Help with buying land/lot for 1st timer

gardenweb123456July 9, 2014

This is the first time I will be buying a home but I don't want to build the home just yet, I have a few questions that I would appreciate some help with.

There is a lot in the suburbs for sale that I absolutely want. My questions are:

1. I can buy a lot and build the house whenever I want, let's say 5 years from now right? I still pay property tax and it counts as a tax write off similar to a home, or no?

2. Let's say for the sake of the argument, the lot is $100k and the value of other houses in the division are $300k, making the price of building the home $200k. Is financing in any way different than you would go through for a home, and should I bother trying to get as high of a down payment as possible? Is there any incentive for that if I don't plan on building for a couple of years?

3. I read somewhere else: "monthly payments you make will end up counting towards your down payment on your home."
I thought house price was different than land price. Does this mean that if the house itself costs $200k to build, and I have made $60k worth of payments on the lot itself after a couple of years, that the house will now cost $140k (200 - 60)??

I would appreciate any help for a first timer as well as any other tips you may have. Thank you

This post was edited by gardenweb123456 on Wed, Jul 9, 14 at 9:13

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1. As long as there are no covenants tied to the land requiring a house be built within a certain time frame. This probably isn't the case, but may be if the lot is in a subdivision.

2. If you can't pay cash for the lot, I would advise against making the purchase. What is the square footage of the $300k homes? Spending $200k on construction (you won't be able to borrow 100%) will usually get you a 2000sqft house.

3. I'm not sure I follow this question.

    Bookmark   July 9, 2014 at 9:19AM
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As for the tax implication- if you are in the land business, if you sell at a loss. other than that, it's a possession.

You are posing and concluding based upon "if and maybe"
which will only be factual, at the time.

    Bookmark   July 9, 2014 at 9:54AM
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This is my experience in Illinois, the state our land is in - YMMV:

1 - we have been told there is a time limit to build on the land, verify with both the seller and city
- we are paying property tax but cannot write it off because it is not a primary residence (it was either that or because there's no house, I can't remember what our accountant said)

2 - you can either pay off the land and use that as equity or do the 20% down payment - it might actually be more because it is a construction loan - riskier for the lender


- meet with several different lenders. We bought our land with a small mortgage and are paying the land off before we build. The loan we have though, we have the option to roll over the remaining land amount into the building loan and then finally, the 30 year fixed loan. This is unusual for today. Also, you always want to get as much time as possible to build - our max is 9 months.

- find out if utilities are readily available or if you have to connect them. That is very expensive to do.

- research your county and city's laws on building new homes, land restrictions, and zoning requirements. You may find surprising restrictions. For example, our land backs up to a 40-acre wetland - our property ends before the wetland but the development on the opposite side has a lot of their property in that wetland. They cannot touch it, mow it or do anything with it and that's a lot of useless land piling on property taxes, which are high in our town. Additionally, our land is zoned as an estate - which means the house has to have x sq ft, cannot have a fence in the front, etc.

    Bookmark   July 9, 2014 at 11:02AM
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Just because houses are selling for $300k and land is selling for $100k doesn't mean the house will cost YOU $200k to build.

In my area, big builders who turn out hundreds (thousands?) of identical houses every year buy up lots in existing subdivisions and build their houses at reduced costs due to economy of scale (use the same plans over many houses, buy bigger quantities of materials). Everyone else has to compete for the land, and doesn't get the same deals building. We're paying more than if we just bought a house from a builder. But we're getting what we want rather than what the builder thinks "everyone" wants.

Also, we're in a fast rising market. Our land has probably gone up 10% in the last year. Build costs have gone up less. So by the time we build, we might get closer to what a new house would have cost us.

If you own the lot and have significant equity in it, that can be used as a down payment for the house. (In Canada, anyway.) If the bank loans you $200k to build a house and the house is worth $300k including land, it's the same at the end of the day as the bank loaning you $200k to buy a $300k house. Either way, if you don't pay, they get a $300k house for $200k. If you're building yourself, the bank may require more than 30% of your own funds tied up though. If you aren't experienced, they may want more assurances that you aren't going to walk away and leave them with a hole in the ground.

    Bookmark   July 9, 2014 at 12:31PM
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Sophie Wheeler

Don't forget that a lot in a subdivision may also need to be mowed and otherwise maintained even if you haven't yet built a home on it. It's not static. Anti neglect ordinances will have you busy, or paying someone else to do the upkeep.

Building new custom costs more than existing. So if homes in the subdivision are selling for 300K, they could cost 350-400K to build. Building custom is about getting the home that you want. It's not about ''investing'' your money in real estate.

    Bookmark   July 9, 2014 at 7:56PM
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One more thing to consider is that getting a land-only loan can be difficult. First, there are not that many lenders who even make land-only loans and second those that do usually charge at least 2 to 3 percentage points MORE for a land-only loan than for a construction loan.

In 2003, when DH and I decided we wanted to buy land where we would eventually build our dream home, we found a 4 acre lot we loved for just under $50K. Since our credit rating was impeccable and we were confident we could easily pay off the loan in 5 years, we didn't think financing would be any problem. However we discovered that if we wanted to purchase a $50K new car, we could have gotten a five-year new car loan for 2 percentage points LESS than the best five-year land-only loan available!

We really wanted to go ahead and buy the land because it is a lovely piece of property, in a neighborhood that we loved, outside of the city but close enough to drive in easily, and because of an influx of people moving to our area, land prices were sky-rocketing and the number of available lots was shrinking quickly. But we didn't want to commit to building YET because we already owned one house that we were still paying for and we didn't want to wind up saddled with two mortgage payments if we couldn't sell the first house when the new one was ready to move in.

But, it didn't seem right that a land loan would cost us 9% to 10% when we could have walked into any dealership in town, picked out a $50K new, and gotten immediately approved for a loan at about 7.5%. Didn't make sense to me at all! I even asked one banker why they would be willing to loan us the same amount of money for a brand new car that I could easily drive off the lot and totally wreck the next day leaving them with nothing to repossess for less than they would lend us the money to buy land that simply could NOT disappear. The banker had no answer other than "that's the way it is."

So we did some creative thinking and ended up doing a cash-out refinance on our first home and essentially borrowing the equity we had built up in it to buy the land we wanted. (In other words, we sort of loaned the money to ourselves!) Because mortgage interest rates were lower at that time than our original mortgage rate had been we actually came out quite a bit ahead...even after paying the points on the refinance. As I recall, the mortgage refinace loan was at 5.3% and we had been paying something like 7.4%. Five years later we had paid off the first house completely and owned our land outright. Therefore we could use it's full value as equity to qualify for the construction loan we wanted. Plus, because we were no longer making house payments and had no rental expenses, we could qualify for a larger construction loan.

Anyway, just thought you should be prepared. If you're hearing that 30 year fixed mortgages are costing around 4.25% and thinking that you ought to be able to get a land only loan for less - because, after all, you won't need 30 years to pay it off, think again!

    Bookmark   July 10, 2014 at 1:45AM
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Agree w/Bevangel, loans on bare land are not that easy to come by. We purchase 20 acres adjacent to our property w/out any intention to build (had an old tear down home on it). IF we had intention to build we would have had more options as some lenders will give you up to 5 years to build on a bare land purchase. After looking into all of our options we ended up w/an owner carry contract w/40% down @ 7% for 10 years. That was waay better than any lender could do. The closest lender option was 20% down @ 13% for 15 years (this was a few years ago). We have sub 3.5% interest on our primary residence (fixed 30 year) there was no way I was going to pay 13% for bare land! I'd get as creative as you can if you really want that land, get as much equity into it up front as possible (downpayment).

    Bookmark   July 10, 2014 at 10:46AM
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It sounds like your situation is similar to mine.

We bought our lot in December '13. It was a 90k lot and we put 20% down. Most lenders have lot loans on parcels that have an address, but if it's just raw land, good luck. All subdivision land should have an address (disclaimer, I also work in banking). We did not have intentions of building right away this year however seeing the housing market go up, and us being overly impulsive we decided to list, sell, and build this year.

There are many different types of loans out there that will pay off your lot loan and roll that into your construction loan.

I was lucky enough to find a lender who will do an 80/10/10 loan for me so I can avoid having to pay PMI payments on it. That woudl be an 80% first mortgage, a 10% line of credit, and I need to put 10% (of the total cost, lot included) down. That would mean using your example. I would have bought my $100k lot financed 80k added a $200k home to it and only had to put a total of $30k down payment ($20 from the lot and $10k additional)

Does this make sense?

    Bookmark   July 10, 2014 at 11:45AM
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Another thing to factor in is that if the lot is in an HOA, you may have dues to pay and you need to check the HOA documents to be sure you can build what you want. Not trying to throw cold water -- in fact we just bought a lot in an HOA that we don't intend to build on for several years -- just alerting you to another potential consideration.

    Bookmark   July 10, 2014 at 2:03PM
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Thanks for all the help guys. Financing isn't that much of an issue for me. I should have mentioned that I can put a pretty good down payment on the house. I just needed some help with trivial stuff. Thanks

    Bookmark   July 10, 2014 at 2:44PM
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