Updated: Oct 22
I was asked today some good questions about land that I felt deserved an article.
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.
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.
Unique Elements of Land Purchases:
Check the Utilities Available
It's important to know the utility options available in an area as those can increase or decrease the costs involved in a land purchase as long as you plan to buy land where you plan to need a well, septic tank, electricity, or otherwise.
Of course, there are workarounds in some cases, like propane coming via truck or solar panels. That said, often propane will be pricey to operate. Solar panels make sense much more in some scenarios than others and don't tend to make as much sense for those who are not planning on being somewhere for less than 12 years in SE VA where sunny days aren't as prevalent as places like Southern California, where electricity is cheap, and where government tax incentives aren't as strong as places like California. That said, it really depends on your individual circumstances, so here's an article on calculation from CNET.
Check the State, Local, & Zoning Regulations
While typical of commercial buyers, many familiar with purchasing resale homes & purchasing land are unfamiliar with the importance of checking the zoning regulations for a wide variety of elements of the use of the land, from setback restrictions, to permitted uses, to gun regulations, etc. Start by knowing the state regulations (i.e. construction code). Within the same city/county, different zoning types can have very different rules. 2 cities/counties can also have very different rules even when comparing zoning types that are otherwise similar.
For a bit of a cheat sheet for SE VA, go to my article on the subject here, and within the link I put at the top, go to "law" where I have some information as well as links to a number of county/city websites on various subjects like setback restrictions & building ordinances. If you're my client, and you'd like me to add more to fill in some gaps, just let me know.
Check the Association Regulations
If purchasing land for the purpose of building in a homeowner's association, condo association, or other association, be sure to know about what rules and regulations are involved on your usage of the land/building you plan to put on the land, especially architectural regulations. Architectural regulations may include rules on minimum square footage (that will price some out of a neighborhood immediately), types of siding that may be used (i.e. prohibiting lower cost materials like typical siding), prohibiting modular homes, requiring paved driveways, limiting color selection, etc.
In considering properties, it's ideal if you can get the association regulations prior to seeing land. If a listing you're considering doesn't have it, see if it's available elsewhere, such as in other available properties in the neighborhood or past sales. Your agent can accomplish this task much more quickly than you can, since it's not unusual for this information to be on MLS.
VA Peninsula Hack:
While it's not all up to date, the number one place I've seen with HOA documents online in SE VA is on the HOA doc page of Mr. Williamsburg. Sure he's my competitor, but that doesn't mean I'm going to hold out on information for you or plagiarize.
Disclosure: #'s & my Business
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.
Land Only vs Construction Loans
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 balloon payments at the end where a lump sum is expected after a period of fixed payments.
Down payment requirements are typically higher
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 typically higher
Interest rates are typically higher (while land or incomplete construction at least) vs a typical single-family investment mortgage on an existing home.
Shorter Amortization 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.
Less Programs to Reduce Home Costs, but Some Are Still Available
While there aren't as many options with land purchases and construction loans for reducing your costs, there are some that are still available.
Below are a few examples available with qualified buyers in certain rural areas (i.e. parts of York County, most of Gloucester County, most of Isle of Wight County, etc.).
Image courtesy USDA
For instance, USDA has a product (1, 2) for "Beginning Farms and Ranchers". Qualified applicants can get a partial loan for up to 45% of the purchase price of the lot in some scenarios where there is a 20-year loan term & where the "Interest rate is 4 percent below the direct farm ownership rate, but not lower than 1.5 percent." Alternatively, there's an option where "The interest rate is 2 percent less than the direct farm ownership rate but not lower than 2.5 percent. The term of the loan will not exceed 40 years or the useful life of the security."
Again, USDA has a product available, and unlike most construction products, no down payment is required. Here's more on that from Forbes.
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