan,” which is just for the raw land, or a “lot loan,” which means that some of the pieces are in place (for example, a building permit or survey and/or the utilities). Often the rates for a land or lot loan might be a bit higher because lenders consider these loans riskier since it’s not as easy to sell as a developed lot if you decide ultimately not to build the home. Therefore, defaults tend to be higher.
One great option might be a USDA Rural Housing Site Loan if your desired plot is considered to be in a rural area. Be sure to ask your lender if you might qualify based on your income, your plans for the site and other qualifications.
If you’re able to pay for the loan in cash, that can ease your other financing, Roudybush explains. “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.”
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 signing.
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 variable rate mortgage.
Preparing To Build
Once you have the land ready, it’s time to jump into the fun stuff – designing the home. Right? Well, not quite. Here are a few more elements you should cover before choosing countertops and flooring.
Hire The Right Professionals
It’s probably best to assemble your team before you progress to other areas since this will inform the type and size of home you are building. You also want to be sure that the best professionals are available so you don’t get stuck at any point of the project.
For example, once you engage an architect and invest in plans, you want to be sure a high-quality builder is available on your ideal time frame. 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.
Once you assemble your team, they can be your go-to source for the entire process, as they are well-versed on the ins and outs. Before hiring anyone, seek references, check licenses and interview them 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 structural drawings 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. He or she will be the “big picture” thinker who keeps all the subcontractors on schedule.
- 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.
Getting The Permits
Once you have your plans drawn, work with your team to make sure you get the permits you need before any work is done.
In fact, it’s smart to draft the purchase agreement of the land to include a provision that you are not required to close until you have a building permit, says Ailion. “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. They will work with the inspector to get all the permits you need, including electrical and plumbing.
Not only do they have the knowledge you need, but it’s smart to have these professionals be the ones who actually register for the permits. That’s because the person who pulls the permit becomes 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.
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.
Land Clearance And Preparation
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.
You’ll also want to consider such features as drainage, sun direction and privacy as you determine the placement of your home.
Bottom Line When Buying Land To Build A House: Is it Right For You?
As you can see, the process for buying land to build a house is quite extensive and not for the faint of heart.
However, it might be just the ticket for someone who is looking for a nonstandard home experience – whether that’s because you desire more acreage to raise llamas or have a specific look and feel in mind for your home that you can’t find elsewhere.
Even though the undertaking might seem ambitious and adventurous at times, when you finally cross the (custom!) threshold, you can revel in the fact that you have a dream home built specifically for you.