Buying raw land and building a home is much more difficult than people realize. In 2021, we’re battling with a roaring housing market, inflation, and a looming Coronavirus Pandemic. I’ve had clients recently who have bought land, gone through 13 builders (literally), and fought to get building permits underway, only to end up selling the land and giving up after wasting 10 months chasing people around to no avail. The great news? We sold the land not even a year after purchasing it for $25,000 more than they bought it… But not every client has been this fortunate.
This is a long read… But it’s a useful Step-By-Step Guide on how I would encourage someone to buy land and build a home from scratch.
Step 1: Put A Plan Together
Most… And I mean probably 95% of the initial land conversations that I have with folks… fail to have a solid game plan before they start this process. That is a recipe for disaster. Can you buy land first and work out all of the details later? Sure. But do you really want to roll the dice on a six or seven figure investment? If someone asked you to spend $500,000 and didn’t explain what all of your options were, with good, better, and best scenarios, would you consider that a well-informed investment? Probably not. You don’t want to be so smitten with the idea of living on a piece of land that you fail to prepare for worst-case scenarios.
- Pick Your City/Town (and have a backup location): Certain Builders stick to specific, concentrated areas because of fuel, travel expenses, and where they get their materials. They have employees (subcontractors) that might refuse to drive too far outside of their home radius, which delays your build timing. And certain Banks/Credit Unions will only provide funding for real estate being built within a number of miles from their local branch. Having a backup location is key because you may end up not trusting the Builders or Loan Officers in that first location? That’s a situation that you can overcome, but Tom Brady doesn’t run a play without reading the defense first. You know what I mean? Visit restaurants, shop at grocery stores, interview school systems and sports coaches, and strike up a few conversations with some of the locals! The appearance of an area isn’t the only factor that makes it feel like home, remember that.
- Build Your Network: Once you’ve chosen an area that you see yourself living in, it’s time to begin making real estate connections.
- If you’re financing, interview several banks and credit unions in the area. Your first financing choice may not be experienced with Construction Loans? Submit a few applications and get a few interest rate, down payment, and closing cost quotes (we’ll discuss financing shortly). Ask these lending institutions for their Preferred Builder’s Lists. If they don’t have one, ask for several names/companies that they work and have had success with. Familiarity will help you have a smooth process every time.
- Google/Research and put together a list of Local Builders, especially if you’re paying cash and don’t have a lending institution making recommendations. Read their reviews! Very important. What if you don’t have the internet, you say? Head down to the local City/County Offices and speak with Planning & Zoning, Utility Engineers, and find people that communicate regularly with the local builders. They all have to pull permits and file various Certificates before allowing someone to move into one of their homes. Once you have a short list of Builders, call and ask to meet them at a job site so that you can witness an example of their work. This will also give you a chance to interview them.
- Interview a few local Land Realtors… That’s key. You might say, “Byron, I don’t need a Realtor. They’re going to cost me commission and try to sell me everything we look at.” Look, most Realtors deal specifically with residential housing, not land. But if you find the right experienced Agent that also handles land and development, they’ll be an extremely valuable resource for you! Trust me. They may know a land-owner in the area that would consider selling off market, for example? Experienced Land Realtors also know how to organize and manage your due diligence process so that you have a smooth process. They’re savvy with land contracts, and will help you put together Agreements with Contingencies so that you can back out of the deal and get your deposits back if the land fails any of your testing. They’ll run a “Price Analysis” for you to make sure the project you’re constructing has a total price comparable to other home values in the area! This will help you not over-spend and build a “unicorn” that will be difficult to sell in the future! They’ll educate you on the going rate for land per acre in that location, and set your expectations properly to make sure you’re getting a good deal. A great Realtor is worth every penny… A bad Realtor… not worth a pee pan.
- Custom Blueprints/Architects – You can always find free floor plans and blueprints online. But if you’re planning on having your own Custom Home designed by an architect, great! Blueprints can cost anywhere from $500 to more than $10,000+ depending on your extravagance… This is the best way to ensure that the finished project is exactly the home that you’re looking for. But keep in mind, not every Builder out there will agree to build according to your custom Blueprints. That may be because of the lack of experience of their subcontractors (framers, drywall, roofers, etc.) It might be because of the extra time needed on site to ensure it’s done correctly (and these guys are insanely busy in this market). It could be because of a lack of familiarity with the design… Who knows? I wouldn’t get upset. A No is as valuable as a Yes, because you’d rather know that your Builder is not committed to the project on the front end, rather than later. That could be a disaster and a huge waste of time. Be willing to compromise a little, though. Something as simple as the location of the electrical meter may alter the floorplan slightly, or where a water main enters the structure. The slope of the ground may change the plan too? There are so many moving factors impacting construction. If you marry one specific idea, you’re very likely to get frustrated. Show the Builders that you interview your Blueprints when you interview them.
- Building It Yourself: I get this answer every so often when I meet someone for the first time. Look, I’m a D.I.Y. guy. If I wasn’t in real estate, I’d love to do carpentry or woodworking. But building a house!? The first obstacle that you’re going to run into will be financing. The bank will likely not provide funding for a structure not being built by someone licensed and insured. “Byron, I’m paying cash…” Let me ask you this… Would you feel comfortable living in a house that wasn’t built by a real professional? If you’re building a log cabin in a town that has a population of 500, and the governing authorities allow you to do it, go for it. But if you’re building a home that someone else might live in say, 10, 20, even 50 years later down the road… Do you think it’s safe and good for the community? I’ll leave that ethical decision up to you. I’m not a surgeon, I wouldn’t perform brain surgery.
Step 2: The Financials – Construction Loans
For the record, I DON’T consider myself the financing expert. I realize that my lane is real estate. The following is based on my own experience, and it’s good enough to start with. Bet your lunch money on it.
Why is it important to handle financing upfront? Because different lending institutions have different down payments, interest rates, closing fees, Debt to Income requirements, and much more. In fact, you could ask for 3 different quotes and none be the same!
I’ve seen banks offer as little as 10% down (First Farmers Bank as of 2021), but usually down payments are 35% for an unrestricted, non-subdivided rural parcel, and 25% down for a subdivided, recently-approved parcel. This down payment is usually for the cost of the total loan (Land + Construction + Development). Your down payment can also fluctuate depending on access to water, sewer, electrical, and gas in some cases (infrastructure). Slope of the terrain, access to utilities, and soil content (sand or rock) can also make your total project budget fluctuate… We’ll discuss choosing your home site in just a bit. Very important.
Land Loans & “Buying & Holding” Land
This is definitely another option. You can always do a standard bank loan (portfolio loan) from a bank or credit union as well? Or use your equity to open a Home Equity Loan or Line of Credit. But if you’re contacting an institution such as Farm Credit, and you want to buy the land and pay the note on it for maybe 10 years, you can. Land loans have a different structure than a 15/30 Year Mortgage. 10, 15, and 20 year notes are most common. And as of September 2021, the interest rates are just under double of what a 30 year fixed rate would be (around 5%). Surprisingly, the land payment ends up being almost as much monthly as a mortgage payment! But the benefit is that you’d pay the land note off much faster than a mortgage.
Remember: Effective communication is the key to a smooth experience. Don’t settle with a lender that never answers your phone calls/emails. You and your lender will be communicating very frequently during the process, so choose them carefully! But also be respectful. Don’t contact them too often. They have other customers that need their help.
Closing Costs – Do not forget to receive an estimate on what your Closing Costs (financing charges) will be at Closing. This does not include your down payment. These charges vary depending on who your lending institution is. They can be negotiated to be paid for by the Seller as well.
Are you still reading!? Wow. You're committed. I love it!
Step 3: Due Diligence
You’ve targeted two cities/towns. Your receiving property alerts instantly when new land hits the market. You now have several builder contacts! You have your Pre-Approval for Construction Loan financing. You’ve chosen a floor plan. You know the estimated numbers, and they make sense… It’s time to go under contract!
Let’s say you’ve chosen the land, written an offer, and gotten it accepted – Congratulations!!!
The battle is far from over. I’ve had clients contract and terminate several properties and waste thousands of dollars on Due Diligence before finding a parcel that worked for their project and house type. What is Due Diligence? It’s how you determine that the land can be built on, basically. Percolation testing for septic, water well testing, utility access and quotes, soil engineering and density readings… The real work begins now.
Click these images to expand them as a reference:
Paragraph 6 is critical in our contracts. We make our offers Contingent on the approval and success of these items. Once you’ve contracted your land lot – DO THESE STEPS. You’ll thank me later. You may even want to pay me, which I’m not against. (Haha)
- Choose THREE (3) home sites on the Lot: “Byron, why 3?” This is especially important if the lot does not have access to sewer and septic will be required. The amount of rock in the soil at your chosen spot, property setback lines, natural water “drain-way & runoff” approval by the city/county, elevation or slope of the human waste pipes pitching into the septic tank, tree root density, water absorption rates in proximity to your water well… These are all things that can cause failure during Due Diligence and cost you thousands of dollars, let alone time, to remediate. Choosing 3 spots will cost you a few hundred extra dollars on your inspections. And Spot #2 may be more expensive to connect electric and water mains from their sources? But you’re better off testing several sites on the lot at once so that you don’t focus on one site for a month and a half, pay for testing/inspections, have something fail, and then have to start over at another site. Make sense? Always have a backup. It’s a recurring theme in this post. Don’t marry one particular spot on the land lot. No emotions.
- What to Test & The Costs: These numbers fluctuate, and can vary state by state. Get several estimates… Don’t rely entirely on these numbers. Make yourself (or have your Realtor create) a spreadsheet.
- Survey – Property boundary surveys range from about $500 to more than $5,000 depending on the size of the lot, the type of Survey you order, and the time that it takes for the Surveyor to complete the job.
- Percolation Test – This is your “Septic Testing” if Sewer isn’t available. These run around $750, but expect to pay around $1,100 for picking three home sites. Here’s a more detailed explanation of what this testing entails.
- Soil Engineering – This is critical. The engineer measures the water absorption rate, density of rock in the soil (soil content), and works closely with your Septic Engineer if that’s required. The Soil Engineer makes sure that you aren’t building on poor ground. They usually charge about $1,000 and range upward very quickly depending on the size of the structure you’re building. They’re way more expensive in the commercial world… You can imagine why. But the engineering is worth every single penny.
- Water Well Test – There are two tests I’d recommend. First, contact a local Drilling pro and show him your chosen home sites. He’ll help you determine the best location for your Well (if city/county water isn’t available). This inspection runs around $500. The second is a Bacteria Test. And they sell kits that allow you to test the water yourself for dirt cheap. But if you’re unsure of yourself, there are local labs where you can send samples of your water to ensure it’s safe for drinking. Your local city/county Health Department can give you those contacts. This is usually less than $100.
- Appraisal – You’ll appraise the property twice. But running the numbers on your project is like sharpening your axe before you fell a tree. It ensures that you aren’t overpaying for the land. The second appraisal (once you’ve closed on your land parcel) gives you an Opinion of Value on what the home plus the land will be worth after construction is completed. This helps you adjust your budget and pick your selections (counters, cabinets, faucets, etc) more accurately. The appraisals are usually about $500 each.
- Rezoning – This is another cost that can vary depending on your location. Look at your local City/County Planning and Zoning website. If you’re simply building one house on a land lot, you likely won’t need to rezone. But confirm this before you write the offer for the land! If the information isn’t available, either you or your Realtor should call the Planning & Zoning Department. Regarding the costs – take a look at Savannah Georgia’s Rezoning Webpage and scroll down to Zoning Applications. If you click on the “Rezoning & Comprehensive Plan…” link, Page 7 of the Application details the fees. It’s around $600 in Savannah. It’s $2,200 in Nashville! Huge difference. Always confirm.
The total cost for Due Diligence on your land parcel will cost around $4,000 (rounded up) in 2021. This is another nudge from me, your friend, telling you to do your homework extensively before you jump into buying land thinking it will be easy. Know the playbook before you start the game. You don’t want to run around confused with your hands in the air causing other professionals to stop everything that they’re doing to fix one of your emergencies.
I tell my clients that buying land and building from the dirt up in this insane market is like riding a ticked-off rodeo bull… You’d better grab the rope and hold on tight! It’s challenging, and not for the faint of heart. It DEFINITELY isn’t for the impatient person. Many have tried and failed. Real Estate casualties people. They say if you sit quietly and listen on a Tennessee October night, you can hear their groans in the wilderness.
The final product is more than rewarding. You’ll build a home exactly the way you imagined it, on the perfect piece of land. You’ll get to wake up every morning with coffee and watch every sunset on your beautiful new property. That’s what I call American freedom. That’s how I was raised, and I wouldn’t trade it for the World.
If I can answer any of your questions, or help in any way, please don’t hesitate to email me at HatcherByron@gmail.com. I’d love to help this dream become a reality for you. Don’t forget to check out the latest land for sale on our team websites in the Nashville, TN and Savannah, GA areas: