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Buying Land
There is something appealing in the idea of buying an open plot of land, a place untouched by development and open to a world of possibilities. One might think that buying land is a simple process, but it can be complicated and in many ways is more difficult than buying an existing building or business. Despite these challenges, many people decide that vacant land is the right real estate investment for them.
Location
One of the most important factors to consider when buying vacant land is location.
- Land that is near shopping centers, office parks and other community features will be higher in price but are much more likely to increase in value.
- When looking at land in an undeveloped or underdeveloped area, it's important to investigate the future of the area as well. Local land-use plans should be available at city hall or from the county. Land that is in the path of development will appreciate considerably as the infrastructure nears. Researching upcoming development can alert you to any potentially objectionable future neighbors such as refuse transfer stations or noisy industrial operations.
- The proximity of the land for sale to developed areas can affect building costs, as some contractors will charge extra for jobs on remote work sites.
Things to consider
Zoning!
Zoning is the single most important consideration when looking to purchase vacant land. Simply put, how a parcel of land is zoned will determine what, if anything, you will be able to build there in the future.
Zoning regulations are often complex and highly specific, even in rural areas. They may deal with issues that are large (maximum size of buildings allowed on a lot) or small (the maximum slope allowed for a parking lot). Violation of zoning rules can result in hefty fines and corrective costs.
Zoning regulations vary greatly from county to county and city to city, so carefully study the local zoning rules that apply to any prospective land purchase.
Utilities
If the property doesn't have hookups for water, sewer, electricity and/or telephone, check with the county or municipality regarding plans to extend access and the estimated time frame. The value of a property with access to sewer is always greater than the value of land without access to sewer. The availability of utilities greatly affects a property’s value so this must be investigated before you purchase.
Septic tanks & wells
If sewer utilities are not available, you will need to have soil tests to see if the land can support a septic system. If water utilities aren't available, you'll need to see if a well is possible and if so how deep the well must be dug. Digging wells can become expensive, and installing septic systems can range from $5,000 to $50,000 depending on local labor rates and material costs.
Soil quality
Additional soil borings may be necessary to determine how far down builders would need to dig in order to excavate for the buildings foundation requirements. Even if you don’t plan to grow crops on the land the soil quality is critical to support building, utilities, etc.
Topography
The grade and slope of the land will determine how much you can build and the costs you will incur. Steep or rolling land requires careful water drainage management. Forested areas may require extensive tree removal prior to any construction.
Road Access
If the land isn't accessible by a public road, there should be a right-of-way that gives you the right to access the land. You may be required to share the costs of road construction and road maintenance.
Future construction budget
Most buyers of vacant land purchase the property with the intent of building at a later date. When doing so, it's important to factor in realistic future construction costs to help determine the true value of that land deal. Some buyers may have the tendency to get caught up in the excitement of a promising property, and in the process ignore the possible fiscal challenges.
Finding Financing
While the mortgage industry today has focused on making it easier for housing buyers to obtain financing, land loans are more difficult. Most lenders view raw land as riskier in comparison to purchases of existing improved property. You can expect to obtain financing for your land purchase but you should also expect it to require more documentation and expense.
Story loans
Land loans are often referred to as "story loans", meaning that you will have to tell lenders the story behind the property and your plans for the property in the future. Getting the lender to buy into your vision is essential.
Risks for lenders
Why are land loans considered riskier for lenders than home loans? Primarily because the loan's collateral (the property) is not in current use, making it easier for the owner to walk away. Land value can also be harder to accurately assess.
The bottom line
Because of the risks, down payments and interest rates are generally higher for land loans than they are for residential loans. Using a local community bank whose loan officers are familiar with the area may lessen some of these increases.
Other factors
Unimproved, raw land is the hardest type of land to finance because it is essentially a speculative investment. Some lenders will require a 50 percent down payment for a raw land loan, although loans with 20 percent down payments are not uncommon.
Loans for improved land (land with utilities, sewers, street access, etc.) will have a lower down payment and interest. Buying improved land with immediate plans for construction is the easiest way to secure a land loan, because the lender will be paid off when you take out a mortgage on the structure. Land loans generally mature in 10-15 years.
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