Buying Land
There is something romantic in the idea of buying an open plot of land, a place untouched by human hands and open to a world of possibilities. One might think that buying land is a simple process, but in actuality it can be surprisingly complicated and in many ways is more difficult than buying a home. Despite the challenges, many consumers decide that vacant land is the right real estate investment for them.
As with single family homes, one of the most important factors to consider when buying vacant land is location.
- Land that is near shopping centers, schools and other community features will be higher in price but is much more likely to increase in value.
- When looking at land in an undeveloped or underdeveloped area, it's important to investigate the future of the area as well. Local land-use plans should be available at city hall or from the county. Land that is in the path of development will appreciate considerably as the infrastructure nears. Researching upcoming development can alert you to any potentially objectionable future neighbors such as refuse transfer stations, major highways or noisy industrial parks.
- The proximity of the land for sale to developed areas can affect building costs, as some contractors will charge extra for jobs on remote work sites.
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Zoning
Zoning is the single most important consideration when looking to purchase vacant land. Simply put, how a parcel of land is zoned will determine what, if anything, you will be able to build there in the future.
Zoning regulations are often complex and highly specific, even in rural areas. They may deal with matters as large in scope (such as the permissible size of home to be built on a lot) or small (the maximum slope allowed for a driveway, for instance). In almost all areas, violation of zoning rules results in hefty fines.
Zoning regulations vary greatly from area to area, so carefully study the local zoning rules that apply to any prospective land purchase.
Utilities
If the land doesn't have hookups for water, sewer, electricity and/or telephone, check with the city/municipality regarding plans to extend access. CALL 1-800-DIG-RITE First
Septic tanks & wells
If sewer utilities are not available, you will need to order soil tests to see if the land can support a septic system. If water utilities aren't available, you'll need to see if a well is an option and if so how far down the well must be dug. Well digging can become expensive, and septic systems alone can range from $3,000 to $18,000 dollars depending on local labor rates and material costs.
Soil quality
Additional soil borings may be necessary to determine how far down builders would need to dig in order to excavate for the buildings foundation.
Topography
The grade and slope of the land will determine how much you can build and the costs you will incur. Hilly land requires careful water drainage management. Wooded areas may require extensive tree removal prior to any construction.
Road Access
If the land isn't accessible by a public road, there should be a deeded right-of-way that gives you the right to access your land. You will share the costs of road construction and upkeep.
Future construction budget
Most buyers of vacant land purchase the property with the intent of building a home at a later date. When doing so, it's important to factor in realistic future construction costs to help determine the true value of the individual land deal. Some buyers may have the tendency to get caught up in the excitement over a promising piece of property, and in the process ignore real fiscal challenges that the land itself may present.
While the mortgage industry today has focused on making it easier for homebuyers to secure financing, land loans are more difficult to secure. Most lenders view vacant land buys as riskier in comparison to purchases of existing homes.
Story loans
Land loans are often referred to as "story loans", meaning that you will have to tell lenders the story behind the property and your plans for the property in the future. Getting the lender to buy into your vision is essential.
Risks for lenders
Why are land loans considered riskier for lenders than home loans? Primarily because the loan's collateral (the property) is not in current use, making it easier for the owner to walk away. Land value can also be harder to accurately assess.
The bottom line
Because of the risks, down payments and interest rates are generally higher for land loans than they are for home loans. Using a local savings and loan or community bank whose loan officers are familiar with the area may lessen some of these increases.
Other factors
Unimproved, raw land is the hardest type of land to finance because it is essentially a speculative investment. Some lenders will require a 50 percent down payment for a raw land loan, although loans with 20 percent down payments are not uncommon.
Loans for improved land (land with utilities, sewers, street access etc) will have a lower down payment and interest. Buying improved land with immediate plans for construction is the easiest way to secure a land loan, because the lender will be paid off when you take out a mortgage on the structure. Land loans generally mature in 10-15 years.
Financing options
A home equity loan or cash-out mortgage refinance of your current home may be better ways to finance a land purchase. Because your current home secures a home equity loan, the interest rates should be lower
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