How to Buy Land: Finding and Financing Your Perfect Parcel

After months of looking, you just can’t find a house that has two bathrooms, a basement, and a large yard. Your dream home simply doesn’t seem to exist, so maybe it’s time to consider building it. The desire to have a home that fits all your needs is one of the main reasons that home buyers might consider buying land. But not everybody knows how to buy land.

Maybe it’s not a house — maybe you need room to build a manufacturing facility, start a hobby farm, or another commercial venture. Whatever your reasons, if your past experience in real estate has only been home buying, buying land will be a different experience.

Philip Orr is an agent who’s been working in real estate for more than four decades, operating in his rural area of Missouri, says that you should both “have some knowledge of how to develop that parcel, and that you need to have someone readily available that could assist and advise.”

Here’s what you need to know about how to buy land.

Finding the land

Before trying to locate the right parcel for your needs, get clear on what you intend to do with the land. Having this clear will help you decide exactly where to look, set a budget, and help you sort through parcels faster.

Do you want to build another barn close to your existing farm operations? Distance from your fields will dictate your search radius. Or perhaps you’ve always dreamed of building your dream home from the foundation up, but you also want room for a pool in the backyard. Space requirements could lead you to look in a more rural area. A great agent can help you narrow it down if you’re struggling defining your wants and needs.

Think about the future, too. Someday, you may want to sell the house or ranch. If it’s an hour drive to the closest grocery store, or the local schools aren’t great, it could hurt your resale value.

Whatever you want to do with the land, you’ll need to make sure that it’s zoned for your purpose. Land can be zoned for residential, commercial, or agricultural use. The zoning restricts what you can build, and it also includes other requirements, such as the distance between the building and the street.

While you can find out a parcel’s zoning by inquiring with the county, you could also ask an attorney for help. Kathleen Crebo is an attorney with Hocker & Associates, a law firm in Indiana, who focuses her practice on real estate law. She says that it’s important for a buyer to check the zoning of their parcel — but also the zoning on adjacent land.

“If a buyer is purchasing zoned residential, and that residential parcel is adjacent to a parcel that may be undeveloped but is zoned for commercial use,” she explains, “then maybe the buyer doesn’t want to be adjacent to a parcel that could wind up with a strip mall on it.”

Deed restrictions could also interfere with your plans. Common deed restrictions, such as whether or not you can build a fence or obstruct a neighbor’s view, could require a change of plans. If you’d planned on building an auto garage, but the deed restricts both the type and number of vehicles you can have on the property, then you might need to keep looking.

When looking at land listings, your agent can help you interpret descriptions and usage requirements. Orr thinks that it’s extremely important to work with an experienced agent if you’re buying land, one who has the applications on their phone or computer to actually locate the property, the city limits, the subdivisions. “Can they do it online and offline? Because not all areas have internet access,” he points out.

Agents working on land deals also need a basic understanding of soils. The parcel’s soil will impact what you can build on it. Orr says that agents should know about, “compactions, grasses, trees, and the cost for so many yards in excavation or fill” that you may need to prepare the land for building.

This knowledge can help them steer you toward another property if site preparation for the land that you’re considering would be more expensive in comparison.

Vetting the land

In addition to learning about the land’s soil as it relates to either growing crops or building a house, you’ll need to investigate other items, which would add to your overall cost of ownership.

Does the land have road access? If not, construction vehicles could have a hard time getting onto the property to work. You might have to build an access road or a long driveway before you can get started on your main project.

What about utilities? Could you hook into a city line or sewer system, or would you have to build a well or install a septic tank and system? The difference in cost between linking up to city sewer or installing septic could be significant. The cost to connect to city sewer can range from $1,200 to $4,900, but the cost to install a septic system could be as high as $9,500.

Electricity is something else to consider — even land intended for agricultural use would need lights in the barn. If there are no wires running to the land, how far would you have to run the wiring?

And don’t forget that for any construction or utilities work, you’ll probably have to pay permit fees. Depending on where you live, you might also have to pay for inspections before the county will sign off on the work.

If zoning issues come up, you could have to apply for variances or petition the zoning board. There will be fees for this, and you might possibly have to hire a land surveyor or attorney to help draft plans and the variance proposal.

The current property taxes on the land will change once you’ve completed your project. Assessors apply a value to both the land and the property upon it, so once you’ve built a home or a commercial building, it’s likely that your taxes will rise.

Before you make an offer and apply for financing, make sure that the land’s total cost is affordable.

Financing the purchase

Financing a land purchase isn’t the same as buying a house and taking out a mortgage. With a house, it can be easy for a lender to pull comparable properties and determine its value. Land’s value could be more subjective, with fewer comparison points, and could depend upon its intended use.

If you’ll need to finance your land purchase, instead of buying it outright with cash, here are your options.

A local bank or credit union

Some credit unions specialize in agricultural lending, particularly in more rural areas. Their bankers will have the expertise to accurately value the land. Through their community connections, they could direct you to the right person for land survey or soil tests.

Orr says that, “so many people will go to a lender and get preapproved for financing that doesn’t fit.” Local lenders could be better equipped to craft a loan for the land that can then be converted to a traditional mortgage when the home is completed.

Be aware that you may pay a higher interest rate, and the bank could require a higher down payment, than with a traditional mortgage. Because there’s no house or other building on the property, there’s a higher risk that you could default. If you want to avoid paying a higher interest rate, look into USDA loans.

USDA loans

The U.S. Department of Agriculture, or USDA, issues loans specifically to fund buying land. The government-backed loans typically have favorable terms and a lower interest rate than a private lender.

Section 502 loans

Designed to help lower-income families afford housing, you might think that you can’t use a Section 502 loan to purchase land. But since you can use the loan to build a property, if you intend to build a single-family on the land, this loan could work for you.

To qualify you must:

• Promise to occupy the property as your primary residence
• Be unable to obtain decent, safe, or hygienic housing
• Meet citizenship or eligible non-citizen requirements
• Can’t be suspended or prohibited from participating in federal programs
• Unable to obtain regular financing elsewhere

Income eligibility depends upon the state and you must be buying within an eligible rural area of less than 35,000 occupants. Interest rates could be as low as 1%, with a repayment term up to 38 years. You can check your eligibility online and apply at a local office of rural development.

Section 523 or 524 loans

Both of these loan programs apply if you plan on building a house on the land you’re buying, but they’re different when it comes to how the house will be built.

You can take out a Section 523 loan to acquire and develop sites only for homes that will be built by the Self-Help method. With the Self-Help method, you must construct the home either yourself or with the help of two to four other families.

If you’re not handy, or don’t have a general contractor in the immediate family, consider applying for a Section 524 loan. These loans fund the acquisition and development of sites for low- or moderate-income families, with no restriction on how the home is built.

Both programs define “low-income” as having income between 50% and 80% of the area median income (AMI); and the upper limit for moderate income is 115% of the AMI. These loans only have terms of two years, so you’d have to refinance the property once you’d finished building, interest rates vary. You can also apply for these loans at your local office of Rural Development.

Consider seller financing

With seller financing, there are no banks or government agencies involved. If there are appraisal issues, you don’t have great credit, or otherwise can’t qualify for a conventional loan, seller financing is an option.

With seller financing, “the owner of the parcel is also financing the buyer’s purchase of the real estate,” Crebo explains. “A seller can use different vehicles to finance a buyer’s purchase of the parcel —a note in mortgage, a land contract, or a lease option.”

A private mortgage and land contract are similar to loans from a bank; it’s just between the buyer and seller. It would contain the repayment terms, default provisions, and possibly an agreement to refinance the contract into a conventional loan. The legal title doesn’t transfer until the contract has been fulfilled.

With a lease option, you may pay an upfront option fee that’s similar to a down payment. You make monthly payments, with some or all of those payments going toward the purchase price. After two to five years, you’ll have the option to purchase the property in full.

Under a lease option, the seller typically remains responsible for any maintenance, repairs, or property taxes. This means that they can also deduct them on their taxes, and you don’t get the mortgage interest deduction. If you decide to finance your purchase with seller financing, Crebo strongly advises having a lawyer review the document because “a seller can sometimes use the buyer’s unfamiliarity against him or her to slant the document in their favor.”

Use your existing home equity

Another way to finance a land purchase is with the equity in your current residence. You can take out a home equity loan or line of credit and use that as a down payment or use it to buy the new land outright. Essentially, you use your home to finance the land purchase.

The risk to this approach is that, if you default on the home equity loan, you could lose your home. But if you plan on building on your new land, then selling your primary residence — thus paying off the home equity loan in the sale — it could be worth it.

Things to know about financing a land purchase…

Even though you’re not buying a house, you’ll probably still need a down payment. The lender will also still require an appraisal, as the land serves as collateral for the loan. And you’ll need to know how you plan on using the land.

Making the offer

Your agent will help you write up an offer, which typically includes the purchase price, a closing timeline, and requests for any concessions. Because there is no building that could need repairs, there may be less room for negotiation.

According to Orr, in Arkansas, where he often helps facilitate real estate deals, sellers make minimal concessions. “You might get somebody to pay for a survey, the title work, or closing costs,” he says. In Arkansas, the transfer tax is normally split between the buyer and seller, but the buyer might negotiate for the seller to pay 100%. Your agent will know what’s common in your area.

Most offers contain contingencies which would allow the buyer to back out of the offer and keep their earnest money. When buying a home, it’s typical to have contingencies around financing and the inspection. But in a land offer, your agent could advise that you include contingencies related to:

• Septic system tests and permits
• The results of a land survey
• Environmental and soil tests
• Zoning and receiving approval for any exceptions

Because a purchase offer to buy land is so different from an offer on a single family property, you will want to make sure you’re working with an agent experienced with land deals. They’ll know how to write an offer that addresses potential issues they could see with the land and protects your earnest money.

Closing

Prior to closing, you’ll have to pay for environmental tests relating to soil, or possibly water if there’s a creek running through the property. While not required, having the land surveyed is a good idea, even if the property is in a subdivision.

When helping buyers purchase land, Orr has encountered instances where the seller had the property surveyed, staked, approved, and then built in the wrong place. “One of the reasons you have properties re-surveyed,” he says, “is that you’ll find surveyors don’t agree on where the lines are, or the line goes through a portion of a building, or a fence was built incorrectly.”

A land survey ensures that you don’t have to tear down and rebuild later on, or fight a neighbor over a fence that encroaches on your property line.

If you’re using financing, the lender will probably order a land survey. Usage, easement requirements, and boundaries all influence their collateral’s value. They’ll also order an appraisal, even when there’s no house to inspect. You’ll need a specialized appraiser with experience evaluating land’s value based on its highest and best use, access and easements, zoning, and more.

Title review is also important when buying land. A title with liens on it, or issues with previous owners, could lead to a nightmare down the road. A title company will research the land’s ownership history and investigate any potential liens, such as for unpaid property taxes. They also frequently sell title insurance to protect your investment.

If you’re purchasing the land using seller financing, have an attorney review how real estate taxes will be handled at closing. “Normally, you prorate real estate taxes to the day of closing,” Crebo explains, but she’s seen instances with seller financing where the seller tried to have the buyer pay the previous year’s real estate taxes. Buyers who are unfamiliar with the document’s terms could have been taken advantage of if they hadn’t engaged an attorney’s help.

You will still need liability insurance, and possibly other insurance products if your property poses additional risks (such as a creek, with liability for drowning).

These costs will likely all be rolled into the closing costs you pay on the loan, though you may have to pay some of them upfront. Other closing costs could include attorney fees, lender and loan origination fees, and prorated property taxes.

Turning your dreams of buying land into reality could take more work than you anticipated, but with the help of a good agent, it will go more smoothly. From identifying the perfect parcel to helping you find a local lender, their years of experience will help you find, finance, and eventually close on your perfect parcel.

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