Land Purchase Advice

[OpenCountry]

Hey everybody, I’m curious if you can provide any ideas on what the best method is for financing land to eventually build a house (Fall 2021 or Spring 2022). Our current house is paid off, but I’m being transferred to the Butte/Helena area and would like to build a house there. We don’t plan on keeping our current house once we move. One of the lender’s I talked to mentioned if the land isn’t paid off it can be more of a challenge to get approved for the new construction loan. This will be the first time going this route so any advice would be greatly appreciated.

Would doing a HELOC or equity loan against my current house be the best option to pay the land in full?

Is the standard down payment still 20% or is it more for a land purchase?

Any other finance option suggestions?

 

[Birddog916]

I was lucky and found a seller willing to finance for me with a 40% down payment. The seller and I went to an good real estate attorney who drafted up the documents. Basically, I put down 40% and pay 4% interest. Monthly nut is 1000$ over 15 years. It has worked out well so far. I'm 5 years in.

 

[OpenCountry]

I was lucky and found a seller willing to finance for me with a 40% down payment. The seller and I went to an good real estate attorney who drafted up the documents. Basically, I put down 40% and pay 4% interest. Monthly nut is 1000$ over 15 years. It has worked out well so far. I'm 5 years in.

Did you end up building? If so, how did the new construction loan work with the seller financing?

 

[Wildabeest]

HELOC would definitely be the easiest way to go. You likely won’t get the best rates, but you won’t have to deal with the lender having to value and underwrite the underlying land asset. You will likely save some closing costs as well, as it would be up to you as the whether you get an appraisal, survey, etc. I generally skip those things and the associated costs unless I’ve got specific concerns. All of my recent land buys have been quick close cash deals with no contingencies other than standard title work.

If you go the above route, don’t underestimate the value of that. You should get a better price since you are removing all of the risk from the seller. Unlike developed property, getting traditional financing on raw land is less straightforward and means that you don’t have as many buyers able to complete the transaction. I’d guess that a substantially higher % of land deals fall through due to financing roadblocks than traditional single family home purchases. Use that to your advantage.

As for traditional financing, it will depend a lot of the actual land you are purchasing as to financing options. A lot in a platted, maintained subdivision with utilities and active HOA will be easier to finance than a 20 acre parcel in the middle of nowhere with no maintained roads. As a general rule, the more broadly and easily marketable the property is, the easier time you’ll have getting financing.

And don’t rule out owner financing if the property is not broadly marketable. Owners of these properties understand the difficulty of potential buyers getting financing, so often they are forced to finance it themselves. Which is why coming in with cash (or cash from your HELOC) is often a big advantage. I usually try to tease out the current owner’s financial situation to determine how important immediate cash is to them. For example, one property I bought last year had a tax lien on it, was tied up in a divorce settlement and the dad also had child support judgement against him. I was also able to ascertain that dad likely also had a gambling problem. All of this was discovered through public records research and social media research on the internet. And the property had some issues that made it difficult to finance. Know all of this allowed me to buy it at 30% less than the asking price. I got a good deal, he got some cash, and hopefully his kids got some Christmas presents.

Finally, don’t neglect the issue of water. Out west, you generally do not have a legal right to the water on you property. That right is sold separately. If the development where you buy your lot has a community or municipal water system, then you’re golden. If not, you need to make sure there are water rights that are included in the deal so that you can drill a well. In addition, if you are going to drill a well you should do research on neighboring properties to find out how deep they are having to go to find water. This is especially important if you land is up in in the mountains. I know people who got a “great deal” on a 5-20 acre lot for $50-100k only to find out after the bought it that it was going to cost another $50k to drill a 500ft well. Septic is similar. Make sure there are lots close by that have been able to get their septics permitted. There’s a decent amount of consistency in an area as to whether the soils will perk or not. But if the lot you are looking at seems exceptionally rocky or otherwise causes you concern as to whether it will perk, you might want to have someone look at it or do your own perk test.

 

[Birddog916]

Did you end up building? If so, how did the new construction loan work with the seller financing?

I haven't built yet. The spot I purchased already had a old farm house on it. I might build sometime in the future I have about 15 more years of work before retirement.

 

[d-edward]

HELOC would definitely be the easiest way to go. You likely won’t get the best rates, but you won’t have to deal with the lender having to value and underwrite the underlying land asset. You will likely save some closing costs as well, as it would be up to you as the whether you get an appraisal, survey, etc. I generally skip those things and the associated costs unless I’ve got specific concerns. All of my recent land buys have been quick close cash deals with no contingencies other than standard title work.

If you go the above route, don’t underestimate the value of that. You should get a better price since you are removing all of the risk from the seller. Unlike developed property, getting traditional financing on raw land is less straightforward and means that you don’t have as many buyers able to complete the transaction. I’d guess that a substantially higher % of land deals fall through due to financing roadblocks than traditional single family home purchases. Use that to your advantage.

As for traditional financing, it will depend a lot of the actual land you are purchasing as to financing options. A lot in a platted, maintained subdivision with utilities and active HOA will be easier to finance than a 20 acre parcel in the middle of nowhere with no maintained roads. As a general rule, the more broadly and easily marketable the property is, the easier time you’ll have getting financing.

And don’t rule out owner financing if the property is not broadly marketable. Owners of these properties understand the difficulty of potential buyers getting financing, so often they are forced to finance it themselves. Which is why coming in with cash (or cash from your HELOC) is often a big advantage. I usually try to tease out the current owner’s financial situation to determine how important immediate cash is to them. For example, one property I bought last year had a tax lien on it, was tied up in a divorce settlement and the dad also had child support judgement against him. I was also able to ascertain that dad likely also had a gambling problem. All of this was discovered through public records research and social media research on the internet. And the property had some issues that made it difficult to finance. Know all of this allowed me to buy it at 30% less than the asking price. I got a good deal, he got some cash, and hopefully his kids got some Christmas presents.

Finally, don’t neglect the issue of water. Out west, you generally do not have a legal right to the water on you property. That right is sold separately. If the development where you buy your lot has a community or municipal water system, then you’re golden. If not, you need to make sure there are water rights that are included in the deal so that you can drill a well. In addition, if you are going to drill a well you should do research on neighboring properties to find out how deep they are having to go to find water. This is especially important if you land is up in in the mountains. I know people who got a “great deal” on a 5-20 acre lot for $50-100k only to find out after the bought it that it was going to cost another $50k to drill a 500ft well. Septic is similar. Make sure there are lots close by that have been able to get their septics permitted. There’s a decent amount of consistency in an area as to whether the soils will perk or not. But if the lot you are looking at seems exceptionally rocky or otherwise causes you concern as to whether it will perk, you might want to have someone look at it or do your own perk test.

Does the application of any of this vary in considering raw land (with the intent to build) for a second property vs. a primary residence? Have been casually looking for raw land where I'd like to put up a cabin but have been struggling to find clear guidance on the financing options available to me.

 

[NEWHunter]

I would take a look at the local farm credit out that way. They specialize in financing rural homes amongst other things. Looks like it’s Northwest Farm Credit Services out there. That said a REM on your current house, either a conventional 1st or HELOC still might be the easiest and most cost effective way to go.

 

[Wildabeest]

Does the application of any of this vary in considering raw land (with the intent to build) for a second property vs. a primary residence? Have been casually looking for raw land where I'd like to put up a cabin but have been struggling to find clear guidance on the financing options available to me.

If you are just borrowing money for the land, it won't really matter whether it's intent is for primary or secondary residence. However, if you plan to borrow money for construction, that's where that will become an factor. If I was in that situation, I would look to pay off the land - either with cash, taking a HELOC on your primary residence, borrowing against your 401k, etc. - before applying for the construction loan. If that was a problem, then I'd seriously reconsider whether I could really afford to have a second home. You'll have issues getting a construction loan if you don't own the land free and clear because it would create a situation where two lenders would have primary liens against the same asset (since you can't really separate the land from the dwelling once it's "improved" - it's a single asset).

If you get a pure construction loan that will be paid off at the end of the construction, then again, it would not matter whether the intent was for primary or secondary home. Most construction loans, though, are "converting loans" that automatically convert into a traditional mortgage once construction is complete. If it's that type of loan, then the lender may have different policies, rates and terms depending on whether it's your primary or secondary residence.

If you do plan to / need to borrow on all aspects - land, construction, mortgage - then you may be able to find a lender who will allow you to do that. But you'd need to have all of that defined upfront, and again, you'd likely not come out of it with the best final interest rate on that mortgage. You could always refi once it's all done though if that would give you a better rate.

Unfortunately, you likely won't find clear guidance on these things because different lenders will have difference appetites to take on these kinds of loans. My experience has been that your typical big box retail banks and mortgage lenders tend to shy away from lending on undeveloped land. There are niche lenders out there that will do it, but rates will tend to be higher than a traditional mortgage and they may require higher % down. Your best bet for finding a lender would be to ask local real estate agents if they know of lenders who have been willing to do it. They tend to have pretty broad networks of people that can help them get deals done.

 

[NEWHunter]

Does the application of any of this vary in considering raw land (with the intent to build) for a second property vs. a primary residence? Have been casually looking for raw land where I'd like to put up a cabin but have been struggling to find clear guidance on the financing options available to me.

See Farm Credit.