How to Buy Vacant Land

Vacant Land Sold SignAlthough buying a home is a concrete part of the American dream for most adults, owning land as part of an investment strategy or wealth-building plan is becoming more popular. Having a small, untouched piece of property holds quite a bit of potential for building a home in the future, farming, or starting a business. However, the ins and outs of financing vacant land can be difficult to navigate since they differ from financing a traditional home purchase. If you’re in the market for vacant land, here’s what you need to consider before starting the buying process.

Know the Type of Land

There are two main categories of land which can be purchased: improved land or raw land. The former is fairly simple to recognize in that some work has been done to improve otherwise 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. Improved land typically costs more than its counterpart, raw land. With raw land, no human or machine has touched the natural landscape of the property. The possibilities are endless with raw land, but potential buyers may find it more difficult to convince a lender to finance the purchase.

Understand the Lender’s Perspective

Speaking of lenders, it is important to know what you are up against when buying improved or raw land that is vacant. Improved land is far easier to obtain financing for, given that the lender can see the possibility of building a home or erecting a business on the property. Should the owner default before the final improvements are made, the land is less of a hassle to unload to another buyer. For raw vacant land, however, lenders view the purchase as a risk. If the owner walks away from the 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 some willing lenders, potential buyers have their work cut out for them before signing on the dotted line.

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Do Your Homework

In order to secure financing for a vacant land purchase that has not been improved upon in any way, buyers should take the time to complete a handful of steps first. Start with a land survey which details the boundaries of the property. In some cases, the seller of the land has this information readily available, but other times, a land survey needs to be completed to determine the property’s limits. Once the survey is complete, it may also be necessary for potential buyers to conduct an easement and title search. An easement is essentially a list of individuals or businesses who have permission to use or enter the property, such as a utility company or city to repair underground pipes. A title search provides information about the different easements connected to a piece of vacant land, but also offers a history of property ownership including liens that may be linked to the title.

Vacant land buyers should also look into 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 may be designations for agriculture or other special uses as well. Once this information is known, an appraisal is often required to determine 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.

Select the Right Financing Option

Although there are fewer options for financing vacant land than there are for purchasing a home or business already built, potential buyers do have viable solutions for financing a land purchase. Here are the most common:

Community Bank Financing

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 credit union. First, smaller financing institutions do not often sell their loan portfolios in the secondary market, meaning riskier loans like vacant land financing need not 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.

Home Equity

Current homeowners may have an option to access the equity built up in their primary residence to help finance a vacant land purchase. Home equity loans and lines of credit can be a more affordable, flexible solution than a traditional vacant land mortgage loan, but a default on the loan or line of credit puts a primary residence at risk.

Government Loans

There are a handful of government mortgage loans made available through the U.S. Department of Agriculture which may be used to purchase vacant land. A USDA mortgage loan comes with stringent credit requirements and specific property eligibility criteria, but for qualified buyers, these loans may be a strong contender in financing a land purchase.

Owner-financed Loans

Another option for financing a vacant land purchase is owner-finance agreements, also known as a seller-financed loan. With this solution, the potential buyer creates a promissory note with the current owner of the land, detailing the terms of paying for the land over time.

Each financing option, with the exception of an owner-financed loan, requires a review of the borrower’s credit history and score, income, other assets, and debts.

Before diving into the adventure of land ownership, potential buyers should understand which type of land they are buying, how lenders view that type of property, and what is required to ensure the vacant land is ready for purchasing. Finally, it is crucial to know the types of financing options available and which may work best.


Posted on July 27, 2017 by in Mortgages

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