How to Buy a Lot for Building

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parts

1Researching Lots

2Obtaining Financing

3Closing on the Sale

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If your dream is to build a home from scratch, then you’ll need to find a lot. Although land is plentiful in many areas, you should thoroughly investigate the lot before tendering an offer. A good real estate agent is a significant plus, so find a real estate broker in the area where you are searching for a lot.

Steps

Part 1

Part 1 of 3:

Researching Lots

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   Find available lots. You might already know which parcel you want to buy. However, if you don’t know yet, you should narrow down where you want to build. You can find parcels in the following ways:

   • Look online. Search websites such as Zillow for vacant lots.
   • Drive around and search for lots. Some vacant lots might not be advertised. You can find the name of the owner in the county land records office.
   • Search the newspaper. Lots for sale are often advertised in the local paper.
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   Work with a real estate broker. A broker will know which lots are for sale and can help guide you through the process of buying one. Find a broker in your phone book or by searching online. Set up a meeting and discuss where you want to buy. Your broker should have experience negotiating land deals.
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3. 
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   Check whether zoning laws allow construction. You might have found the perfect piece of property, but zoning laws might not allow you to build there. You should thoroughly research what kinds of buildings can be constructed, if any. Stop into the local zoning office and check.

   • For example, some areas might be zoned for agricultural, commercial, or industrial use only.
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   Ask about setbacks. A setback is how far from the property line your building must be located. For example, a parcel might be only 20 feet (6.1 m) wide but have five-foot setbacks on each side. These setbacks will limit the amount of space you can build on.

   • You can find information about setbacks from the local zoning and planning office. Stop into the office and ask.
   • If you are buying a lot near waterfront, there are probably restrictions requiring you to build a certain distance from the shore. Check those as well.
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   Check how accessible the property is. You need your lot to be accessible from the road, otherwise you’ll need to travel over other people’s property to access it. If there’s no access, then the land has little value.

   • If you’re landlocked, you might have an easement, which is a right to use a neighbor’s property to access your home. You can check the deed at the Recorder of Deeds office. Easements should be located on them.
   • Otherwise, you need to consider how realistic it is to create a driveway into the property.
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   Confirm the land has utilities available. Your building will need certain utilities. For example, if you aren’t hooked up to the public sewer system, then you’ll need a septic tank. Septic tanks take up quite a bit of space, so make sure there is enough room on the land.

   • You’ll also need running water. It’s expensive to dig a well if public water isn’t available, so calculate that cost if necessary.
   • Check whether or not electricity can reach your home easily.
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   Analyze the desirability of the neighborhood. If you’re building a home, assess your neighbors just as you would if you were buying a house. Are homes well-kept? Does the neighborhood look to be up-and-coming? Talk to a real estate broker if you don’t know.

   • If you’re constructing a commercial building, analyze how compatible your neighbors are. For example, you might be building a movie theater. Look for complementary business, such as restaurants or bars.
   • If you want to build a commercial shopping center, then it should be close to public transportation.
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Part 2

Part 2 of 3:

Obtaining Financing

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   Identify the type of loan you want. You typically have three choices. Spend some time identifying which one you want before you approach lenders:

   • Land or lot loan. This loan lets you buy the land, but it won’t fund the construction of a building. This is an ideal loan if you are willing to wait a while before building.
   • Construction loan. This loan is a short-term loan, usually lasting only one year. It is ideal if you have found a builder and have your house plans finished. Typically, you get a conventional mortgage and make a balloon payment to pay off the construction loan.
   • Construction-to-permanent loans. This loan covers the cost of building a home and then converts into a regular mortgage after construction is completed. This is probably the most convenient option for someone who isn’t experienced in this area. However, you might end up paying a higher interest rate than with a construction loan.
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   Find lenders. Contact any bank you have done business with and discuss how much you want to borrow. It can be very difficult to find financing if there isn’t a building already on the land. However, you might need to shop around. Visit multiple banks and credit unions.

   • Also research online lenders. The online lending market has exploded recently, and you might be able to find financing from an online lender. Make sure the online lender has a good reputation by looking them up at the Better Business Bureau website. Also check with your state’s Attorney General’s office.
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   Look into government loans. Depending on where you live, the government might make loans to incentivize people buying land. Many cities have created programs to get people to buy abandoned lots.

   • In the U.S., you should check Section 502 loans. These loans are available to low-income people living in rural areas. Check income eligibility requirements at https://www.rd.usda.gov/files/RD-DirectLimitMap.pdf. You can apply at your local Rural Development office, or by working with a lender who deals in USDA loans.
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   Compare loan offers. Because the lot is undeveloped, your loan will probably have a higher interest rate than what you could get for a regular home mortgage. Nevertheless, you should compare offers from multiple lenders so that you find the one that offers the best terms.

   • Compare interest rate, as well as the length of the loan and any prepayment penalties.
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   Clean up your credit. Your credit should be as good as possible before applying for a loan, so pull a copy of your credit report. In the U.S., you can get one free report each year by visiting annualcreditreport.com. This website will provide you with one free copy from each of the three credit reporting agencies.

   • Look for errors in the report. Common errors include the wrong balance or accounts inaccurately listed as in default. Dispute any errors with the credit reporting agency that has the inaccurate information.
6. 6
   Save a large down payment. Instead of the usual 20% down payment required for a mortgage, you might need to save up to 50%. You should check your finances to see if you have that amount of money.

   • It’s much easier to walk away from an empty lot than it is when there is a building on it. For this reason, lenders want greater protection in the form of a larger down payment.
     
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Part 3

Part 3 of 3:

Closing on the Sale

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   Negotiate a purchase price. Don’t be afraid to bargain with the seller. You might want to start with a low bid based on your real estate agent’s analysis of how much comparable properties have sold for. You should also check with the local tax assessor’s office to find the appraised value of the lot.

   • Your broker can tender your offer to the seller. If your offer is lower than the asking price, you might want to explain how you arrived at your bid.
   • Expect the seller to make a counteroffer. If the seller won’t come down to your price, ask for concessions. For example, ask the seller to cover some of the closing costs.
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   Sign a purchase and sale agreement. You should have your real estate broker or a lawyer help you draft this agreement to protect your rights. For example, you’ll need to include “contingencies.” Approved contingencies are conditions or events in the contract that must be waived and cleared for the transaction to be completed.

   • For example, you will probably include a contingency that you receive a clear title report and a contingency that you receive financing. If neither contingency is met, then you can proceed into further negotiations or you may be able to terminate the contract, depending on its terms.
   • Typically, the seller should pay the broker fee for this service. However, you should always establish who covers what fees and how payment should be made prior to having your broker provide a service.
   • You can draft a purchase and sale agreement on your own using publicly available forms. However, you should still consult with a broker or lawyer to review it in case you overlooked something.
3. 
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   Hire a land planner. Land planners are like home inspectors for raw land. They will check the soil type, slope, water table, and vegetation to make sure you can build on the land. In some situations, a parcel will be unable to build, and you want to know this ahead of time.

   • You can find a planner by asking your broker for a referral or visiting the planning.org website.
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   Have a survey completed. The survey will outline the legal boundaries of the lot and show the lot’s elevation points. You definitely want it done before going ahead with your purchase. Surveys cost between $200-1000, depending on the size of the property.

   • Ask your broker to recommend a surveyor or check the directory of the National Society of Professional Surveyors.
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   Have a title report run. The title report will confirm that the seller owns the land and can transfer it to you. You should talk to your seller about buying title insurance, which protects you in case there is a problem with the title that you discover later. Your seller or closing agent will typically obtain title insurance for you, and the fees are rolled into your closing costs.

   • If no extended title insurance is purchased and a survey has not been completed prior to closing, you will have no protection over boundary disputes.
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   Attend your closing. If your due diligence doesn’t reveal any problems, you can go ahead with the closing. The closing process will vary depending on where you live. However, you can expect to review and sign multiple documents with an escrow officer or an associate broker.

   • Your real estate broker or attorney should attend with you. They can review the documents and make sure there are no surprises.
   • You’ll need to pay your closing costs and any required down payment at the closing. Make sure you have a cashier’s check for payment. You might also be able to wire the money.
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