Buying a lot is as much an act of reason as it is of faith. After all, the process of turning that vacant land into something better is a massive undertaking that can take many years, depending on what you’ve got in mind and where the vacant lot or property is located. There are a number of things to consider throughout the process, and, if it’s your very first land purchase, securing financing may be of particular concern.
So what do you need to know to make a lot purchase? Turns out, a lot.
Your land pre-offer checklist
Buying land, just like buying any other real estate, is a process that happens in phases. When it comes to land, though, it’s extra important that you do some pre-offer legwork to ensure that your land purchase will allow you to achieve your ultimate goal, whether that’s building a single-family home, constructing a mega mall, or installing a complicated Planned Urban Development (PUD).
Before you even make an initial inquiry on any piece of land, ensure that it’s suitable for your project, with particular attention to items like these.
- Zoning regulations. Is the property zoned correctly for what you’d like to see done with it? It can be very difficult to change the zoning of a property, especially in a municipality that prefers contiguous zoning. Don’t count on a variance, no matter how much the listing agent may “guarantee” one. Zoning laws are hard to fight, like city hall.
- Access. Does the property have access that will meet the needs of the traffic you’re anticipating once the project is complete? Although road access permits are far easier to secure than spot zoning permits, they are still never guaranteed. A city may refuse to allow additional entrances onto a busy road, creating bottlenecks and other traffic nightmares for commercial developers within a property.
- Deed restrictions. There are properties that have restrictions on their deed, meaning those restrictions are conveyed along with the land and are theoretically unseverable. For example, in the Bible Belt, it’s not uncommon to see properties that are absolutely not allowed to be used for businesses that sell alcohol. If you were going to open a nightclub there, or even a strip mall (where a packaged liquor store could be housed), you need to seriously consider whether or not your future venture will continue to follow that restriction for its lifetime. Like anything else, it’s possible to change these restrictions with enough time and money, but you’re almost certainly better off to just find a piece of land that’s more suitable.
Making an offer on raw land
Before you make an offer on any kind of empty land, find a real estate agent with experience in this area of real estate. Unimproved land is a specialty of its own, with a variety of unique inspections and verifications that should be completed before you put your hard-earned money into it. In some cases, a lot line in the wrong place or a skipped test can spell the difference between that building lot being an income-generating one and an income-losing one.
The following checks will protect your interests. While potentially costly, they're bargains when issues are uncovered and tragedy avoided.
- Surveys. A land surveyor may be your absolute best friend when it comes to purchasing land. Not only will they mark the definitive boundaries of the property, which is helpful in knowing if your planned project will actually fit as you had envisioned it, but they can also determine if a neighbor is encroaching on your property-to-be.
For land investors, the last thing you want is to lose land to accidental adverse possession that started a generation ago. Land surveys ensure that you know exactly what you’re buying and where the boundaries are. If you’re going to get a construction loan later, you’ll almost certainly need one anyway.
- Environmental testing. Depending on the history of the property, testing for soil contamination may be another item your lender will require before green-lighting your project, so it has a great deal of value beyond the obvious. In many communities, known environmental hazards are hidden in plain sight, and yours may be the same.
If the property was ever used as a gas station, for example, or involved in heavy manufacturing, dangerous pollutants may be present that will require costly clean-up before you can move forward. However, even retired farms and residential properties can have a history of significant improper chemical disposal that renders the site too dangerous to work with as-is.
Securing a land loan
A raw land loan can be very difficult to secure, especially if you don’t have a history of investment projects that a bank can look at to determine how much actual risk your purchase poses. Because undeveloped land can be difficult to resell, should you default on the payments, many banks will require as much as a 50% down payment before they consider loaning on land alone.
However, if the ultimate goal is new construction, rather than something like subdivision and resale, you may be able to secure a construction loan for the project that will essentially include the cost of the lot. The current property owner typically needs to be involved to essentially give you the use of the equity in their property (called land subordination) until it becomes yours. Your mortgage lender can walk you through the process, should this be an option in your particular circumstances.