Buyer's Checklist for Purchasing Vacant Land

Never bought a vacant plot of land before? Don't begin building your home until you learn more about zoning, environmental, sewer, and other issues unique to this type of purchase.

By , J.D., University of Washington School of Law

Designing and building your own home on a plot of vacant land can be hugely satisfying. But unless you've done it before, the process can be confusing. Before purchasing vacant land, you'll probably want to check into:

  • what services will be available to you locally, including government entities
  • whether your plans will be incompatible with other local property uses
  • whether you'll qualify for a loan to fund the purchase and building
  • what building permits you'll need, and
  • whether your plans will be limited by environmental concerns such as endangered species.

We'll offer detail on these matters below.

What Are the Local Amenities and Government?

Start by doing some information-gathering on the area where the land is located. Some issues to look into are similar to what you'd consider when buying an existing home. For example, is the local government well run, or will it make your life difficult when you need permits or variances? Is public transportation conveniently located? What about nearby schools, shops, parks, grocery stores, and sources of quality medical care? The joys of rural living can be seriously diminished if you'll be spending half your time on the road.

How Will Environmental and Zoning Matters Affect Your Building Plans?

Investigate the immediate vicinity of the vacant land for concerns like landfills, noisy highways, or industrial uses. Maps and aerial surveys prepared by FEMA or Google or found on the town clerk's website can be helpful.

On the plus side, you might find that the plot is near conservation land or other protected resources, meaning you'll enjoy green space around you far into the future.

What Building Permit Obligations Will You Face?

You'll want to know whether you or your general contractor will need to obtain permits or approvals other than the building permit itself, most likely for:

  • Sewer service. Many towns and villages provide sewer service. But is there sufficient sewer capacity for you to make a connection? Ask the town clerk or local board of health. If a connection is available, how expensive will it be? If the property is far from the nearest sewer line, it might be more cost effective to install a private septic system. State and local health codes will likely govern the required soil quality, height of ground water, and distance from lot lines. If the property seller hasn't already pulled a permit for an engineered septic system, make your purchase contingent on having soils testing done and being satisfied with the results.
  • Water. Public water hookups might also require a permit, as might private wells. Many towns require that private wells—even those on neighboring properties—be located a minimum distance from a private septic system. Be sure you can get both on your lot.
  • Zoning. Virtually all towns have zoning bylaws regulating the kinds of uses permitted on vacant land, including how the lot can be developed, whether for residential, commercial, farming, or some combined use. If building a home, make sure that your land is zoned residential! Zoning also regulates setbacks from lot lines and similar issues affecting home design, like the maximum length of a driveway.
  • Subdivisions. If the land is within an established subdivision, additional laws and regulations may apply. Speak with the town clerk about whether the subdivision was properly approved and to check that your land is actually on a public road. Check the subdivision plans on file for rules governing detention ponds and use of common rights of way within the subdivision.
  • Regulated water resources. Building in or near wetlands, rivers and streams, ponds and lakes, and coastlines is governed by a complicated net of overlapping federal, state, and local laws. These can severely restrict the area available for building. If your land might contain protected water resources, have an engineer evaluate it.
  • Hazardous materials. If, for example, your land is the former site of a large industrial plant, have an engineer perform preliminary research for you.
  • Special regulatory issues. Your land might be located in a historic district, or be within a protected view shed. See what you can find out at town hall.
  • Possible title issues. If you go ahead and buy, your attorney (or the lender's) will examine the land's ownership history. Even so, you can anticipate title issues by looking at the local paper or talking to neighbors. Are there rights of way or other easements that cross the property? Has the property been foreclosed on? Has the town begun proceedings to collect back taxes? Issues like this can often be resolved before or at the closing, but it can't hurt to know what to anticipate.

How Will You Finance the Land Purchase and Construction?

There are many ways to finance the purchase of vacant or undeveloped land. The most common are:

  • seller financing
  • bank financing, or
  • an equity loan or equity line of credit secured by your existing home.

Here are suggestions about how to qualify for them.

Seller Financing of the Parcel of Land

A seller of vacant land—especially one who is highly motivated to sell—might be willing to provide financing (purchase money financing) to a qualified buyer, for some or even all of the purchase price. Here, "qualified" means any criteria that will satisfy the seller that you can be counted on to repay the loan.

Since the seller has already determined the land's market value , you won't need to obtain an independent valuation in order to confirm its worth as loan collateral. Be prepared to demonstrate that you have good credit (as in, a high credit score and solid credit history, or letters of recommendation from banks, tradespeople, and such), and that you will be able to repay the balance of the loan when it comes due (with such evidence as tax returns or W-2 statements showing income sufficient to pay for the periodic interest on the loan).

Because the land itself won't generate income, showing the seller a construction-financing commitment from the bank to cover building costs will be very helpful.

A lawyer can be worth bringing in, for both you and the seller. You'll both want to be sure that basic terms, like price, term, interest rate, and when and how payments of interest are to be made, are included in the promissory note. The mortgage, which secures the note with the land, will be recorded; you'll want to take particular care with the description of the premises, event of default, and other standard mortgage terms.

Qualifying for a Conventional Bank Loan for Land Purchase and/or Construction

Qualifying for bank financing for the purchase of vacant land usually requires showing excellent credit, income sufficient to pay for the interest that the bank will charge for the loan so long as it is outstanding, an appraised market value for the land that exceeds the principal amount of the loan, and a plan to pay off the loan.

You will need to provide the bank with evidence of income (tax returns, W-2 statements, and so on) that meets its income-to-loan ratio requirements (your total monthly debt payments, including the interest on the new bank loan, divided by your monthly pre-tax income, typically 30% to 40%). The bank will obtain (and you will pay for) copies of your credit score and history and a property appraisal.

If seeking construction financing from the same bank, it will also ask for engineered construction plans and detailed construction cost estimates. Your architect or builder's construction plans and other documents will determine the estimated cost. In addition to the costs of construction, the bank will likely insist on reserves, including:

  • a contingency reserve (often 5% to 10% of the estimated construction costs), and
  • an interest reserve (if you don't want to pay the monthly interest payments on the construction loan out of pocket).

After all, both you and the bank want to be confident that there are sufficient funds available to finish the project even if there are cost overruns or if the unforeseen happens, like your builder going into bankruptcy. If the project comes in on budget, you won't need to draw down the reserves. On the other hand, cost overruns that exceed the contingency reserve will be your responsibility to pay.

If obtaining construction financing from a different bank, or if you don't have immediate plans to build, the bank financing your land purchase will probably expect an even better credit record and history and ask for a lower income–to-loan ratio. (It will want more collateral for every dollar you intend to borrow.)

Considering an Equity Loan or Line of Credit If You Already Own a Home

If you already own a home, and if, over time, have built up some equity (either by paying off your mortgage or because the property has appreciated in value), consider a home equity loan or equity line of credit on that property as a source of financing for the vacant land purchase.

Your bank's lending requirements are likely to be less onerous than if you were applying for a construction loan or for permanent (long-term) financing for a new home. That's because your bank has already determined your creditworthiness and appraised the value of your existing home when you first bought it.

Expect the bank to ask you to update your credit and income documentation (recent tax returns, W-2 statements, and so forth). As with new financing, the bank will likely look for an income-to-loan ratio of 30% to 40%.

Are There Endangered Animals or Plants on the Land Where You Hope to Build?

Both the federal and states' governments protect a number of endangered species and their habitats. (County and smaller governmental bodies usually don't.) Some endangered species, like the bald eagle, are famous; others, like grey wolves, are the subject of contention, with farmers and ranchers fearing threats to their herds.

Information from the U.S. Fish and Wildlife Service can help you locate federally protected endangered species near you, and explain the kinds of protections that the government will enforce (for example, limits on numbers of the species that can be "taken," or minimum distances between endangered habitat and new construction).

The news isn't always bad; the U.S. government offers grant or loan programs to finance protection of endangered species and their environments during new construction. Often, property improvements that protect endangered habitats can also improve storm drainage or reduce damage from soil erosion.

Many states protect a longer list of endangered species than the feds. Check your state's maps and lists. And again, look for grant or loan programs that will defray or cover the cost of protecting endangered species on your land.

Almost all government agencies enforce their endangered species regulations by granting or denying permits that are specific to proposed construction or other activity. If your land is home to an endangered species, you might need to obtain one or more permits before going forward. The permits might limit the location of new construction or require special protections, like hay bales, during construction.

Building without approval on a piece of land that contains an endangered species or its habitat is an invitation to disaster. If in doubt about whether your plans are legal, consult an environmental engineer or an environmental biologist.

Should I Hire an Attorney Before Buying the Land or Building?

It's wise to get legal and other professional help with this process. Even after the land sale has gone through, an attorney might be needed, to make sure you don't miss something important regarding:

  • What zoning regulations apply for mixed uses of the land? If, for example, you're hoping to build a combination home and daycare center, you and your attorney will need to make sure that both such uses are permitted.
  • What title issues must be kept in mind during planning and building? Prior to closing escrow, you should have reviewed the title insurance preliminary report for potential issues impacting your plans. The attorney can help you revisit that report and further evaluate what kind of recorded restrictions affect the lot, such as environmental or historical designations.
  • Whether previous land owners tried to build on the property. By reviewing your land's files at the local building and planning office, your attorney can find out whether previous owners attempted to build, and if so, why their plans weren't successful. Your attorney might also check with local courts for lawsuits involving the property or its neighbors.

There are numerous potential issues when building on vacant land, but having the right real estate attorney available to help will make the process much easier.

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