You have made the exciting decision to build a new custom home! Now, you have to pick and purchase the lot you are going to build on. Let’s take a look at the steps you should take before buying land.
Find Your Lot
Finding the right lot for your custom home can feel overwhelming if you don’t already have your dream lot lined up. To save time on your lot hunt, narrow down where you want to live and then start researching available lots in those areas. Once you’ve tightened your search radius, you have a number of options to go about finding the perfect lot.
Builders or architects can help you understand the process of searching for land. He or she can find data on the property’s history, including what it has sold for in the past and insight into developments in the works that could impact the property. Compare the listing price with comparable properties currently on the market and those that have sold within the last six months. And, use your appraisal district’s website to track appraised values for the lot and surrounding ones. Watch for trends in value that can give you a clue as to a reasonable offer price.
Real estate agents and brokers often have access to a large collection of property for sale through multiple listing services (MLS). Look for a real estate professional who is well versed in land or lot purchases. You will be charged a commission, around 3 percent to 5 percent, for the sale, reflected in the overall price.
If you want to avoid paying someone to find your land, you can explore local auction companies for property auctions. Many hold live auctions or sell online. GovernmentAuction.com lets land shoppers purchase affordable government land via live auctions. The seized land on GovernmentAuction.com includes single-family home plots ranging from 1 acre to 640 acres near desirable features like lakes, mountains and golf courses.
Visualize Your New Home on the Lot
Imagine your home on the lot you’ve picked. How does it look? Do you have enough room in the front yard for the garden you’ve always wanted?
Know the dimensions you want for your home so you can determine the footprint of it on the lot. Talk with your builder and get any advice about the home on the land.
Think about the characteristics of the lot. How close are you to neighbors? What views do you have from the house? What will be beside you, and what will be behind you. This can vary greatly depending on where your lot is located, whether that be in an open area with no development, or on an open lot in a growing neighborhood.
Check Local Zoning Ordinances
You have to check your local zoning laws before you commit to building on the “perfect” piece of land. While you can research zoning laws yourself — if you aren’t connected with a custom home builder that manages any zoning requirements — you should speak with a local attorney to ensure that you don’t spend money on a worthless lot.
Check with your local zoning office or look online for the zoning records for the land you’re interested in purchasing. Pay attention to the surrounding land as well and try to gauge what future zoning and construction will happen in the area.
Make sure the prospective land has access to a street. If it doesn’t, you will need to get an easement, or permission to use a neighbor’s property, to access your home. If you need to acquire an easement from a landowner, consult a land agent or real estate agent to help you write up the deed.
More Rules to Know
Ask the seller or listing agent for a copy of deed restrictions and homeowner’s association rules. Check the survey for building setbacks. Are there minimum square footage or building materials requirements? Can you choose your own builder or is the lot “builder-bound”? Are you required to join a homeowner’s association? Some developments limit the number of pets, and even the number of vehicles parked, at a single residence. Be sure you understand and are willing to play by the rules.
Get a Builder’s Perspective
Lot slope, underground water issues, tree locations, accessibility to the build site — these are among the factors that will impact the ultimate cost of building on your lot. “A builder with local experience is the most knowledgeable resource for input on the buildability of your lot,” says Austin custom builder Keith Durio with JKD Builder. “For example, a steep lot will require more excavation and you can expect slab costs to be higher than on a flat lot. And while trees are always desirable, if the trees are in the building envelope rather than around the perimeter, most likely they will have to come out, also adding to excavation costs.”
These can be red flags for lenders as well. “For bankers, lack of utilities is the biggest red flag on lot purchase loans, but ingress/egress to the lot is very important as well,” says Denny Buchanan, president-Lakeway with Independent Bank. “The contour of the lot also is important. Is it flat and easy to build on or a slope or cliff?”
Check Out the Neighborhood
Consider what kind of neighborhood is going to be the best fit for your family long-term before purchasing a piece of property. As you search for the perfect lot for your custom home, think about how you want to live, and keep the following in mind:
- The commute time to where you work
- The crime rates in the surrounding area (You can use a tool like CrimeReports to find this information.)
- How long it takes to get to daily necessities like grocery stores, shopping and schools
- If you have children, how well the local schools are rated (Niche.com has some of the most accurate ratings and reviews of school districts.)
- If you want to live in a neighborhood with a homeowner’s association
- If community amenities help foster your desired lifestyle
- If it’s a close-knit community
- If it’s the kind of community where neighborhood kids play outside
- If you have any special needs for where you live, does this community meet them
Spend some time in communities where you’d like to build to get a true feeling for the neighborhood. Drive to your daily necessities to get a feel for area drive times. Ask residents how they feel about their community and if they spend time with their neighbors. Taking the time to really understand the community can help you determine if a lot there is the right place for your new home.
If you are thinking about building your custom home in an HOA-controlled community, be sure to ask about HOA fees, rules and regulations. You should also ask for a written copy of the community bylaws. To ensure you build in a community you truly love, do not start looking at lots until you read the bylaws and know that you can happily follow all of the rules.
Also consider the area’s growth rate. Is there a lot of new home construction or new businesses opening? Or is the neighborhood more established with plenty of amenities already in place? To get accurate information about a neighborhood’s growth rate, use the Census Explorer from the Census Bureau. This interactive map lets you dig down to the neighborhood level and learn all about population patterns of your potential new community.
Evaluate Traffic and Noise
Another aspect to look at when choosing land is traffic and noise. As a growing family, you should be aware of the amount of traffic flowing through the neighborhood. Is the lot you’re looking at close to the entrance of the neighborhood? If so, that can attract a lot of noise and traffic from people coming and going.
Cul-de-sacs are great for kids playing in the street because there is less through traffic, but they can be problematic when it comes to emergencies. The street design may make snow removal and fire rescue more difficult.
A lot on a cul-de-sac may have less room in the front, which may make that dream of a large front yard impossible. It can also prevent you from having the space you need for parking. Yet, the backyards tend to be larger and provide more space for your kids to play with their furry friends.
A corner lot means you will have traffic and sidewalks on two sides of your land. These corner lots tend to be larger and allow for a side-loaded garage, which is great for homeowners who want the garage out of sight, and the front of the home to have a “cleaner” look. If you live in a colder weather climate, you’ll have to consider snow removal during the winter with a corner lot. Both streets and sidewalk paths will have to be cleared.
If you’re considering a lot at a T-intersection, or a lot facing an incoming street, you may have to deal with headlights of oncoming traffic. Design a floorplan where the bedrooms are not facing the front of the house, so the headlights aren’t distracting at night.
Finance Your Lot
Building a custom home on your own lot is typically more expensive than purchasing a production home due to the added cost of purchasing land. According to the Federal Housing Finance Agency, undeveloped land in nonrural areas cost on average $6,500 per acre, adding to the overall price tag for your new home. Your land cost, along with all the customizations you want to include in your home, can increase your custom home’s bottom line.
First, you should make a reasonable budget so you don’t overspend. Then, find a lender to help finance your land and home. Before talking to your lender, obtain your credit information and bring documentation of your income and employment, bank accounts and other funds and assets.
Check Insurance Rates
What you’ll pay for homeowner insurance will be determined in part by factors like accessibility to fire hydrants and emergency services. Many carriers won’t write coverage on properties outside of city limits. If the lot is in a floodplain — or any area that’s flooded before — you can expect rates to reflect the greater risk. Ask for recommendations on insurers that are knowledgeable of the area and can provide estimates for your future home’s insurance costs before you commit to a location.
Ask About Utilities
A lower-priced lot may suddenly not be as much of a bargain if it requires installing an expensive septic system and water well. If a septic or well is required, get cost estimates from a reputable installer. If the lot is served by a municipal or private water provider, research its rates and water supply source.
“During the recent droughts in Central Texas, several subdivisions’ water supplies went dry,” says Keith Durio. “Homeowners in those subdivisions paid a premium to have water trucks bring in water.”
Find the Right Lender
Most, but not all, real estate lenders make lot loans. “Most banks that make lot loans do them because they want to do the construction loan/permanent mortgage as well,” says Buchanan. “Look for a bank that is known for being a real estate lender and one that also does a lot of construction lending.”
On lot purchase loans, most lenders offer a fixed rate for three to five years, with payments based on a 20-year amortization. “Sometimes exceptions can be made, but the majority of banks want a minimum 20 percent down payment on a lot purchase,” says Buchanan. As with other loans, you should expect to provide the lender with an application, two years of tax returns, your most recent pay stubs and financial statements that show liquidity. “The normal maximum debt-to-income ratio is 45 percent on lot purchase loans,” says Buchanan.
With the right homework, a team of professionals providing guidance and a good dose of patience, you can land the perfect lot and be closed on your loan within a month.
Construction Loan
A construction loan covers the custom home you plan to build and the land purchase. You will pay for two closings, first on the construction and second on the permanent mortgage. It is a short-term loan, ideal if you hired a builder and have the house plans drawn out. This loan is similar to a line of credit; you only borrow what you need, when you need it, and only pay interest on the amount borrowed.
Land Loan
This type of loan covers the purchase of the land but not the construction of your custom home. This loan is a lot less common, as lenders are more hesitant to underwrite a loan for a land purchase. They typically ask for a 50 percent down payment, compared to 10 percent to 20 percent for a home. The interest rate can also be higher than on a home loan. A land loan is an option to consider if you don’t have immediate plans to build on your lot, because when you get a land loan, you’ll still need a construction loan.
Construction-to-Permanent Loans
This is a type of single-close financing, similar to a construction loan, that covers the cost of the land and the build. It converts into a regular mortgage after construction is complete. Like any other mortgage, you can choose a fixed-rate or adjustable-rate loan. Lenders require a down payment of at least 20 percent of the expected amount of the permanent mortgage.
Government Loans
Several government agencies offer loans to help finance the purchase of a lot. For more on financing your new custom home, read How to Finance a Custom Home.
Negotiate and Sign
If you’re buying land on your own, negotiating can be a scary. Don’t be afraid to stand firm with your price. Before making your bid, evaluate the lot’s appraised value and compare with similar surrounding properties. If the seller is firm on their price, ask them to cover some of the closing costs.
When you draft the agreement, include contingencies that need to be met before the transaction is complete. An example of a contingency is having the seller give you a clear title report before closing. If they do not meet this contingency, you can break the contract.
Once you’ve finalized and signed the agreement, you can proceed with having a land survey completed on your newly purchased lot. During this time, you should have the title report run to confirm the seller owns the land and can transfer it to you. Talk to the seller about buying title insurance, which protects you in case there is a problem with the title. These fees can be added to your closing costs.
At this point, all that’s left is to attend the closing. Congratulations! You’re one step closer to building the custom home of your dreams.
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