Before You Buy that Building Lot

There are a few options for buyers that want a new home; most just buy from builder and move on. Others take a more challenging route and go it alone, that starts with finding a suitable location and building lot. But before you buy that building lot, a significant amount of research is required. The dangers of buying a building lot without completing proper due diligence cannot be overstated; this is arguably the single most important step of the process.

“Building lots” aren’t just laying around for the general public to purchase. In new communities, the developer owns the lots and sells them to builders they work with. In developed residential areas, empty lots lying around are scarce; usually there’s a reason they’re undeveloped. Adverse external influences are the most common; traffic, power lines, water and terrain. If development were fiscally feasible, there would likely be a home there.

The question of “value” must always be the first thing addressed. Our clients hear it constantly; “every deal is a math problem” and the math has to work. The building lot cost, admin costs, construction costs and all of the miscellaneous expenses MUST be supported by values the immediate area and trends for the future. In short, don’t spend 100K on a project in a 75K area. How to examine and analyze all of that is another post, hopefully your agent knows how (and 85% don’t). You might want to work with an appraiser if your agent is incapable of diving deep with data.

The most common option for would be home builders is to buy a “tear down”. That’s also the usual route for the smaller builders; you will be competing with them for any opportunity. Sellers are wise to the market and not shy about asking inflated prices just to see who bites. If you win and get a shot at a building lot, it’s critical to consider things that come into play – many things not often considered. The process gets  complicated (and expensive) very quickly.

Do you have the cash to purchase a lot? Lenders tend to avoid extending credit on land; it is even less of an asset than an improved property if taken into foreclosure. If you’re considering buying a parcel with an existing home and then removing it, you must to check into possible mortgage restrictions. Fraud could be an issue if the home is razed on a mortgage where it is part of the collateral.

If you do buy the property and decide to remove the home, don’t expect to just bring in a dozer and loader. Permits need to be secured, disposal needs to be arranged, control of the site (dust, debris, noise, traffic, work hours) need to be handled according to local ordinances. You might hire a demolition firm but know that many place the administrative burden on the client. Oh, and what if the property or the area is in some type of “restricted” area? There are historic designations popping up all over, so too are moratoriums on in-fill or tear down builds. Rebuilding in a flood zone? Many locals abhor the “McMansions” invading neighborhoods of older bungalows or the gentrification of areas to the point they become unaffordable for the locals. Take nothing for granted and know that none of this is cheap or quick.

An inability to collect and assess applicable data is bad enough, but most agents have no idea of how to write a land contract. The nuances needed to protect the buyer, how to handle due diligence and how to help the buyer navigate the required approval steps. The potential for disaster is obviously high – many buyers have no idea just how high until it’s too late.

What are you building? This is a classic “chicken or the egg” conundrum; can you build what you want on the lot? The only way to know is to submit everything for approval and get permits. Easy enough in theory, but before seeking approval expect to provide and consider…

1.  A full set of architectural, stamped plans to submit to the approving party. This requires the obvious consulting and design work and the appropriate expense. Consultation, design and getting plans stamped is an expensive and often time consuming proposition.
2.  A survey with setbacks, the building envelope and all other points of interest (easements, utility drops, septic/leach fields) clear noted. A survey is an expense.
3.  A site plan that examines the percent of “impervious surface” on the lot (things that don’t drain like driveway, the roof, patios, etc) and in some cases percent of “tree canopy”. Landscape plans can be required to show how much foliage will be present, plant type and size and drainage patterns. A landscape plan is an expense.
4.  A utility survey is also required; what is available? How much are hook ups Where are they? Are the drops accessible from the lot or is an easement required? Can that be obtained? How much? If a septic is required, does the lot perc? Where are the leach fields? Will they impact a pool or landscaping down the road?

What is the zoning where this build is planned? Is this design permissible? Is a variance required? Will the neighbors object to this build and petition for either rejection or significant change? The potential for significant delay and added expense is significant. So is the potential for rejection and failure.

The best is saved for last…that “Chicken and Egg” thing. This list of things (by no means comprehensive or complete) needs to be done BEFORE the building lot is purchased; little point in buying dirt that you can’t do anything with. So that begs the question; will the seller stick around for weeks or months while this plays out? The next obvious question; do you have/want to spend the money and time required on all of this? Some buyers will, others won’t. A big part of the equation is how the contract is structured; is the seller incentivized to wait? Does your agent know how to structure an offer? Write the stipulations that protect you? Who is the other agent? Can they control their part of the transaction? Probably not.

Many builders buying infill lots and tear downs are familiar with the areas in which they work; they know ahead of time what to expect, how the locals feel about things and the proclivities of the area. They typically have relationships with local trades and maybe even with those in the governing jurisdictions; often the process is expedited. Many times they have packages 75% ready to go; sets of plans that are already matched to the site.

“Double the time, double the budget” is the building rule of thumb. Evaluating and buying a building lot is the first step of a long long process. If this is fumbled, significant time and money will be lost. Unfortunately it bears repeating time and time again, work with experienced agents as even under the best of circumstances this is a trying process.

Questions? Maybe we should talk.

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