Although buying a home is a concrete part of the American dream for most adults, owning land as part of an investment strategy or a wealth-building plan is becoming more popular. Having a small, undeveloped piece of property holds considerable potential for building a home in the future, using it for farming, or starting another business.
However, the ins and outs of financing vacant land plots can be tough to navigate because they differ from traditional property purchases.
If you’re in the market for vacant land, here’s what you need to consider before starting the land buying process.
Types of Vacant Land
Two main categories of land can be bought: improved land lots and raw land.
– Improved Land Lot
The former is fairly simple to recognize because some work has already been done to improve the untouched, vacant land. This could mean someone added an access road or driveway, or that utilities have been connected to the property in some form. A plot of improved land typically costs more than its counterpart, unimproved raw land.
– Raw Land
Raw land is a completely undeveloped area with no sewers, electricity, or roads. With raw land plots, no human or machine has done much, if anything, to enhance the natural landscape of the property. The possibilities are endless with unimproved land, but potential buyers may find it more difficult to convince a lender to finance the purchase of it.
Land lots without major structures or other dwelling enhancements are also commonly referred to as spare ground, urban prairie, vacant lots, empty lots, and undeveloped lots.
How Lenders View Vacant Land
Before buying vacant land, it’s crucial to understand how lenders view improved and raw land in case you need a land loan or plan on selling the land in the future.
– Improved Land
Improved land is far easier to obtain financing for because the lender can see the possibility of building a home, installing a mobile, manufactured, or modular home, or operating a business on the property. Should the owner default before the final improvements are made, the land is less of a hassle for the lender to unload to another buyer.
– Raw Land
For raw land, however, lenders view the purchase as a higher risk. If the landowner walks away from the vacant, raw land without repaying what is owed, the lender has a lower chance of reselling the property in a timely fashion. While it is possible to finance raw land through willing lenders, potential buyers have their work cut out for them before signing on the dotted line.
Vacant Land Research Steps
To secure financing for a vacant land purchase, buyers should take the time to complete a handful of research steps first.
1. Conduct a Land Survey
Begin your research by obtaining a land survey that details the property’s boundaries.
In some cases, the seller of the land has this information readily available. When they don’t, you can check with the county assessor or the recorder’s office where the property is located for the file. You can also hire someone to complete a new land survey to determine the property’s features, property lines, and limitations.
Once the survey is complete, it may also be necessary for potential buyers to conduct an easement and title search.
2. See if Easements Exist
An easement grants specific individuals, businesses, or other entities permission to use or enter the property for some purpose.
For example, it could allow the city access to the property to repair underground pipes. Another example is a property owner granted access to their property through another.
3. Do a Property Title Search
A title search provides information about the easements associated with the vacant land as well as a history of property ownership, including liens, encumbrances, and legal disputes that may be linked to the property.
4. Research Area Zoning Laws
Vacant land buyers should also examine the zoning laws applicable to the property to ensure plans to build or develop are not impeded. Residential and commercial zoning laws are the most common, but there could also be designations for agriculture or other special uses.
5. Have the Property Appraised
Once this other information is known, an appraisal is often needed to determine the land’s estimated value. The appraised value of the vacant land serves as the foundation for financing options, no matter the intended use of the property in the future.
Vacant Land Financing Options
Although there are fewer options for financing vacant land than there are for purchasing real estate with a stick-built or manufactured home already in place, potential buyers do have viable solutions to choose from.
Here are the most common ways to finance vacant land:
a. Community Banks and Credit Unions
It may be tempting to work with a large, national bank to secure land financing, but buyers may have better luck working with a community bank or local credit union.
First, smaller financial institutions don’t sell their loan portfolios in the secondary market as often, meaning riskier loans, such as those for vacant land, don’t need to conform to tighter loan characteristics. While it isn’t always a slam dunk, community banks and credit unions may offer more affordable terms to land buyers than national lenders.
You will typically need a down payment of 20% or more and a great credit score to buy unimproved or raw land, or improved land with a mortgage loan. Furthermore, the interest rate on land loans will usually be higher than that for a single-family residence.
b. Home Equity Lending
Current homeowners may have the option to access the equity built up in their primary residence to help finance the purchase of vacant land. Home equity loans and lines of credit can be a more affordable, flexible solution than a traditional vacant land mortgage loan, but defaulting on them puts your primary residence at risk.
c. Government-Backed Land Loans
There are a handful of government mortgage loans made available through the U.S. Department of Agriculture that can be used to purchase vacant land. A USDA mortgage loan comes with stringent credit requirements and specific property eligibility criteria. For qualified buyers, these loans may be a strong contender in financing a rural land purchase.
d. Owner-Financed Land Loans
Another option for financing a vacant land purchase is owner-finance agreements, also known as a seller-financed loan. With this solution, the buyer creates a promissory note with the current owner of the land, detailing the conditions for paying for the land over time.
This type of financing can be beneficial to buyers with bad credit, those who need a smaller down payment, or those who require other non-traditional terms.
e. Personal Loans
You can also buy land using a personal loan. Personal loans are the most accessible to couples and individuals with good credit, are quicker to obtain than other financing options, and don’t require a down payment or collateral to receive the funds.
Personal loans of up to $50,000 are the easiest to acquire; however, individuals with enough income and a low debt-to-income (DTI) ratio may be able to borrow $75,000 or more by searching around.
f. Hard-Money Land Loans
Hard money land loans are short-term loans generally reserved for real estate investors and land developers. They are typically obtained from private lenders and offer faster closing times compared to traditional loans. Hard money loans must be repaid much quicker than other loan options and usually come with higher interest rates and fees. This type of loan prioritizes a property’s value over the borrower’s credit score.
Final Thoughts on Financing Vacant Land
Before diving into land ownership, potential buyers should have a solid understanding of what the land will be used for now or in the future. Rural land that will be used for farming will have different requirements than land in the suburbs where you plan to build a house or put a mobile home on.
Understanding the type of land you’re buying, how lenders view that property, and what is required for your needs can ensure the vacant land is appropriate for your use and you’re ready to make the purchase.
Finally, it is crucial to know the types of financing options available before and after the land purchase. For example, do you expect to be able to take out an equity loan on the vacant land? Each land financing option, except for maybe an owner-financed loan, requires a review of the borrower’s credit history and score, income, other assets, and debts.