Location, Location, Location
I could see why you may want to skip this section, but let me point out a few considerations about location that you may not have thought about.
I recommend looking for signs foreshadowing growth and popularity. You can buy into an area that is already well established, but, if you buy into an area that is up and coming, you may be able to cash in on future growth. Or, if you want to live in a remote location, be aware of these signs of future growth:
New neighborhoods are being developed
Large plots of land are being sold/advertised
Employers and businesses have moved or are in the process of moving to the area
Stores (even local/small) have chosen to call the location home
With more housing, comes more people. People need places to shop, eat, work, etc. So, if you’re seeing businesses and housing being established in the area, it may be on the rise.
Think about ease of travel to other locations, for work and for leisure. This was our personal thought process: we chose a location equidistance to Indy and Bloomington (2 popular cities in Indiana for work and play), less than an hour to multiple lakes and parks, and within 15 minutes of a major highway.
I, also, see many people debate if they want to be in a neighborhood or not. One benefit of being in a neighborhood with building criteria is that it ensures the homes built in close proximity to yours have similar architectural properties and use. This may be preferred if you don’t want to live next to an apartment complex, rental, or storefront any time soon. But, in a neighborhood, your ability to use your lot as you see fit may be limited. Plus, you’ll likely have to pay dues to an HOA.
Buying the Lot or Land
I get this question frequently: with new construction, does the builder buy the land or does the prospective homeowner? It depends…
If you’re going with a tract home builder, the lot purchase will very likely be bundled with the build cost. Even choosing the “build on your lot” option, it’s similar to building a tract home in the sense that the builder takes on the financial responsibility during the build, and you essentially purchase the home from the builder when it’s complete. Because of this, you can purchase these homes using traditional financing (FHA, insured-conventional, conventional, etc.), rather than having to use a new construction loan.
If you’re going the custom route, you have 3 options:
Buy the lot in cash
Use a land loan
Buy the lot with a new construction loan
If you buy the lot in cash, then you can take your time finalizing the house plans, finding a builder, and shopping around new construction lenders. Buying in cash is also a faster timeline to closing because there's not a mortgage or lender involved. You may have more negotiating power with the seller if you pay cash, too.
When you apply for a new construction loan after buying the lot in cash, the lot value is bundled with the home value and you are taking a loan on the combined amount. The advantage of this approach: the lot value (in theory) goes toward your new construction loan down payment.
This may sound like a big win, but here is the caution...
In our situation, we bought our lot for $35k, thinking we would have at least that amount in equity toward the loan down payment. When the appraisal (lot + home, based on comparable homes) came in significantly lower than the home build cost (35k+ lower than the build cost), that equity no longer existed.
*If your combined appraised value matches the cost to build plus lot cost, then that equity goes toward the down payment. If your appraisal is lower than the lot cost plus build cost, then the equity you thought you had may not actually be there. I’ll talk more about this when I break down the numbers in Part 5 of the New Construction Series, New Construction Loans.
Land loans are a unique loan type and only certain lenders, usually farm banks and credit unions, offer these types of loans. I would recommend looking into these individually, as I don’t have a lot of experience with them. What I do know is it may be an option if you want to buy land prior to having the building plans and the builder, and don’t want to or can’t pay for it in cash.
The last option is using a new construction loan to purchase the lot. You’ll have to have some of the details already figured out if you go this route. The home plans will need to be finalized or nearly final, have an estimate from the builder, and have the builder chosen. And when you submit an offer to purchase the land/lot, it will be contingent upon receiving this financing, at the very least.
It's probably obvious to see why offering to purchase with a new construction loan wouldn’t be as desirable as offering cash or even going the land loan option. Closing on a new construction loan involves a lot of variables, including the appraisal, where the purchase can fall through.
On the other hand, having these details figured out prior to purchasing the lot can prevent you from figuring out later that what you want to build is not feasible or out of your price range. At that point, you may be stuck with the lot or forced to sell.
*I am not a mortgage lender or financial expert. Follow up with your resources in these areas for further personalized guidance.
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