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Guide to Buying Residential Land

Maybe your dream home just doesn’t exist yet. In this case, building a home on a vacant piece of land may be the perfect option.

But before you get serious about laying a foundation, be aware that a land purchase may yield more surprises than buying a home – from easements and zoning restrictions to environmental conditions that could easily turn your dream build into a headache the size of a McMansion.

Whether you’re buying vacant land to build a home for your family or you hope to sell the plot for a profit in the future, follow these rules to avoid buyer’s remorse.

Here are the do’s and don’ts of buying vacant land:

  • Do work with an agent to find the land.
  • Do have your finances in order.
  • Do take utilities and road access into account.
  • Don’t expect to get a loan.
  • Don’t forget the survey.
  • Don’t assume you can have property rezoned.

Do Work With an Agent to Find the Land

Working with real estate agent when you purchase a home can help you navigate the finer details like negotiations, due diligence and closing the deal. But when you’re purchasing land, it’s important to hire an agent who has extensive experience negotiating land deals specifically.

A common mistake many land sellers and real estate agents make is to advertise a plot of land as having the potential to be subdivided. Buyers may be left with a plot of land that will yield less profit than expected, while sellers could easily face a lawsuit for false advertising.

Use an agent who actually has a track record of representing both buyers and sellers for land transactions

Do Have Your Finances in Order

As with any home purchase, it’s important to know how much you can afford to spend before you start visiting properties. Know that land purchases are often done in cash, because lenders are less inclined to provide funds for undeveloped land. Take a look at the amount of cash you have or can secure before purchase, and determine your budget that way.

Proof of funds is also important when making a cash offer, as it helps the seller feel confident that you have access to the money you claim to, like a mortgage preapproval does when buying a house. If your cash is tied up in other investments, take it out prior to making an offer to avoid a sudden loss of funds from an unexpected disaster.

Do Take Utilities and Road Access into Account

It’s easy to take for granted access to running water, electricity and sewers when you’re buying an existing house, but with vacant land these are not always a given.

Buy land to build on, not to hold, as city ordinances are being passed more regularly against vacant land, and the chances are high that these ordinances restrict the build-out, thereby devaluing the land that you own.

Don’t Expect to Get a Loan

A land purchase can’t be leveraged with a bank the same way a home purchase can, so you’ll likely have to pay cash if there’s no structure on the property yet.

An investor purchasing an apartment building, for example, might be able to put down 20% and get 80% from a bank, putting up the land and the building for a mortgage. But if you have a piece of land, you might be lucky if (a lender) gives you 40% or 50% of the value – and that’s typically if you have a good bank relationship or other collateral. You’re more likely to get zero.

You’ll have a much better chance of being approved for a construction loan on the building you want to put on the land, since the house you’ll build serves as collateral on the loan.