Tips on Buying Vacant Land for New Construction
Updated: Sep 15
Building a new home from scratch can be a dream come true. The idea of designing the perfect property with morning sun in the kitchen and evening breezes on the deck can be exhilarating; the first step to a successful project is finding the right piece of land on which to build. This can present challenges if not approached correctly.
Top Tips When Buying Vacant Land for New Construction
Hire a Certified Agent– More than most real estate transactions, it’s critical to hire an agent who specializes in vacant land purchases and can guide you through the process. There are a lot of intricate pieces in this process that will need to be managed between the lender and builder as well as the builder and the purchasing of the land. An agent who is certified in new home construction will educate you on the process and link you with key professionals that are needed to ensure success.
Get the Neighborhood Comps – Do not neglect to understand home values in the community you wish to buy the land so you do not over, or under, build your home. Once the home is through construction, depending on the loan type, a permanent financing option or mortgage will require an appraisal of the property. The appraisal will take into consideration the value of the properties surrounding your new build. It is important to know prior to purchasing land the values of the homes surrounding to ensure that the value of home you wish to construct is comparable.
Do Your Due Diligence – It is critical to research the property thoroughly prior to purchasing. Just a few considerations to include:
Site Surveys and Environmental Testing
Easements and Zoning Restrictions
HOA, Covenants and Restrictions
Lot Survey and Boundaries
Utilities and Water
Oil Mineral & Gas Rights
Future Changes (schools, new highways, shopping centers)
Know Your Financing Options – Be prepared to pay cash. Finding a lender for vacant land on your own can be very difficult. An experienced agent will be able to point you in the right direction of lenders who specialize in land loans, construction loans and construction to permanent loans. Lenders who will finance land typically require a 50% or higher down payment.
Land Loan - This type of loan is used to finance the purchase of land. Lenders will take into consideration credit score and down payment amount. Principle and interest payments usually begin 30-45 days after loan closing, so you should be prepared to begin making these payments. Once a construction loan is in place the land is deeded under the construction loan.
Home Construction Loan - A home construction loan is a short-term, higher-interest loan that provides the funds required to build a residential property. These loans are usually one year in duration during which time the property must be built and a certificate of occupancy issued. When Construction is complete the borrower is either going to pay the loan off in full or acquire a permanent mortgage. During the construction period the borrower is responsible for interest only payments.
Construction to Permanent Loan - A Construction-to-Permanent mortgage is a three-stage mortgage that allows you to finance the construction of your new home. During construction, disbursement is made to cover the cost to build and interest is paid only on the outstanding balance. When construction is complete, the loan converts to a permanent mortgage.
Once you’ve completed these preliminary reviews, it’s time to consult with an architect, general contractor or custom home builder who will then begin to develop concept drawings to consider. The home builder's plans will also be used when lenders are considering approval for the construction loan. The lender will want to ensure a qualified builder is doing the construction, along with a timeline and projected costs. Even at this stage, you might find that the home you want is not appropriate for the land you’ve chosen. Staying flexible is a key component to searching for land; remember that by following a few tips, you can ensure you find the right lot for your dream home.
It is always important to consult with a licensed lender that can give you the exact details on terms and types of loan products that are available to you. Need help with the getting the process started? Call me! I would love to help you work towards living in your dream home!