Looking to buy land to build your dream home? Land is the most simple asset class in real estate — after all, it is simply dirt. However, there are a surprising number of boxes to check in order to be sure you are buying a property that will fit your needs. Before you buy the land you plan to build on, here are seven things to consider.
Zoning is critical to understand when buying land. If your intention is to build a home, it is important that the zoning is R-1 residential, or a type of residential zoning that allows for single-family homes. There is residential zoning that only allows for multiunit structures, in which case a single-family home would not be possible. I’ve heard buyers say, “I’ll change the zoning after I purchase.” In most cases this is extremely difficult, time consuming and expensive, and it’s often not even possible. A zone change through a general plan amendment, or other amendment, sometimes makes sense for high-value commercial projects, but rarely for the standard single-family home.
2. Local Building Codes
Once you’ve identified land with the correct zoning, it is important to confirm the building code and ordinances allow for development. There is a surprising amount of residential-zoned land that is completely unbuildable. A common reason is that it doesn’t meet the minimum size requirement; however, there can be several other reasons, such as topography, soil, water access, sewer access or environmental issues. Consult with the city or county planning department regarding these items before purchasing. Remember, residential zoning does not necessarily mean buildable.
Topography, or physical condition of the land, is highly important to consider regarding the cost of building and whether the land is buildable at all. Many cities and counties have hillside ordinances that prohibit development on a slope that exceeds a certain grade, or they may limit the size of home permitted on hillside land. Assuming the home you want to build is allowed on a certain hillside lot, the cost can be dramatically higher given the added construction cost, engineering, plans and permits. Hillside land often comes with coveted views, but keep in mind the cost to develop will be significantly higher.
In more urban areas, it is typically the city that handles zoning, building and safety, and permits. Sometimes, even in urban areas, it can be the county, not the city, that handles permits. It is important to learn who issues permits when performing your due diligence. Sometimes a property can be under city jurisdiction, directly across the street from another property that is overseen by the county. The ease of obtaining a permit often varies between the two and is important to know before purchasing. A good real estate agent or architect will often know whether the city or county is preferable for development in your area.
If the land is being purchased for you to build your dream home, be sure it is in an area where you can see yourself living. If the purchase is for a spec home to flip, it is important to calculate all building, architect, planning, utility connection and engineering costs in that city and county to be sure there is enough profit in the deal.
Negotiating for the purchase of land is different than negotiating for a home, and in most ways is preferable for the buyer. There is generally a large market for the purchase of homes, but there are fewer buyers for land. This often means the list price is simply a starting point from where you can negotiate. Sellers sometimes list firm pricing (not negotiable), but it is worth testing the waters with an offer. Sellers are more open to carrying, which leads us to the next item.
With land, sellers are generally more willing to carry, or give seller-finance options to buyers. The interest rate is generally higher on seller-carry deals than rates with banks, but the qualification process is usually far less intensive. Seller-finance deals can vary widely from 50%-80% down to no money down. It all depends on the seller’s motivation to sell, and can also depend on the seller’s motivation for cash flow. There are some sellers who prefer seller-financing over cash to capture the interest and possibly receive a higher sale price. Most banks don’t offer residential real estate mortgages for land, but there are a few that do, so be sure to research your options.
Performing your due diligence to ensure the land will work for you is important, and it is equally important to determine what builder to use. Everyone knows someone who has had a bad experience with a builder who took too long, took shortcuts that caused issues or grossly exceeded the quoted construction cost. Be sure to interview, check references and feel comfortable with your builder before proceeding. Make sure the contractor not only is a qualified and skilled home builder, but also understands the specific codes and nuances of the city and county where you are building. Many builders often have existing relationships with the local planning departments, understand their needs and can help push projects through to completion without any significant delays.
Land appears to be “what you see is what you get,” but there are many seemingly good lots that have significant issues that prevent development. Perform your due diligence, and you’ll be on your way to building that dream home.