Finding the perfect lot for your home often is the first step toward achieving your dream home. There are many factors to consider when shopping for and financing your future home site. Here are six tips to help you land the perfect lot.
1. Do Your Research
Shopping for lots can be overwhelming, time consuming and confusing. Don’t try to go it alone. Rely on the experts to help you navigate the process. That includes finding a builder or architect that can help you understand the process of searching for land. He or she can find data on the property’s history, including what it has sold for in the past and insight into developments in the works that could impact the property.
Compare the listing price with comparable properties currently on the market and those that have sold within the last six months. And, use your appraisal district’s website to track appraised values for the lot and surrounding ones. Watch for trends in value that can give you a clue as to a reasonable offer price.
2. Know the Rules
Before you make an offer, first review the rules regarding what can be built on the property. Ask the seller or listing agent for a copy of deed restrictions and homeowner’s association rules. Check the survey for building setbacks. Are there minimum square footage or building materials requirements? Can you choose your own builder or is the lot “builder-bound”? Are you required to join a homeowner’s association? Some developments limit the number of pets, and even the number of vehicles parked, at a single residence. Be sure you understand and are willing to play by the rules.
3. Check Insurance Rates
What you’ll pay for homeowner insurance will be determined in part by factors like accessibility to fire hydrants and emergency services. Many carriers won’t write coverage on properties outside of city limits. If the lot is in a floodplain — or any area that’s flooded before — you can expect rates to reflect the greater risk. Ask for recommendations on insurers that are knowledgeable of the area and can provide estimates for your future home’s insurance costs before you commit to a location.
4. Ask about Utilities
A lower-priced lot may suddenly not be as much of a bargain if it requires installing an expensive septic system and water well. If a septic or well is required, get cost estimates from a reputable installer. If the lot is served by a municipal or private water provider, research its rates and water supply source.
“During the recent droughts in Central Texas, several subdivisions’ water supplies went dry,” says Austin custom builder Keith Durio with JKD Builder. (Full disclosure: This writer is married to Mr. Durio.) “Homeowners in those subdivisions paid a premium to have water trucks bring in water.”
5. Get a Builder’s Perspective
Lot slope, underground water issues, tree locations, accessibility to the build site — these are among the factors that will impact the ultimate cost of building on your lot. “A builder with local experience is the most knowledgeable resource for input on the buildability of your lot,” says Durio. “For example, a steep lot will require more excavation and you can expect slab costs to be higher than on a flat lot. And while trees are always desirable, if the trees are in the building envelope rather than around the perimeter, most likely they will have to come out, also adding to excavation costs.”
These can be red flags for lenders as well. “For bankers, lack of utilities is the biggest red flag on lot purchase loans, but ingress/ egress to the lot is very important as well,” says Denny Buchanan, president-Lakeway with Independent Bank. “The contour of the lot also is important. Is it flat and easy to build on or a slope or cliff?”
6. Find the Right Lender
Most, but not all, real estate lenders make lot loans. “Most banks that make lot loans do them because they want to do the construction loan/permanent mortgage as well,” says Buchanan. “Look for a bank that is known for being a real estate lender and one that also does a lot of construction lending.”
On lot purchase loans, most lenders offer a fixed rate for three to five years, with payments based on a 20-year amortization. “Sometimes exceptions can be made, but the majority of banks want a minimum 20 percent down payment on a lot purchase,” says Buchanan. As with other loans, you should expect to provide the lender with an application, two years of tax returns, your most recent pay stubs and financial statements that show liquidity. “The normal maximum debt-to-income ratio is 45 percent on lot purchase loans,” says Buchanan.
With the right homework, a team of professionals providing guidance and a good dose of patience, you can land the perfect lot and be closed on your loan within a month.