How to Buy Land and Build a House

Last update: May 2018

Buying land and building a home may sound simple and straightforward, but the process is far more complex than you might think.

We’re working under the assumption that you plan on purchasing land and building a home afterwards, but you also have the option of allowing a builder to buy the land, build the home and sell it to you. Some builders own several lots and will build a new home on one of their owned lots for you. This is a sort of turn-key, "package" deal that many homeowners consider when having a new home built. In this case, a traditional mortgage is all that’s necessary to purchase the home in most cases.

How to Buy Land and Build a House

Purchasing the lot first and then hiring a builder will be a more complex, but will provide you with more options. Let’s first consider the land itself. Will you be purchasing the land outright, or will you be taking out a loan?

If you have the budget to purchase the land outright, then the process becomes a little less complicated. You simply find a piece of land that you want, purchase it and start searching for a builder.

If you plan on taking out a loan to purchase the land, obtaining the financing you need will be no walk in the park. Be prepared to pay a higher down payment, higher interest rates and higher fees. These types of loans typically have much shorter term periods as well.

There are three types of loans that are generally used to purchase land and build homes: a land or lot loan, a construction loan or a construction-to-permanent loan.

Land or Lot Loan

If you have fallen in love with a piece of land but aren’t quite ready to build yet, a land loan may be a good option. This type of loan will allow you to purchase the vacant land and then search for a builder at a later date. Once you are ready to begin building, you can then consider a construction loan or paying for the construction outright.

A land or lot loan is ideal for borrowers that want to:

• Secure a piece of property before the construction phase begins
• Take their time planning and designing their new home
• Take the time to settle into a new job or wait for children to finish school before building their home

Land loans can be difficult to obtain, and lenders may treat your loan differently depending on the type of lot you purchase. If your lot already has access to utilities and roads, the loan may have different terms than a lot that is undeveloped.

Construction Loans

If you’ve found a piece of land, finished your house plans and found a builder to work with, a construction loan is your best option. These are short-term loans and the funds are dispersed periodically.

You can use a construction loan to fund the construction of a new home on a piece of land you already own, or you can use the loan to purchase the lot and have the home built.

• If you already own the land, you may be able to use equity as collateral for the loan.
• If you’re using the construction loan to purchase the lot and build the home, the closing of the land purchase and the construction loan will take place at the same time.

Construction loans can also be difficult to obtain and require a great deal of paperwork before being approved. Make sure that your home plans are as detailed as possible to improve your chances of being approved.

Construction-to-Permanent Loans

Construction-to-permanent loans, also known as "all-in-one" or "single closing" loans, are the most common type of loan that borrowers take out when purchasing land and building a home. These loans will cover the cost of building the home, and then convert over to a permanent loan once the home is built.

These loans allow you to work with one lender and have one closing. The loan becomes permanent once the final inspection has been approved and a certificate of occupancy has been issued. Single closing loans are a more cost-effective alternative to traditional construction loans and the most convenient option.

What to Look for When Purchasing Vacant Land

Now that you understand your financing options, you need to understand:

• Where to find vacant land
• How to know if land is buildable

In theory, finding vacant land is easy. At Land Century, we can help you find land that meets your needs and budget, or you can search for vacant land listings online, even for cheap land under just $1000.

When looking for land, you need to consider more than just the look of the property and whether or not it’s buildable. Consider the location, your neighbors and anything else you would consider if you were to purchase a pre-existing home.

What Makes a Lot Buildable?

Building on vacant land is not quite as simple as you might think. Some lots are buildable, while others are not. Subdivision regulations, zoning ordinances, building codes and permits will partly determine whether or not your lot is buildable.

State, federal and health department regulations will also need to be taken into consideration. Regulations regarding endangered species, wetlands, water quality, toxic materials and other more complex environmental issues may prevent you from being able to build on a piece of land. Before making an offer on a piece of land, you need to ensure that you do your homework to ensure that the lot is buildable from both a legal and practical perspective.

Building Permit Preparation

Assuming that you have discussed the lot with your local city council and know that it is buildable, it’s time to discuss what permits you’ll need to build your home. Every city and jurisdiction is a little different in terms of what permits may be necessary.

In virtually all cases, you’ll follow a standard practice.

Before breaking ground for your new home, you’ll want to take all of your building plans to a building inspector. These professionals can be found at your local courthouse in most cases. Your local city council or township clerk will be able to help you find the right building inspector contact to have your plans looked over.

In general, you can expect to spend 1% of the total cost of the home on various permits.

Official blueprints of your home may be needed at this time. Thankfully, the building inspector will discuss all of the permits you’ll need to get your plans underway. It’s important to note that agricultural land may need soil samples to determine the state of the land prior to building which can be costly.

You’ll need:

• Building permit application
• Agent authorization form
• Appointment declaration

This is just what will be needed initially by the inspector for the building permit. You’ll also need to bring along several copies of the following:

• Building plans
• Proof of land ownership or title
• Structural drawings
• Soil report
• Survey plans
• Drainage plans

Construction plans and the layout of the project will need to be provided.

Permit fees are very different depending on the cost of the home. Again, this will change from one city to the next, but the following figures do provide a sample of what the costs may be. For example, a $100,000 project would have a $400 fee applied with an additional fee per $1,000. The additional fee may be $2 per $1,000, which could add up to $650 for a $200,000 project.

You’ll also need to have a permit for plumbing and electrical work, which will need to be accounted for in your budget.

Your contractor will likely help with securing the necessary permits needed for the job. It’s important to discuss your options with your contractor, ensuring that you have the legal right to have the structure built on the property.

Land Clearance and Preparation

A few other concerns will be the land itself. Land that is heavily treed may need to be cleared. This will add to the total cost of the project. In the event that water and sewer lines are not in the vicinity of the lot, you’ll want to discuss your options with the township and builder to determine how much it will cost to have the proper lines ran to the home.

The same must be done for all of your utilities if they’re not already present on the property.

Clearing the land will involve removing:

• Trees
• Roots
• Vegetation

Removal of the cleared land will depend on your location. In some cases, you’ll be able to bury the trees and roots on the property, or you may have to pay for the removal of the items. If you’re allowed to bury these items, note that surface depression will occur as decay sets in, causing an eyesore on the property.

Excavation will need to occur if you’ll have a basement.

Drainage systems may also need to be installed to control potential runoff and erosion. This will depend on the area and the geography of the land itself.

Weighing Your Building Options

There will always be the question of whether a modular home or a new construction will be best for your land and budget. New construction and modular homes are on par in terms of long-term value. A modular home will appreciate in price just as quickly as traditional homes constructed on the property.

Modular homes are not mobile homes that depreciate in value.

In terms of cost, a modular home’s price is typically 10% - 20% less than a “stick built” home. This will allow many homeowners to save money on the cost of construction, but you’re limited in terms of the building plans available and the companies that are available in the region.

Many rural towns will have a difficult having a modular company deliver to outer locations far from the city.

Discussing the costs and options with a local builder or modular home manufacturer is the best option to determine which is the most cost effective option for you.