When purchasing land for recreation, investment, farming, development, or to build your dream home, the process requires more steps than buying a home already built. Understanding what to expect and following key guidance can help create a smooth transaction instead of a risky venture.
Before Looking at Land to Buy
The first step in buying land is making sure you can qualify for a land loan or a construction loan if you are not paying cash.
Lenders consider vacant land a riskier investment than financing a house that’s already built.
Talking to a trusted lender to be sure your dream of owning land comes to fruition is step one!
Land Loan
Land loans are different from conventional mortgages, because their higher costs reflect the amount of risk assumed by the bank to finance an undeveloped property.
Land loans usually require a higher down payment, a higher interest rate, and a shorter term to pay off the loan. Land loans are often done at a local bank or credit union, where they are more likely to specialize in rural and agricultural lending.
Construction Loan
If the plan is to build right away, a construction loan with a bank or mortgage company may be preferred, with better interest rates and terms. A ‘construction to permanent’ loan can include financing the land purchase.
This type of loan would have interest on the balance paid monthly, up to 12 months during construction, then the loan is converted to a permanent loan upon completion of the home.
Due Diligence
Once you find the right land to buy, the next step is to analyze the suitability of the land for your specific needs, which involves the buyer investing time and money doing testing, research, and analysis.
The time period in a contract for you to analyze if the land will work for your goals is called due diligence and can be as much as 30-90+ days. To avoid surprises or unforeseen expenses, it is important for the buyer to do proper due diligence when buying raw land.
Many of the recommended due diligence steps take considerable time to complete. As soon as a contract is binding, these steps should be started quickly.
8 Key Due Diligence Steps to Buy Land
- Obtain a current or new survey to confirm boundaries, encroachments or easements
- Confirm utilities such as electricity, gas, water, and internet service are available
- Get a soil percolation test done for a septic tank if sewer is not available
- Obtain an estimate for a well if public water is not available
- Analyze zoning to make sure your desired construction plans will be permitted
- Review flood maps to confirm any building limitations or flood insurance needed
- Have a trusted builder give a quote on your construction project
- Verify you have approval for a land loan or construction loan if not paying cash
Building a Custom Home
If the goal of buying land is to build a custom home, keep in mind that building a custom home from scratch is usually more expensive than buying an existing home or building in a neighborhood where the builder owns the lots and builds all the homes.
Although it is more expensive, building a custom home on your own land can be a wonderful experience. It is great to get exactly what you want, selecting everything from the ground up, including the land, floor plan, builder, materials, and finishes for a one of a kind place to call home.
Owning Land
Having a Strategic Guide walk with you in this journey to becoming a landowner will make it go more smoothly, with less hassle and risks.
Whether you buy land to build a home or simply have it for recreation, most land owners enjoy the fun, relaxation, peace, and serenity that land ownership gives them!
