Buying land presents an investment opportunity and a blank slate to get creative, but proceed with caution if you intend to build a house on it. This is especially true if the land is not in a residential subdivision, because a developer is not preparing the site for construction. That said ...
Do: Find the right agent
As with buying a new or existing house, it can be helpful to have a real estate agent represent you. Some agents are more knowledgeable than others about vacant land. The agent may be particularly helpful in negotiating any contingencies to enable a buyer to get out of a contract, if necessary, if it turns out a house can’t be built there. The Realtors Land Institute, associated with the National Association of Realtors, is an example of a group that provides specialized training for agents in this market segment, as well as listings of vacant land for sale.
Do: Find out whether adding a house is an option
A prospective buyer should ask the local government planning or community development office that regulates construction to confirm what can be built on the land. Can the desired house fit there even with the required setbacks from the property line?
Is there road access, and can the home be connected to local utilities, such as water and sewer services? Is it in a flood zone?
This is also a good time to inquire whether any future development in the area might negatively affect the property’s value, such as a proposed cellphone tower or power line. It’s also helpful to check whether someone has already surveyed the site to verify its boundaries. If not, hire a professional to do so.
Don’t: Forget about costs beyond the house
A vacant lot isn’t likely to come with certain essentials that an already developed property would have, such as water lines from the street to the house site and sewer lines or a septic tank. But if the property had a house on it in the past, a previously completed survey should indicate whether the utilities are still present.
Do: Think about how to finance the purchase
A conventional mortgage isn’t an option when buying vacant land. According to Bankrate.com, banks commonly offer land loans instead. These loans typically involve higher interest rates, down payments and shorter terms than a 30-year mortgage. If the buyers already own a primary residence, they may be able to take out a home equity loan instead, secured by the existing house.
The buyer will then need a separate loan to pay for the construction of a house. Unlike a mortgage, the full amount of which is available upfront, a construction loan is paid in installments. Like a land loan, this type of lending may have a shorter term and higher rate than a mortgage, and may come with other requirements, according to the National Association of Realtors.
Do: Learn about the homeowners association
If you are buying land in an existing community, it may be covered by a homeowner's association. Just as the local government can restrict what can be built on a property, so can a homeowners association if the lot is part of a subdivision it regulates. The association may also charge regular fees to maintain areas held in common, such as private roads.
Don’t: Buy land sight unseen
It’s wise to visit the property before buying it, because some things may not show up on a paper survey and some sellers won’t provide the level of detail that an on-site inspection will. A big consideration is topography; if the land is too steep, a house isn’t likely to work there. There could also be low places on the property that would be too wet to build on.
Do: Obtain title insurance
A good title agency or attorney will help identify any outstanding disputes over land boundaries that may exist and could delay building a house. There could also be easements for phone or power lines, water or sewer mains, or even roadways.
Don't: Ignore signs of a scam
The National Association of Realtors has published advisories in recent years on a scam in which people unknowingly buy vacant land that is not actually for sale. Fraudulent "sellers" look for property that does not have a mortgage and pose as the owners, asking agents to list the land at prices below market value. The "sellers" often communicate only electronically, claiming they are from out of state, and request a remote closing rather than in person. They also often ask to be paid in cash.
“These scams have defrauded buyers out of great sums of money and left property owners, brokers and agents having to sort out the mess,” Charlie Lee, NAR senior counsel, said on the organization's website.
Fraudulent "sellers" also tend to want to use their own notary so they can use fake stamps and seals, the NAR says. Genuine stamps will have clear, readable text, an official state seal and consistent ink. A buyer can also check a notary's commission number and expiration date against state records.