Land is famously a safe investment. To construct your dream home on it, however, there are various things to consider as you cannot build on all plots as you wish. By addressing each step of the land purchasing process with careful planning, and as early as possible, you can maximize your chances of getting the piece of real estate you need for your new home.
Home prices have gone through the roof lately, and while fixer-uppers can be an alternative to purchasing turn-key homes, buying a suitable piece of land to construct a new house is always an appealing solution. To help you get familiar with the land-buying process, we’ve asked real estate experts specializing in land sales how to buy for residential construction and avoid the pitfalls. From how to ensure you have a suitable plot of land to budget optimization and paperwork essentials, plus renting some self storage to help the process go smoothly, here are the things you need to know before embarking on the land-buying journey.
Make sure you choose the right sort of land
To build a house you need land that ticks a lot of boxes. You will need to find solutions to any problems it may have and, of course, determine how much these will add to the purchase price even before you have started building.
Michigan-based broker Derek Bauer at Door to Dreams gives us the low-down on buying land for residential building. “In recent years, the historic inventory shortage has forced would-be home buyers to look at other alternatives, including building a home,” he told us. “While the land-purchase piece of building in a new plotted sub with developed infrastructure is fairly straightforward, many like to consider their options outside of a development. This is an entirely different process and can involve multiple challenges, though it can be a very worthwhile consideration.”
The first thing to know is whether a plot is zoned for residential building. You must also check out local building codes to see if the home you want to construct will satisfy the requirements. And in residential neighborhoods, don’t forget homeowners’ associations, who can hold quite a lot of sway regarding what can and cannot be built there!
Determining the land’s classification is an obvious step but it can still catch some people out. If it’s not been built on before, it could be subject to environmental legislation, particularly if it is included in some piece of terrain with special status, for example wetlands.
A representative for Kris Lindahl Real Estate, which operates in Minnesota and Wisconsin, pointed out another process to tick off the list at this early stage: “Start thinking about the accessibility and easements.” Nobody likes traveling through somebody’s else property to get home, so frontage onto a good road is always an advantage.
Make sure you choose land in a suitable location
There can be unexpected challenges with a plot of land away from an established residential neighborhood or in an area where your preferred type of house has not been built before. Flooding and subsidence are just two such factors, and they may not be obvious when you visit the plot.
If you have the whole country to choose from, be aware that some local laws are better than others for building. There are also different types of weather out there, determining what sort of buildings work best and what types of land are suitable — Tornado Alley gets its name for a reason!
While an urban location is something you might appreciate, for example for public transportation, our correspondents said that proximity to schools, colleges, hospitals or even parks can mean big problems with traffic.
Waterfront locations can be splendid. However, Florida-based Scott Wheeler of LoKation Real Estate, has some interesting things to say about building in this type of location. “At the recent height of the market, people were spending as much as $2M to buy smaller 2-3 BR homes originally built in the 1960’s in this neighborhood to use as lots of land to construct new homes,” he says. “In this community of deepwater homes with ocean access, there is very limited raw waterfront land to purchase, so people buy older homes and tear them down for new construction. Prior to building a new larger home on a waterfront lot of land, one must have geotechnical soils engineering testing performed. That analysis will help engineers determine whether (and/or how many) pilings will need to be inserted in the ground to properly support the weight and structure of the new home to be built on that plot of land.”
Assess your finances and make your budget
Start making your budget and decide how much financing you need to secure. It can be a good idea to get pre-qualified for a loan before you enter any land purchasing process, then you can budget for that amount. Banks, credit unions and other lenders may be able to provide a loan — some special schemes exist for land purchases, so find out if you qualify.
Construction and labor expenditures can be estimated by asking local builders for quotes. Costs have certainly been rising recently and, given the time it can take to make a raw plot of land habitable, this can mean going way over original estimates, so don’t budget too optimistically.
Be aware of all the other expenses involved. You may be asked to give ‘token money’ to the seller at some time, which you would forfeit if you decided not to go through with the deal.
One expense you might not mind paying is for a nearby self storage unit where you can keep all your tools and equipment safely while construction is underway — the service is generally inexpensive. Check your local market as prices differ based on location, as you can see from the average prices in these big cities:
New York City Self Storage — Avg. $251/mo.
Boston Self Storage — Avg. $193/mo.
Atlanta Self Storage — Avg. $148/mo.
Los Angeles Self Storage — Avg. $264/mo.
Houston Self Storage — Avg. $100/mo.
Chicago Self Storage — Avg. $135/mo.
Don’t forget that you will have to pay certain taxes if you do purchase the land.
Due to financial factors both seen and unanticipated, it can be a good idea to have a more economical backup plan in place, involving a cheaper or less complicated plot of land.
Finally, be aware that you will be tying up money in something quite long-term — land is a rather ‘illiquid’ asset as it is complicated to sell and so cannot be turned quickly into cash.
Assemble your team of professionals
A real estate agent who specializes in land sales — which are more complicated than simple house sales — will help get you through all the purchasing process.
If you want to try to change your land’s zoning, an attorney could help guide you through this process, and other tasks as well. Your real estate agent will be able to recommend one for you.
To get a team of builders ready to do the construction work at a price you can trust, ask around for recommendations. Local builders generally know about municipal requirements and have knowledge of soil characteristics in the area. They will also probably have a licensed surveyor onboard who can do that important work for you.
Not least, an architect would help a great deal for presenting your building plans as successfully as possible. “I would strongly suggest hiring a 3D architect and putting together a model of what your house will look like on the property,” concludes our correspondent at Kris Lindahl Real Estate. “This will give you a picture of what it will all look like in the end.”
Surveying and evaluating the land
Once you have found a piece of land that may be a candidate for building your home on, it is time to survey it and check everything to be sure it is going to be suitable.
Leading-up to a purchase, Derek Bauer suggests buyers should be extra careful with their research and take all the necessary steps, including “securing vacant land disclosures from the seller and ideally a survey, any soil evaluation and/or percolation test results if applicable, and a negotiated due diligence period to get additional insight.”
Derek Bauer encountered several situations when prospecting was crucial in avoiding going over-budget with unexpected expenses. “For a prospective purchase, we identified that due to the soil conditions, topography, and the type of home that was desired, additional structural support work in the $45,000 range was going to be necessary. Sometimes a zoning variance may be needed in order for the desired structure(s) to comply and thus municipality approval would be necessary. This could possibly be accounted for in the contractual due diligence period.”
Establish a period of due diligence
While the paperwork is being done, a period of due diligence can be established so that you don’t feel pressured to close the deal before all issues have been resolved. Your real estate agent can help negotiate this, and Derek Bauer explains what tasks might be including in this process.
“A due diligence period for a buyer would ideally include but not be limited to (in no particular order): soil condition and percolation testing (if a septic field installation is required); if a well is present, lab results to determine the quality of the water; zoning and use options and requirements; any easements and/or encroachments present; any right of ways present …; setback requirements to determine possible building envelopes; site evaluation for hazardous waste (if applicable or desired); deed restrictions that may apply to the use and/or development of the land; any restrictions regarding if anyone can develop/build on it or if only a particular builder can; and county drainage requirements that may be mandated as part of development.”
Parts of a plot designated for construction will obviously need to be cleared of trees, bushes and other greenery. Trees can be expensive to remove — however, there is just a chance the timber might be worth something, so check out what species they are!
Getting all the paperwork in order
An experienced real estate agent will be able to inform you about all the items of paperwork you need and help you get them, potentially saving you time and money.
It is ideal to know exactly what approvals and permits for building will be necessary before purchasing land. To try to make any zoning changes, get your attorney to arrange having your plans presented on a meeting agenda with your local authorities.
Be aware that some approvals and permits take forms you might not be expecting. For example, “you might require approval to connect to the sewer,” says Georgia-based Bruce Ailion of RE/MAX Town & Country. “Sometimes municipalities have building moratoriums or excessively high fees to tap into the sewer due to limited sewer capacity.”
“Once you own the land, if you want to build on it you generally need plans in place filed with the city or town you are looking to build in,” Brett Rosenthal of the Revolve Philly Group at Compass in Philadelphia, PA, tells us. Your team of experts may have now got you to a place where you have closed a deal on a suitable plot of land and can start building.
There are clearly many steps involved in making a land-buying decision that you will not regret. It is vitally important to get the right plot and to know how to prepare it for building. Fortunately, there are professionals out there who can guide you through the process.