Land Purchases & Sales
I was asked today some good questions about land that I felt deserved an article.
Risk considerations
Land deals are inherently more risky to buyers than residential home purchases. Lenders see the foreclosure data & know this fact. Land loans are higher risk for lenders since the seller often doesn't have a rental use for land as an option that meets or comes close to the demands of the mortgage, unlike a typical residential single family purchase. That's why you'll see stricter criteria typically for land & construction to perm loans vs typical residential single family mortgage loans.
Loan considerations
Disclosure: Keep in mind that any of the numbers below may have changed since the times when I learned about them. Also, I am not a lender.
Often with land purchases whether you want to build within a short time or whether you want to keep the land a long time before building will determine what loan type you'll be using. There are land-only loans and "construction to perm loans". The former is designed to be paid off without any construction costs wrapped in, but sometimes are converted. The latter is designed to go from a land/construction loan to a more typical loan (i.e. a 30-year loan) with higher interest rates and terms at first and lower interest rates/terms later after construction is complete. Just because a lender can do a construction-to-perm loan doesn't mean that they can do a land-only loan. It's not just as simple or land only or construction to perm either. Some construction to perm loan options/lenders can only do stick-built construction, while others can do stick-built & modular homes, but not manufactured homes. Both construction-to-perm & land only loans often have baloon payments at the end where a lump sum is expected after a period of fixed payments.
Down payment requirements are typically higher for a construction to perm loan (& even more so with land only loans) than for an owner-occupied home (i.e. 10%-20% is typical for construction-to-perm loans). According to USDA, "We offer mortgage loans with low rates and no down payment requirement for low-income residents in rural areas who wish to buy or build a home." I've seen as low as 5% for a construction to perm loan that wasn't as restrictive as USDA.
Interest rates are higher (while land or incomplete construction at least) vs a typical single-family investment mortgage on an existing home.
Shorter timeframes: Also with land, typically you're not looking at 30-year loans like you would with a single-family home unless the loan is converted to a 30-year loan after a home is built. That means higher payments required and higher difficulty with debt-to-income ratios. While there are likely higher timeframes out there, the highest timeframe for a land-only loan that I've seen is 20 years. 5-year loans max is not uncommon with some banks.
Where have land prices gone and where are they headed?
One of the best places to look if you're planning on buying land in a location for building homes is the United States Housing Starts graph which shows both where housing starts have gone over the years and where they are trending to go, with higher housing start trends typically meaning the higher opportunity for growth in value. As you can see below, we're in a downward trend as of 2/3/23:
Click "Forecast" for the latest here.
Land prices don't go right with home prices. For instance, the national trends have been a 45% gain in price for houses in the US from 2020 to now, while the gain has been around half that amount for farm real estate values in the same period.
Does Adam help people sell & acquire land? Yes
In addition to my assistance with residential single-family homes, I can also assist with multi-family, commercial property, & land. I've helped buyers acquire land and sellers sell land, and am open to more business in land.
Where can I find out more about a land or new construction purchase?
Here's a Google Doc I've written on new construction, much of which is about the purchase of land & thereby applicable whether you're just purchasing land without any desire to build, want to buy land now and want to build eventually, or want to buy land and immediately start planning and subsequent construction. In that document, I go over unique aspects of land purchases that you often won't hear about with purchases of existing single-family homes like setback restrictions, wetlands, etc.