How to Buy Residential Lots and Land

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Before you build a home, you need to buy a residential lot or land acreage to build on. Remember the adage of real estate when choosing the lot for your home: "Location, location, location." We've put together a list of essential things to consider before you buy a lot.

Key Takeaways

  • If you plan to build a home, you will need to buy residential land, which requires different considerations from when you are simply purchasing a home.
  • Unlike an established home, land may not have pre-existing water, sewer, electric, or phone services already set up.
  • Other key considerations include public road access, deed restrictions, environmental hazards, boundary surveys, and financing your loan.
  • Be sure you work with an agent who is experienced in dealing with residential land.

Service Considerations

Buying a vacant lot or land brings opportunities, but it also brings headaches and challenges that you don't experience when you buy an established home. Here are things to consider when it comes to essential services:

  • Before you jump into buying land, find out whether city or community water and sewer connections are available on the lot or land.
  • If sewer hookups are not available, make your offer to buy land contingent on the ability to install a septic system rated for the number of bedrooms you require.
  • Find out whether other home-buying contract contingencies are advisable for land purchases. For instance, in some areas, water rights do not convey with land, which means that you might not be able to dig a well.
  • Make sure that electricity and phone service are available at the property. Look into cable service if that is a priority.

Access and Building Considerations

Once you know that you can obtain essential services, you might be ready to build. Before you start, there are a few considerations when it comes to land access and zoning.

If the land you wish to buy is not accessible by a public road, verify that a road-maintenance agreement is in place. This document states that everyone on the road agrees to help with its upkeep. There should be a deeded right-of-way in place for land not accessible by a public road. The deed should give you and future owners the legal right to access the land, known as an "easement." Study the deed to discover whether other persons or tracts of land have been granted easements to use your land in any way.

Be sure to check the property's deed restrictions to make sure the type of residence you plan to build is allowed. For instance, some areas do not allow manufactured housing. If the lot is in a planned development, ask for a copy of the restrictive covenants. That's where you'll find restrictions for maximum house size, whether additional structures are allowed, and other limitations. You should ask the city or county whether zoning changes are anticipated for the area or whether there's a plan to build new roads or widen existing ones.

If there are environmental hazards on the land, such as old buried oil or gas tanks, decide whether you are willing to remove them or whether you will ask the seller to take care of removal and cleanup.

Decide whether you want a new boundary survey. Surveys are standard in some areas but rarely required in others. They're nearly always a good idea.

Don't be turned off by the terms "development" and "subdivision." If you're from a city, you might associate both words with small lots and side-by-side homes, but in rural areas, a subdivision lot might be 10-plus acres in size.

Financing a Land Purchase

Not everyone has the cash on hand to buy land outright. If you do not, then you will need to find financing. One option is a land loan, for which the land serves as collateral. If something goes wrong, the lender can seize and sell the land and recover most of their investment.

Empty land is risky for lenders, though. After all, if money becomes tight, you're more likely to pay for your current home and other immediate expenses than an empty lot. To minimize risk, lenders may require a shorter loan term, a higher down payment (20% or more), and a good-to-excellent credit score.

You can finance land in other ways. For example, you can apply for an unsecured personal loan, but those tend to come with higher interest rates and shorter terms. You also could apply for a home equity loan or line of credit, each of which uses your home as collateral. The downside with those is that if something goes wrong, your home could be put at risk.

Selecting an Agent to Help You Buy a Residential Lot

It comes as a surprise to some home buyers that not every real estate agent is knowledgeable about buying a residential lot or land. Land is a specialty practice. Don't make the mistake of believing that any agent can help you buy land, just because they have a real estate license.

From filling out the purchase contract correctly, to negotiating specialty clauses, to finding a construction lender, an agent with a fair number of residential land closings under their belt will be an invaluable resource over your typical resale agent. You deserve a land specialist for this type of transaction.