Buying Land: This Land Is (or May Eventually Be) Your Land

Buying Land: This Land Is (or May Eventually Be) Your Land


Buying and Financing Land is Not “Dirt Cheap!”



Consumers shouldn’t consider buying a parcel of property (raw land) with no building on it unless they are first willing to “get their hands dirty” and learn the basics of financing a land purchase. Obtaining financing for undeveloped land is not as simple as financing the purchase of a finished home and land because many lenders view land loan transactions as moderate to high risk. Because loan rates are based on risk, land with a building on it is much easier to liquidate than an undeveloped housing lot in a new subdivision. Besides charging higher interest rates for land loans, lenders generally require significant down payments from applicants so that, in the event of a loan default, the borrower’s equity position should allow the lender to sell the land and use the sale proceeds to fully pay off the loan.
Loan terms for the financing of land are generally short (usually 1-5 years in length), in anticipation that the borrower will subsequently obtain a construction loan. Buyers purchasing unimproved, “raw” land, with no plans for improvement, will face the most difficult challenge in securing a loan for their property, since it can be considered a speculative investment.
Few buyers want to pay for unbuildable land. Thus, the future homeowner’s top priorities lie with making sure that he or she will be able to obtain a building permit, and determining that the land will legally, geographically, and geologically support the type of house desired. The buyer should evaluate the land’s soil quality (using a soil test) and its topography, consider how the land is zoned, if the lot has road access, and whether there is ready access to utilities such as water, sewer, electricity, and telephone. These factors could influence not only property value, but also one’s ability to get a loan. A real estate broker can provide invaluable assistance during the land purchasing process.

Land Buying Tips (Restrictive Covenants, Title Searches, etc.)


Homeowners in many housing developments are now subject to restrictive covenants that can govern everything from a home’s size to its color.  Buyers should make certain that they are willing and able to abide by those restrictions. The buyer must also determine the location of the property’s boundary lines. Mortgage surveys are typically required by title companies and lending institutions before a loan will be approved.

Additionally, to ensure that they obtain free and clear title to the property, buyers must obtain a title search of the property before purchasing land. A title search will reveal if there are any liens (mortgages, back taxes, mechanic’s liens, etc.) or other encumbrances on the property that may prevent or delay the land purchase. A title report will also show any easements (recorded legal rights) to the property or portions of the property (for example, a previous owner may have legally given a neighbor shared use of a driveway). Some unwary land purchases are surprised to learn, years after the sale has closed, that a right-of-way to a new housing development runs through or abuts their property! As a protective measure, buyers often elect to purchase title insurance, which offers protection against any undiscovered title problems which may arise after the sale.

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