How to Buy Land to Build a Home

Building a home involves a series of decisions. The first is where to build—and that means you’ll need to purchase a plot of land.

There’s something thrilling about the idea of buying your own piece of raw, untouched real estate on which you can build your dream home from the ground up.

But picking a suitable parcel can prove a bit more complex than you’d think—which is why we’ll cover everything you need to know about buying land. Here’s what the experts have to say about where to find land, how much land costs, and ways to pay for it—plus questions to ask to ensure you pick the perfect plot.

Where to find land for sale

Most real estate websites will list land for sale, and sites such as realtor.com® allow you to filter for this specifically.

The best real estate sites allow you to filter for land sales.

(realtor.com)

But even once you’ve found a piece of property you adore, that’s just the beginning. After all, even though the lot may be your desired acreage and seem like a good investment, if it doesn’t meet the specifications for your intended real estate use, you’ll find yourself with a costly but worthless hunk of earth.

Land listings specify the number of acres, price per acre, and a few characteristics about the plot and its location. Listings also usually include details about whether you can build a home on the land. Still, it’s a good idea to work with a real estate agent who’s experienced in land deals, says Jason Gelios, real estate agent with Community Choice Realty in Detroit.

For one, real estate agents can help negotiate a fair price for the land. They’ll also help you check local zoning ordinances and possible building restrictions. In addition to consulting your agent, Gelios suggests calling your local municipality to find out what you can build on the parcel, and also find out if the property has access to utilities, including electricity, water, and cellular and Wi-Fi access.

“I always advise clients to make sure that a piece of land has a viable access point to utilities,” Gelios adds. “It would be a horrendous issue if this was learned after the purchase, because it could mean that the buyer would have to spend an enormous amount of extra money to provide access to such utilities.”

Other things to find out about the land:

• Street access: Unless you plan on parking your car on the side of the road and hoofing it to your home, your real estate property must be accessible from a street or road. If the parcel is landlocked, you will need to get an easement across a neighboring property, which means you get permission to pass through the neighbor’s land to get to yours.
• Setbacks: This refers to how far from a property line a structure must be situated on the vacant land. If you have 20-foot structure setbacks from either side, but your lot is only 50 feet wide, that means your home can be no greater than 10 feet wide. Odds are that won’t work.
• View ordinances: Some local-view ordinances may place restrictions on your ability to add a second story to your house. A restriction on the type of home you can build could affect your chance to sell it later and cost you money.

Neglect to check these things before buying land, and you might find you’re not able to build there at all.

How much does land cost?

According to the U.S. Department of Agriculture’s Land Values Summary, an acre of land costs $3,100 on average. But exactly how much you’ll pay for land varies by location, how much it’s been developed already, and a number of other factors.

Keep in mind that, along with the price of the actual land, there will be land development costs, too.

According to HomeAdvisor, the cost to clear land and prepare it to build a home is between $1,281 and $4,705. Developing lightly wooded areas could run $500 to $2,000 per acre, and up to $5,600 for heavily wooded areas. Costs depend on the land topography, how easily crews can get to it, and how much debris there is to remove.

If you have to connect to utilities, wells, or septic systems, the cost could go up $20,000 or more, Gelios says.

“A builder can work with you to estimate how much a project will cost,” says Cyrus Karl, a real estate agent with Coldwell Banker in Newton, MA, and real estate blogger at Pyvt.com. “For example, if one home had underground bedrock, that may mean that many lots in that home’s same neighborhood need costly site work and grading to remove ledge rock. A competent builder should know the problem building areas of a city or town.”

How to finance a land purchase

Financing a parcel of land can be tricky, since it differs from financing a home. Not all lenders offer loans for land, and the type of loan you’ll need depends on whether or not you’ve drawn up plans for the home, says Denny Ceizyk, a mortgage industry expert and senior staff writer of mortgages at LendingTree.

“If you already have the plans and specifications and a contractor picked out to build a home, it makes more sense to apply for construction financing to roll the cost of the land into a mortgage to build the home,” he says. “Or you can get a land loan, and then pay it off when you take out construction financing to build the home.”

There are a few types of land loans.

• Raw land loan: This is for parcels that are completely undeveloped. You’ll need to provide a detailed plan for how you’re going to develop it.
• Unimproved land loan: This is for land that has been partly developed.
• Improved land loan: This is for areas that have been mostly developed and may have access to utilities and roads.

The basic qualifying criteria, including income and credit score, are all the same for land loans, Ceizyk says. “However, [lenders] also scrutinize whether the land is improved or not.

“Improved land typically is ready to build on—with utility, water, and sewage access ready to connect to a home, and graded and prepped to support a residential home,” he explains.

Because lenders see land loans as riskier, they often require higher down payments and offer higher interest rates. Down payments are typically around 20% for land loans, and interest rates may be up to 3% higher than traditional mortgage rates, Ceizyk says.

Failing to budget for the down payment and higher interest rates is a common mistake people make when buying land, Gelios says. “This will lead to a higher monthly payment right out of the gate.”

Construction loan financing with better rates may be available if you already have plans for your home and are ready to break ground.

Whom to consult before buying land

Before purchasing any real estate, it’s a good idea to talk to an expert, like a builder, land surveyor, or real estate agent to help you evaluate whether your investment is a good idea. They can help you figure out whether a certain lot is ripe for building a home on, and how much it will cost.

“I always advise any client looking to have a home built on land to always consult with a suitable builder,” Gelios says. “Information before you take the leap is crucial to the success of purchasing land and building on it.”

Consider hiring an attorney, too, who understands local building laws and zoning ordinances, Karl suggests.

“Building a home requires sign-offs from many city or town departments, and you want to make sure your plan follows the legal process,” Karl says. “If not, you could get hung up on costly delays, or your project may be blocked indefinitely.”