Finding your dream home isn’t easy. You’ll spend a lot of time to scouring online listings, attending open houses and scoping out neighborhoods – and you may still come up empty-handed.
Maybe your dream home just doesn’t exist yet. In this case, building a home on a vacant piece of land may be the perfect option.
But before you get serious about laying a foundation, be aware that a land purchase may yield more surprises than buying a home – from easements and zoning restrictions to environmental conditions that could easily turn your dream build into a headache the size of a McMansion.
Whether you’re buying vacant land to build a home for your family or you hope to sell the plot for a profit in the future, follow these rules to avoid buyer’s remorse.
[See: 10 Tips to Sell Your Home Fast.]
Do work with a pro who knows land. Working with a real estate agent when you purchase a home is important to help you navigate the finer details, especially when you’re unfamiliar with negotiations, due diligence and closing the deal. But when you’re purchasing land, hire an agent who has extensive experience negotiating land deals.
A common mistake many land sellers and real estate agents make is to advertise a plot of land as having the potential to be subdivided, says Neville Graham, a Realtor specializing in land sales and associate partner for Partners Trust in Beverly Hills, California. Buyers may be left with a plot of land that will yield less profit than expected, while sellers could easily face a lawsuit for false advertising.
Don’t expect to get a loan. A land purchase can’t be leveraged with a bank the same way a home purchase can, so you’ll likely have to pay cash if there’s no structure on the property yet.
An investor purchasing an apartment building, for example, “might be able to put down 20 percent and get 80 percent from a bank, putting up the land and the building for a mortgage,” says Larry Link, principal broker and president of Level Group in New York City. “But if you have a piece of land, you might be lucky if [a lender] gives you 40 percent or 50 percent of the value – and that’s typically if you have a good bank relationship or other collateral. You’re more likely to get zero.”
You’ll have a much better chance of being approved for a construction loan on the building you want to put on the land, since the house you’ll build serves as collateral on the loan.
Do consider the value of homes in the neighborhood. One of the biggest draws of building your home is the ability to customize it, but be sure you’re building your dream home in a neighborhood with similar taste.
Graham recalls working with a client who purchased land and designed a home only to be turned down for a construction loan because the cost of the land combined with the cost to build was about $2.2 million, significantly more than home values in the neighborhood, which were closer to $1.5 million.
“If it’s overpriced, then you’re not getting your [construction] loan,” Graham says.
Don’t skip the survey or environmental tests. Similar to a home inspection and background research on a house, a plot of land needs to be subjected to tests and checks to ensure you know what you’re buying and that you’ll be able to build on it.
Environmental tests check the soil for contamination from previous use. The site of a former gas station or auto body shop is more likely to have contaminated soil, for example, and residential homes can’t be built there. The land’s potential for flooding or poor soil conditions for building are also of concern.
You’ll also want to have a surveyor take a look at your property to identify the boundaries. Especially if the land is in a neighborhood and has been vacant for years, neighbors may have encroached beyond the property lines, intentionally or not.
“You may be shocked that part of the garden and part of the birdbath that these people [next door] have been attending to for the last eight years is on your property,” Graham says.
Do take utilities and road access into account. It’s easy to take access to running water, electricity and sewers for granted when you’re buying an existing house, but with vacant land these are not always a given.
“Depending on how developed the area is around the land, you want to know if it’s going to cost money for infrastructure to be run to that land or if it’s already serviced,” says Michelle Farber Ross, real estate broker and managing partner of MMD Realty in Fort Lauderdale, Florida.
Don’t talk to the neighbors. While speaking to neighbors when you’re looking at a house may be a great idea to get a feel for the area, discussing your plans to build on a vacant lot with can easily lead to organized opposition to your future dream home.
Graham says it’s common for neighbors who are used to having raw land near their home to get upset when the status quo is about change and seek to keep you from building. “All they’re doing is gathering information to use against you,” he says.
Hold off on making friends with the neighbors until any home is built and you’re moved in. Otherwise, discussing plans could lead to a neighbor dispute before you’ve even broken ground.
[See: 8 Types of Roads That Can Have a Big Impact on Home Sales.]
Don’t assume you can have property rezoned. Your local governing body will have zones, codes and ordinances that limit what can be built on any property or require certain steps to build a sound structure.
For example, there may be required setbacks from the edge of the property, mandates to build a sea wall if you’re on the waterfront, or a percentage of the land may be restricted from development. Getting an exception to the rule isn’t easy, and there’s a good chance it will be denied, Link says.
Rather than trying to rezone property, it’s best to keep your vision within existing limits. Seek land that will allow you to build the home you want, but know your plot’s restrictions before finalizing the plans.
“You can start with a conceptual idea of what you want to build with your architect, but to get real specific you’d almost need to identify what piece of land it is,” Farber Ross says.
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