Buying Land to Build a House

Buying Land to Build a House

So many people imagine building their dream home in an ideal location. Finding that location and buying land to build a house is the first step in fulfilling this dream. 

Paying for this lot with cash is the ideal scenario but with lot prices climbing into the hundreds of thousands of dollars range, most buyers will need a loan to purchase a lot. 

The loan you use for buying land to build a house on is very different than the traditional home mortgage loan. Land loans differ because there are generally no improvements like a house on the property. On a traditional mortgage, the home is used to secure the loan. In a land scenario, there are no improvements to use in order to secure the loan. 

This makes the land loan a risky loan for the bank. Because of this, these loans have more stringent requirements than traditional mortgages. You’ll need more money down 20% to 30% depending on your credit score.

Yes, these loans can be difficult to obtain because of the requirements but at the end of the day, it’s worth the hassle because you’ll enjoy plenty of benefits when you do so. Before you even start thinking about them all, you need to do a lot of research. Don’t worry! We’ve done it for you!

Here’s everything you need to know about purchasing land before building your house.

Reasons to Look for Land to Build on

Privacy: Living in an urban or even a suburban neighborhood usually means a lack of privacy. You see and hear your neighbors constantly, and while they may be great people, you want your privacy.

When you buy land to build a house, you have the flexibility of choosing a place the lends itself to seclusion and privacy. Additionally, you have the option of situating your home on the lot in order to maximize your privacy. 

While custom home lots are more extensive than subdivided lots, they also tend to be much larger. This means you’ll have more space surrounding your home, hopefully giving you peace, privacy, and quiet.

Convenience: One of the advantages of buying land is choosing where you’re going to be. That means you can be closer to work, family, or whatever your lifestyle priorities are. 

If convenience is your priority, you may need to be flexible when it comes to designing and building your home. Since communities located close to amenities and other conveniences tend to have more restrictions than more rural communities, you may have to adhere to building restrictions and requirements. This may force you to compromise on the actual type and style of home you end up building.

Style: One of the biggest benefits of building your own home is that you get to choose the style of the home. If you want to build something truly unique, building your own home is the right decision. When you shop for your lot, it’s important that you do your homework in order to make sure you can build what you want. Many communities have architectural guidelines and restrictions that will dictate what you can and cannot build.

When you build your house, you are supposed to get everything that you want. Make sure you buy your lot in an area that has no restrictions or at least restrictions you can live with.

Flexibility: Tract or production builders do a great job of building an attractive product that appeals to a wide range of homebuyers. Unfortunately, not everyone has the same needs and wants. Have you always dreamt about a larger garage, a dedicated workshop, or a cottage? Since you’re in charge of designing the house, you can do it!. You can choose to be practical, extravagant, or something in-between. It’s up to you.

It’s important that you make sure you will have the ability to do the things you want when you choose your building site. You need to make sure the building envelope large enough to accommodate your plans. Also, check to make sure there are no environmental issues that would keep you from executing your plans. We often see large pieces of land that are either too steep or have unbuildable areas because of drainage or some other issue.

The time to find out about these types of conditions is before you close on your lot, not after.

How to Find Land to Build on

Realtor: Your Realtor is a great place to start when looking for land. Realtors often have access to pocket listings, these are lots that are not yet on the market but the owner might be looking to sell.

It’s important to note that realtors tend to specialize in different aspects of the market. A Realtor that specializes in luxury condos in an urban area is probably not a great resource for a custom home lot in a rural or suburban setting. Ask around in order to find realtors that specialize in the type of land you are looking for.

MLS: A Multiple Listing Service (or MLS) is like a realtor’s database, where multiple real estate agents offer both homes and land for sale to each other. Unlike the pocket listing, a property offered on the MLS is there because the owner wants to sell.

Your realtor can set up a search for you on the MLS system. This search will send you notifications when a listing that meets your criteria hits the market. One of the most valuable aspects of this type of search is that the agent can change the search criteria if you aren’t seeing the types of properties you are interested in.

Tax records: If you have a very specific area or neighborhood that you want to live in, this is a great way to search for a lot. Looking at the county tax assessor’s website to locate unimproved properties is how the professionals do it. Builders will often scour the tax records looking for unimproved land. The goal is to find a vacant lot that has been owned for a while, if the owner is out of the area, it’s even better.

Builders will reach out to the owners to see if they have any interest in selling the property. These lots are often owned free and clear, so the only expense to the owner is the property tax. These property owners often don’t even consider selling until someone asks.

This method requires a little detective work and a little bit of hustle but the results can be very rewarding.

Landwatch: Realtors, MLS, and tax records are old-school ways of looking for land. Nowadays, we can take advantage of the internet. And www.landwatch.com is the perfect place to look for land online.

On this website, you’ll find countless land listings from huge agricultural tracts to small parcels. These listings come with descriptions, pictures, pricing, and more. If you like what you see, you can contact the owner and buy it.

Subdivisions: The developers of large subdivisions tend to sell directly to home builders. This is a very efficient method for these developers because the builders buy in bulk and have the financing in place. It’s rare to find a subdivision that sells directly to homeowners, but they do exist. 

Subdivisions that sell directly to private individuals tend to be custom home subdivisions. If you are looking for this type of opportunity, you’ll need to stay on top of the market. Talk to builders and Realtors about where these subdivisions are. If you have already chosen your home builder, they can be a great asset in this search as well.

Important considerations

Rural or Suburban: You probably know the difference between a rural and a suburban setting. When you decide to buy land to build a house, this is a crucial factor.

View: Do you want a view? Or, perhaps, are you willing to sacrifice that in favor of other things? You have to figure out what you want – and to picture how things will look from your finished house, both in and out.

Exposure to the sun: Enough sun exposure will heat your house – but too much of it will overheat your place. In colder areas, too little or too much sun can be the difference between snow and ice on your driveway.

Utilities: Water, electricity, and gas are all a given for most people. Not for those who are building their own house, though. Does your lot have access to utilities? Are the utilities at the property line or will you need to bring them in? Do you have access to a municipal water system, or are you going to need a well? Are you able to tap into a sewer system or will your home need a dedicated septic system?

Access: Can you get to your future house from public-access roads? Sometimes, a plot of land is only accessible from other people’s property; if that’s the case, you need an easement to access your house through private land. That could turn into a legal hassle.

Zoning: Zoning laws and a major consideration when building and proper zoning could be the difference between building your dream house and having a plot of land you no longer want. You need to check and double-check your land’s zoning rules and regulations to make sure you can build what you want.

Survey: No matter if someone surveyed the land not too long ago, you need to survey the lot you want to buy. That’s the only way to know where you can build and where your property ends.

Soils and perc tests: Believe it or not, certain soils like clay and rock can be problematic for building houses. You need to perform a soil test before you build. Savvy buyers will do these tests as a part of the due diligence portion of the sales process. This way you don’t end up with a lot you can’t build on.

How to pay

Cash: Cash is king. Always was and always will be. And this is even truer when you’re buying land to build a house.

Sure, you can take a loan to buy land (although they are more expensive than your average mortgage), but if that’s the case, you’ll have to pay back the loan and invest in building your house at the same time.
On the other hand, if you buy the land using cash, you can then use your new property as equity to finance construction.

Land Loan: As we’ve discussed, land loans are different from mortgages. They have higher interest rates, are not that simple to obtain. These loans have much shorter terms and require a good credit score as well as a 20% to 30% downpayment.

Usually, land loan interest rates are much higher than the average mortgage interest rate. And you have to pay it back in 3 to 5 years; that’s almost ten times less than your average 30-year mortgage.

USDA: Not all land loans are equal, though. If you wish to buy land in a rural area, you might qualify for a loan from the U.S. Department of Agriculture (USDA) – and almost 97% of all Americans are eligible for it.
These loans have few requirements, don’t need a down payment, and feature a fixed interest rate.
The USDA loans are for people who want to build their primary residence, not for any other purpose. And you’ll have to meet specific criteria to ask for one.

Owner Carry: If you don’t have the cash right now and don’t qualify for any loan, it’s not over yet. You can arrange a loan-like scenario with the land’s owner.
Because financing a land purchase can be difficult, property sellers will agree to act as the bank and carry the loan for the sale. The buyer makes payments directly to the property owner. In these scenarios, the buyer will often be asked to make a balloon payment after a number of years. In most cases, the landowner is paid off once the purchaser obtains construction financing.

The relationship between lot cost and total building cost

One final thought when it comes to building your home and the purchase of the lot. Cost and value are two very important factors. It is important from an investment standpoint that you keep the relationship between lot cost and home value in the proper relationship.

The lot price is traditionally 25% of the total cost of the entire home building project. Failing to observe this metric can cause problems further down the road when it’s time to sell the home. After construction, the lot price becomes a part of the home price. If you pay too much for the lot, it increases the price per square foot of the home.

When it’s time to sell, your home is compared to other homes on the market. If your value is in the lot, it’s usually difficult to recover those costs when it’s time to sell.

The bank is also going to be concerned with this when it’s time to get your construction financing. There are requirements you’ll have to meet for this type of loan. Such as showing detailed specs, providing proof of income, and having a good credit score. They vary depending on the loan you’re after.

In Conclusion

Finding an ideal spot to build your dream home can be a difficult task but at the end of the day, it’s worth the journey. In a world where there are very few truly special homes, this is your opportunity to get exactly what you want and make it special. There is a special pride you see in people that have built their dream homes that you almost never see in those that settled for a tract home in a cookie-cutter subdivision.

So, if you are up for the task the rewards are worth it but make sure to use the advice of professionals and experts in the field. Mistakes in this type of project can have serious consequences.

Source: realtybiznews.com

Higher building material costs could push new home prices up

New home sales fell slightly at the end of 2020 due to higher prices offsetting the strong demand from buyers that was seen throughout the year, according to data from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau.

Although sales of new homes grew 1.6% in December, we saw much stronger sales growth in the preceding months, the National Association of Home Builders said in a blog post.

Throughout 2020, new home sales rose by 18.8% compared to the year before.

“While the market remains solid, median home prices are increasing due to higher building material costs, most notably softwood lumber, and a shift to larger homes,” said Robert Dietz, chief economist of the NAHB.

The NAHB reported that the median sales price of a new home in December was $355,900, compared to a median sales price of $329,500 in the same month one year ago.

Moreover, NAHB Chairman Chuck Fowke said that the affordability of new homes could be negatively impacted by increased regulatory burdens in 2021, as well as more increases in the cost of building materials.

In any case, reduced sales will at least have a positive impact on the available inventory of new homes, which currently stands at just 4.3 months supply at the current sales pace, down 19% from where it was a year ago.

Across the country, new-home sales saw the largest gains for all of 2020 in the Midwest, up 24.2%, followed by a 21.2% gain in the Northeast, an 18.9% increase in the West, and a 17.6% increase in the South.

Source: realtybiznews.com

Home builders are cashing in on rental demand

Building firms are constructing more single-family homes specifically for the rental market, and that means a growing proportion of new homes will never be listed for sale.

Experts say the rising number of build-to-rent homes could lead to greater competition for buyers who’re already struggling with low inventories, particularly in the entry-level price bracket.

The Wall Street Journal says that tens of thousands of build-to-rent homes are being funded by investors, who believe that rental demand will remain high in suburban locations as home prices keep on growing.

Since the start of the Covid-19 pandemic, landlords in many suburban areas have reported record occupancy rates, and rents are also on an upward trajectory, the Journal said. That has prompted an increase in build-to-rent projects across the U.S. Builders that specialize in build-to-rent homes, such as American Homes 4 Rent, which has already built more than 2,500 such properties and is currently building many more, have been drawn to the market.

Landlords say that renters are also willing to pay a premium to rent a brand new home, which creates even more incentive.

“Every institutional investor is considering this space,” Trevor Koskovich, who leads investment sales at NorthMarq, a property deal adviser, told The Wall Street Journal. NorthMarq is currently involved in several build-to-rent projects in the Phoenix area, including one with 943 one- and two-bedroom single-family houses.

Some traditional home builders are also partnering with investors to build rental homes. For example, Taylor Morrison Home Corp. has said that it believes around 5% of its new homes will be sold directly to investors for the rental market. Traditionally, the company has only sold around 1% of its new homes to investors, so the trend is clearly gathering pace. Another builder, LGI Homes Inc., told the Journal that build-to-rent homes accounted for around 10% of its sales in 2020, which is around 900 new homes.

Data from John Burns Real Estate Consulting shows that in the 12 month period ending Sept. 30, 2020, more than 50,000 new homes in the U.S. were built specifically for the rental market.

Source: realtybiznews.com

Existing home sales explode, up 27% from last year

Existing home sales have risen for the fifth consecutive month as the housing industry continues to show its resilience in the face of the COVID-19 pandemic.

The National Association of Realtors reported Thursday that homes sales are up an astonishing 27% from the same time one year ago. In addition, it was reported this week that single-family home construction rose by its fastest pace since spring 2007, as buyers increase their interest in newly built homes.

At the same time, buyers are having to deal with higher prices, and sales are happening very quickly. Median existing-home prices went up again last month and are now up almost 16% from the same time last year, to $313,000, the NAR said.

“Considering that we remain in a period of stubbornly high unemployment relative to pre-pandemic levels, the housing sector performed remarkably well this year,” said NAR Chief Economist Lawrence Yun.

Existing home sales refer to completed transactions that include single-family homes, townhomes, condos and co-ops, and hit a seasonally adjusted annual rate of 6.85 million in October, up 43% from September. Meanwhile, the inventory of homes listed for sale dropped again, and is now down almost 20% from what it was one year ago, at just 1.42 million. According to the NAR, that’s just a 2.5 month supply of homes at the current sales pace, a record low since it began recording such data.

Homes listed on the market are selling extremely quickly too, with 72% of homes that sold in October having been on the market for under a month.

“The surge in sales in recent months has now offset the spring market losses,” Yun said. “With news that a COVID-19 vaccine will soon be available, and with mortgage rates projected to hover around 3% in 2021, I expect the market’s growth to continue into 2021.”

Yun forecast that existing-home sales will increase by around 10% to 6 million in the next year.

Meanwhile, the Commerce Department said home builders are also enjoying the fruits of the pent up buyer demand. On Wednesday it reported that single-family construction had risen by 6.4% in October compared to September, to a seasonally adjusted annual rate of 1.18 million new homes, up 8.6% from a year ago.

The most single-family and multifamily starts occurred in the Midwest region, growing by 15.5% year over year, with gains of 7.5% in the South and 4.7% in the West. The Northeast region saw new home starts decline by 6.4%, however.

“Faced with many uncertainties in 2020, the real estate industry has been able to meet surprisingly strong home buying demand and help lead our country’s economic recovery,” NAR President Charlie Oppler said. “As we continue to help consumers secure housing and property, we will also remain vigilant in working to expand housing options, equality, and affordability for all who are entering the marketplace.”

Source: realtybiznews.com