• Financing
  • Inspection
  • Negotiations

Financing a Lot Purchase

Equity Line of Credit (ELOC)

In a strong home value market individuals can leverage the equity that they have in their primary home to buy a lot. This scenario works well when there is not a big time constraint. The home owner refinances their primary residence or take out an Equity Line of Credit to finance the lot purchase and perhaps even a portion of the building cost.

Lot & Land Loan

This loan type is similar to the ELOC in that it usually uses the owners personal equity to secure the loan. The difference is that it includes the lot purchase where the ELOC is simply an instrument to take out equity in the form of cash.

Construction Loan

The Construction Loan can include both the lot purchase and the construction cost. When construction is complete an inspection will be done to determine the appraised value to complete the construction loan and roll it into a standard mortgage.

Government Loan

These are typically offered in depressed areas where there are incentive loan offers for buyers to purchase an abandoned lot to develop.

Inspection Process When Buying a Lot

Buying a lot is a very different process then buying a home. One big difference is the inspection phase. Instead of hiring an inspector that will most likely provide you with a list of fix it items for an already constructed house you will need to obtain a permit for the type of building you want to construct. It’s very important to make sure the property can be permitted for the type of building you want constructed. Here is a checklist of features about the property that you need to discover in order to ensure permit approval;

  1. Check what the property is zoned for and confirm it is zoned for the type of construction you want.
  2. Check any set back requirements that are attached to the lot and confirm they correspond appropriately to your building plans.
  3. Find out if there are any restrictions that may conflict with your building plans.
  4. Study the deed and plot map to make sure there are no easements that conflict with your building plans. If the property is land locked and you still want to pursue the property, your next step is to approach the neighbor who owns the property that is blocking access to the lot and see if you can negotiate an easement with them. If so, have an easement agreement drawn up and submit this to the city planning department for approval.
  5. Determine if the lot can be hooked up to the nearest sewer piping system or if you will need to install a septic system.
  6. Check if the lot can receive city water or if you will need to budget for a well installation.
  7. Calculate what it will cost to connect electricity to the lot. This determination is dependent upon how far cables will need to run from the nearest electrical system.
  8. If the lot purchase if for a business have a full ROI assessment done that calculates population, competition and road count. These factors will determine if the lot purchase and construction is a good investment or not.

One of the biggest items on the inspection list is the lots ability to get permitted for septic or sewer. If the lot is not near city sewer pipes to connect to then you will need to plan to install a septic system.

If a septic system needs to be installed the first step to this process is to hire a soil tester to come out to the property to test the soil to make sure it can perk and the size of home that the perk results will allow for the permit.

The soil test results will be submitted along with your perk permit. The results along with the location and size of the property will determine how many bedrooms your lot building plans will be approved for.

In some cases you will not be able to get your lot permit in the time period allowed for inspection. Some counties, such as Williamson County in Tennessee, can take up to a year before you will receive the results of your permit request. In such a case you will have to make an educated guess on the likelyhood of receiving a permit for the size of home you want to build. There are several ways to evaluate the likelyhood of being approved;

  1. How close are homes to the lot you are considering? If there are several homes in fairly close proximity then the chances of being approved for a similar home size is very high.
  2. What is the terrain of the lot you are considering? If it needs to be approved for a septic system and is fairly flat or rolling then it will most likely perk for a reasonable size structure. If however, it is steep and wooded it may not perk for a large size home. Once again, the size of the lot weighs in heavily on this determination. If it is a large lot, one acre or more, then there is more room and choices for the location of the septic system that might need to be installed. If city septic pipes are near the lot then another option will be to connect your septic system to the pipes. The longer the pipe distance to connect, the more expensive the cost to connect.

Lot & Land Purchase Negotiations

The offer instrument to submit an offer for a lot is called a Lot & Land Purchase Agreement. This document is different then a regular Purchase Agreement in that it contains language that pertains to the lot instead of a structure on a lot.

The offer that you present should depend upon the factors that pertain to the inspection process. The more information you can obtain before submitting your offer the better. The market value will be impacted by how many hoops you will have to move through in order to initiate approved construction.

You will have to be efficient and diligent to discover construction hurdles during the inspection phase. In a regular Purchase Agreement it is reasonable to get the inspection complete within a standard ten days. However, with a lot and land purchase it is wise to extend the inspection deadline as far out as possible due to having to obtain permits for construction. The last thing you want to do it purchase a piece of property that you cannot get permitted for the type of construction you want.

Typically receiving a permit will only take up to 30 days but there are some geographic areas that are in high demand where this is just not possible. In that case the buyer will need to estimate the likelihood of not being able to get the desired permit. Most sellers won’t be willing to take the property off the market and keep it in contract for more then 30 days.

If the buyer isn’t willing to take a risk of not obtaining the desired permit another option is to make the offer with a contingency of permit approval and the option of the owner being able to accept another offer that does not have that same contingency. The property will still be listed as Under Contract but available for additional offers. This may be the only way to enter a purchase agreement that provides for a lengthy permit time frame and provides the ability for the seller to back out if a better offer comes along. Otherwise, if the buyer wants to secure the purchase without the possibility of another buyer scooping up the property, then they will need to buy without the permit phase completion contingency.