Tips to Keep in Mind Prior to Purchasing Land

Written by Posted On Monday, 25 June 2018 12:17
Tips to Keep in Mind Prior to Purchasing Land LandThink

Investing in land can be a smart financial move, provided you have the resources to make it work. Land purchases can be part of your retirement plan, investment strategy, or American dream.

The beauty of buying land lies in the fact that the majority of land lots are improved, meaning that they are designed for residential or commercial use. Beyond zoning laws and other building regulations, improved land lots give land buyers the ultimate freedom to build or develop as they choose.

Navigating a first-time land purchase, however, isn’t the same as purchasing a home that has already been constructed. In many ways, it is much more complex and can even prohibit some prospective buyers.

Here are a few things to keep in mind before you start browsing lots.

  1. 1. No Two Lots Are the Same

It’s easy to type “five-acre parcel in California” into Google and browse the results. The internet is a fabulous resource for prospective land buyers, but it can be misleading when it comes to purchasing a property.

In some highly populated and developed states, it may only be possible to purchase improved lots. These lots are set up for relevant utilities, such as septic systems, electrical wiring, water, and internet capacities.

Unimproved or raw lots, however, are not ready for commercial or residential use. These typically have no utilities in place and are entirely undeveloped.

In general, depending on your intention for purchasing land, it’s wise to seek out improved lots. For one thing, it is far easier to achieve financing for improved land than for unimproved land. It can also be more cost-effective, particularly for land that has utilities set in place.

Be sure to scrutinize property listings to ensure that you are seeking out improved lots. If you are intending to purchase a raw lot, do so with a strategy (and a solid lender) in mind.

All lots will also be subject to distinct zoning laws and other building regulations. In many cases, you won’t be able to view these details until you are in conversation with a seller or real estate agent. Before viewing a property, be sure to know what a certain lot is zoned for.

In many populated areas, zoning laws may forbid commercial structures. Others may involve regulations on off-grid or solar-powered homes. Save yourself time by familiarizing yourself with laws and regulations prior to a showing.

  1. 2. Land Loans Have Stricter Eligibility Requirements

Many land buyers pay for properties in cash, particularly those who have been planning for this purchase for quite some time. Others turn to financing in order to purchase a property.

It is entirely feasible to take out a land loan, which is still technically a mortgage. However, land loans often require a deposit of at least 20% of the asking price. In some cases, lenders may require prospective borrowers to put down up to 50% of the seller’s price. Purchasers of raw lots can expect to pay a larger portion of the seller’s price up front and be subject to stricter requirements.

This is where land financing can be prohibitive for some buyers who simply do not have the resources for such a hefty down payment. Lenders are also likely to be pickier with borrowers when it comes to eligibility, particularly those who have relatively new credit histories and limited proof of income.

Land loans function much like home mortgages in that they require cash up front and monthly mortgage payments that include principal and interest. However, they do not include mortgage insurance.

In most cases, land loans incorporate a construction loan, if the intention is to build a residential structure on the site. This construction loan typically becomes a conventional home mortgage via refinancing, after the structure is complete.

  1. 3. Know all of Your Financing Options

Not all lenders offer land loans; very few offer land loans for unimproved land. For this reason, it’s essential to identify all of your financing options prior to browsing the market.

In general, local or community-based lenders are more likely to offer land loans than online-based, national providers (like Quicken Loans, for example). Begin by having conversations with local lenders about the financing options they offer for prospective land buyers.

It’s also possible to purchase land through government-aided programs. VA loans—suited for veterans—and FHA loans are ideal for veterans and individuals of a certain income bracket purchasing land in a specific rural area, respectively.

Lastly, inquire after land loans that also incorporate construction loans, particularly if you intend to build a home on your new property within a shorter amount of time. Keep in mind that construction loans often require recourse to local builders and timelines.

You can also purchase land directly from the property seller himself or herself. This may not be feasible for some people, but personal financing is actually possible (and happens more than most people assume). If you are able to have a conversation with the seller, consider inquiring after personal financing. This option can be ideal for land buyers who are wary about working through a lender or don’t have the means of a hefty down payment.

  1. 4. Think Ahead

Any property purchase should come attached to some serious future-thinking. When you do seize on a property you love, spend some time truly getting to know it (as much as is possible given agent and seller restrictions).

Identify how and when you would feasibly be able to set up utilities for the property. For example: Will you have to drill a well? Is water already available? Will the water be hard water or will you need to install a water softener?

Consider driveway or structure access and inquire after easements if any exist. If you are purchasing the property for investment or future leasing purposes, check with your city or county commissioner to ensure that you can rent out structures on this land in the future.

Also analyze the process for obtaining a building permit, building restrictions, and other limitations. In many cases, land limitations have to do with seasonal conditions (i.e., navigating winter roads). Walk the property boundaries and get the parcel appraised before you make an offer on a piece of land.

Investing in a Land Purchase

Purchasing land for the first time is a significant endeavour and not one to be taken lightly. Prior to doing so, be sure to become fluent in the types of land available in your area.

Converse with local lenders and familiarize yourself with the current market so that you can identify the financing option most appropriate for you and your financial situation.

Above all, get intimate with the land. Envisioning the future (practically and figuratively) is your key to making a confident purchase.

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Kate King

Kate King is a freelance writer, editor, and blogger. 

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