Consideration When Buying Land

To paraphrase Will Rogers, put your money in land, because they're not making any more of it. But did Will give sound advice? If you're considering the purchase of a piece of property as the site for a vacation getaway, retirement cottage or simply as the next chapter in your personal history as a homeowner, there are a few things you should consider before making an offer on a yet undeveloped piece of America.*

At first blush, the notion of buying a raw land for the construction of your home – either now or in the future – sounds like a reasonable idea. Reserving the location of your choice, hedging against future increases in the price of land, and the appeal of starting with a clean slate and truly getting a home of one's own are just three reasons why many people choose this option.

What's the Down Side?

While there are a number of plusses in purchasing raw land, it's wise to consider the potential negatives before you devote your time and resources to the process of identifying, evaluating and purchasing property.

First and foremost is the issue of financing. Many lenders are reluctant to offer financing for raw land. If available, financing programs tend to be at significantly higher rates and for shorter terms than for mortgage financing for an existing home. This is particularly true of first-time purchasers of raw land who do not have a track record of successful development of such a property.

Limited financing options for raw land leave you with the option of paying cash; an expensive route in terms of opportunity costs for alternative investments, since your cash is now effectively generating a rate of return of zero.

In addition to the opportunity cost, your land purchase will also incur some additional expenses from day one that must be factored into your investment calculation, including property taxes and the potential need to protect the property (by erecting a fence and posting signs, for example) and for additional protection from personal liability through the purchase of liability insurance.

Make a Wish (List)

Once you've decided that the purchase of land is for you, take the time to list the characteristics of your ideal location, as well as the potential advantages and disadvantages of each. As you create your wish list, keep in mind that you're aiming to meet your projected future (not present needs). Here are a few factors to consider:

• Proximity to a town center (convenience vs. congestion)
• Wooded vs. open (shady and cool vs. space for your garden)
• Distance from main road (isolation/serenity vs. increased construction costs)
• Orientation of future construction (lot size, configuration, site prep and construction costs)
• Proximity to water (views/recreation vs. potential moisture/maintenance issues)
• Future Amenities (tennis courts, in-ground pool, etc. = site, cost implications)
• Hill vs. plain (engineering, construction costs)
• Access to utilities (site prep, construction costs)

Dig Deeper

There are plenty of ways to find land for sale. The Internet should be your first stop to get a general sense of the market, but there's no better way to get a feel for an area you're considering than to drive around. You may even find a sign posted offering a lot for sale that appeals to you. Talk to local builders, and be sure to check the classifieds in the local paper - preferably when you're sipping coffee at a local eatery and asking the locals for leads.

Once you've zeroed in on a specific area, we can't think of a better way of locating just the right parcel of land than working with a real estate professional who understands the local market. With superior knowledge and access to listing information, networking among agents, negotiating skills and experience with local authorities and area contractors, an agent can be an invaluable resource in your search for the "perfect" property.

Even if you are interested in a FSBO (For Sale By Owner) property, putting the skills and experience of a real estate professional to work for you can bring your transaction to a successful conclusion smoother, faster and on terms that are favorable to you.

A Few Details to Consider

Once you've narrowed your search to a few parcels, here are a few issues to explore before making an offer – your Realtor will probably suggest others:

Is the Lot Truly "Buildable" – A lot that is represented as "buildable" may not allow for the construction of the home and amenities you've envisioned on the site. Ensure that your offer is contingent on architect/engineering inspection/approvals for suitability for your project.

Utility Easements – Review the survey of the property to determine what utility easements exist, their location and the potential impact on construction, and on aesthetic issues that could affect your enjoyment and/or resale of the property.

Lot Coverage & Other Restrictions – Local zoning typically includes restrictions on the size, building materials, placement and height of fences, and positing/setback of structures on a property.

Homeowners' Association – Purchasers of property sometimes learn of the existence of a Homeowners' Association after the deal is closed. Homeowners' Associations can impose deed restrictions and other regulations that may prevent the eventual construction of your home from going forward as planned.

Proposed Public Works Projects – Proposals for public works projects such as overhead utilities and highway construction are usually filed years in advance.

Utilities – Make sure you are clear on what utilities are available on your lot and what the approximate costs will be to supply them. Often, in more rural settings, you will need to bring power from a somewhat distant pole to your lot, dig a well, and install a septic system. If you are a high speed internet user, check to see if service is available.

Change in Tax Status – The owner of land that is currently zoned for other than single-family residential construction (farmland, for example) may incur unfavorable property tax consequences upon approval for a change in use.

A Final Consideration

As with any other investment, you must consider the appeal of your property to the next buyer. A well chosen location, quality construction and a design with broad appeal will help ensure that you enjoy the benefits of living in a home that's truly your own, and reap the financial benefits when it's time to write the next exciting chapter in the story of your life as a homeowner.

* Presented for informational purposes only.
Consult your tax and/or legal advisor for guidance regarding any and all tax and/or legal issues.