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Ask Our Home Buying Expert

Have a question? Ask our Home Buying expert.

Have questions? Email Send your question to mlerner@smartasset.com

Buying Land? Here's What You Should Know

The dream home you and your family envision moving into might not exist. If that’s your dilemma, you have the option of having your house built from scratch. After you have an idea of what you want your new home to look like, you’ll need to work on securing the land that you want your house to stand on. Here’s what you need to know about buying land to build a house.

What to Do Before You Purchase Land

If you’ve decided to buy land, keep in mind that it’s not going to be a short-term project. Buying land is a major undertaking and to begin the process, you’ll need to figure out how much breathing room you’ll have in your budget for a new house.

Some of the costs you’ll have to account for include fees, permits, the cost of purchasing the land you need, the cost of building your house and the cost of having to make adjustments to the land in order to have access to running water and other utilities (if that’s not already in place for the land).

Before making such a big investment, you may want to consider consulting a financial advisor.  The SmartAdvisor matching tool can help you find a person to work with to meet your needs. First you’ll answer a series of questions about your situation and your goals. Then the program will narrow down your options to three fiduciaries who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.

Choosing the Right Land 

Buying Land? Here's What You Should Know

Once you have a budget in place, you can start your search for a plot of land. A quick internet search can show you where land is available in your region. A specialty magazine or publication might highlight select pieces of land for individuals interested in buying farm land or hunting land.

Confused about what to look for when buying land to build on? You’ll need to find an area where zoning laws won’t keep you from buying land for the investment property or home you want to build. Zoning rules set restrictions concerning things like the size of buildings and the kinds of businesses or residences that can be built.

It’s also a good idea to make sure that the land’s soil doesn’t prevent you from building, digging a well or getting electricity and natural gas. Will the land’s elevation be an obstacle? Are there any liens on the land or environmental problems that need solving? These are some examples of the types of questions you’ll need to answer before you can prepare to buy land.

While it’s possible to buy a house or a plot of land without the help of a real estate agent or broker, it can help to have someone on your side who specializes in working with vacant lots. A real estate professional can hold your hand through the entire process and help minimize hiccups. If you’re opposed to using an agent, it’s important to find a real estate attorney who can address your legal concerns.

One important step to take before finding a lender is to have the land surveyed by a professional. This involves hiring someone to look at how accessible the land is, figure out its dimensions and find out whether anyone already has the right to use the property.

Getting a Land Mortgage

Many folks pay cash for the land they want to buy, but that’s not something everyone can do. If you’ve found a piece of land but you don’t have enough savings to purchase it outright, you may need to look into getting a land loan.

The kind of land loan you’ll need will depend on the type of land you’re interested in buying. There’s financing available for raw land as well as improved land that someone has already begun to develop (by installing sewage lines, for example).

Raw land loans can be challenging to obtain. Trying to develop raw land can be expensive and difficult, so raw land loans are considered to be riskier than loans for improved land. You’ll often find these loans classified as commercial property loans. If you need one, you might have to make as much as a 50% down payment, although there are lenders who let buyers put just 20% down.

Anyone who needs a raw land mortgage should be prepared to pay a high interest rate as well. In addition to looking at your credit score and your financial background, your lender might want to see a detailed plan that explains what you intend to do with the land. Your chances of getting approved for an improved property loan are significantly higher, but you’ll still have to provide your lender with plenty of information to prove you can handle taking on more debt.

If you’re unable to obtain a land loan from a bank, credit union or another lender, you can see whether the owner of the land will offer you financial assistance. Or you can try to apply for a Section 502 direct loan. This subsidy is part of a program administered by the Department of Agriculture that gives low-income individuals the option of buying land in a rural area and using it to build a house.

A land loan isn’t the only form of financing you’ll need. Your builders will likely need construction loans in order to build your home.

Making an Offer on a Plot of Land

Buying Land? Here's What You Should Know

When you’re ready to purchase a piece of land, you’ll have to make the owner of the land a written offer. Much like you would if you were simply buying a house, you’ll approach the seller with the terms you’re willing to abide by along with all of the details related to the transaction.

After you make your initial offer, don’t forget that you can negotiate the land price down. It’s best to come prepared with research and data, though, to back up whatever price you’re willing to pay. You can even ask the seller to pay some of your closing costs and include contingencies such as a clause that states you can walk away from the deal if the land fails to pass inspection.

Completing Your Land Purchase Agreement

In order to claim a portion of land as your own, you’ll need to officially close on the land purchase. To do so, you’ll have to sign a land purchase agreement that specifies how much you’re paying for the land and how much money you’re putting down. The seller will have to sign the agreement as well.

The land contract you’ll sign will include everything that you and the seller agree to regarding the land purchase. Other documents you’ll have to review include state-based real estate forms, a closing statement that highlights all of the costs that stem from the sale and a deed that transfers the land’s title from the owner to you.

The Takeaway

Buying a piece of land isn’t easy. It’s important to do your due diligence and check with specialists and experts who can ensure you’re complying with local zoning guidelines and real estate laws. If you complete all of the necessary steps and make it to the closing table, you can buy the land you need for the home you’ve always wanted.

Photo credit: ©iStock.com/cirano83, ©iStock.com/stevanovicigor, ©iStock.com/sturti

Amanda Dixon Amanda Dixon is a personal finance writer and editor with an expertise in taxes and banking. She studied journalism and sociology at the University of Georgia. Her work has been featured in Business Insider, AOL, Bankrate, The Huffington Post, Fox Business News, Mashable and CBS News. Born and raised in metro Atlanta, Amanda currently lives in Brooklyn.
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