Buying land is nothing like buying a home. There are great differences, pitfalls and things to know before buying land. The last things you ever think about when home shopping is the soil, building restrictions, utility options, environmental issues and much more. It is the opposite with land, these will be the first things you need to think about.
We made this article For You, the first time buyer or even those who have done this many times.
By the end of this guide, you will be able to make a very informed purchase.
Building a Dream Home: A large amount of those buying land do so to build a home. It's a dream for many, you can design a custom home yourself and pick the view for it.
Investing: Land historically has been an extremely profitable investment and really still is. Have you seen those random lots in a large cities with available now signs? Well, some of those were family purchased for very little years ago and are now selling for millions. This is because of lack of inventory vs. demand. In turn, land is Low Cost, Low Maintenance & Inflation Resistant. It's really a unique investment for your portfolio.
Living Mortgage Free: Buying land and building a home within your budget, can allow you to live mortgage free. When done successfully the need to work long hours and make more money isn't as necessary. It's a very large bill you won't have coming in monthly.
Homestead & Remote Living: Buying some land for a small organic farm is growing in popularity. You can get a building loan, make a comfortable place to live and pay it off as a traditional method. Also remote living is becoming very big now, being off the grid is better now with solar, water wells and soon satellite internet worldwide.
Leasing & Renting Out Land: Land doesn't just have to sit around, there are many people who rent out or lease their land. The article below has some great options for making money on the land are not using.
Agricultural & Recreational: Farming is still a huge industry worldwide and most think of raw land use as just that. Recreational is a bit different, no homes or crops go on these, they are mainly for hunting. Which is a popular thing in a lot of states to avoid public hunting zones.
You don't have to be a rich person to have a portfolio, it is nothing more than the assets and investments you hold. So most everyone technically has one and you should try to grow it for your retirement and future goals.
The strategy of holding land vs. a homes is extremely different. Of course if your goal was to build a home, it would switch over to the home ownership side. But for the sake of this article, we are going to look at holding raw land vs holding homes in your portfolio.
Holding Value: Land is extremely good at holding value in market swings as opposed to homes. It is a hard asset without much cost to hold and has gradually gone up since the beginning of time. There is the famous saying "Buy land because they are not making it anymore".
If you think back to the housing crisis of 2008, many people went upside down and lost their new home. So the fluctuation is extreme with home real estate investing. Of course, it is much different to own a home and live in it for 30+ years. But as far as holding value over the years, take a look at this chart. Notice how 2008 had very little impact on land value per acre.
Low Cost to Hold: Probably the best part about owning raw land is the cost to hold it. Given land goes up in value overtime and can even go way up in price. You can hold It by just paying property taxes most of the time. Counties decide this by accessing your land. Many counties have a low assessed value on land vs. homes, making annual tax payments minimal for the owner depending on the property. On the other hand, owning homes has major ongoing costs. Termite damage, water damage, roof replacement, broken appliances, renter disputes and high property taxes. Land is pretty hands off, just pay your taxes and hold in most cases.
Potential ROI: The potential for land to make you some really good money is out there. Your ROI (Return on Investment) on land may be slow, fast or all of a sudden a lottery return for you. Land value is greatly affected by surrounding growth around the land. Buying land slightly outside of a city is a great value tactic in land investing. If the city has a building boom, populous growth and influx of companies for jobs. You will see the city grow towards your land or lot very fast.
Say a mall complex was built near your land, or a popular walking street. Your land has now become scarce and beyond desirable. At this point, your ROI might have just gone up more than any other investment you ever made.
That is a best case scenario but it happens to land holders all over the world. Even remote land in the middle of nowhere can change over night. Something like a huge Amazon.com hub built miles from your land in a small remote town can happen. A similar situation happened in Belen, NM and it really changes a small town/city. With Jobs, sudden influx of people and other business it will increase your land values almost every time.
Understand, some land may not go up in value, even if it is held for ages. Value comes from what others will pay for it. If no one wants it, you will never find an increase in value. But if it becomes desirable then you made a great pick.
Land Buying Step By Step
1. Due Diligence: Some people can fall in love quickly with land, especially those dreaming of moving abroad to retire. A sales agent will close them on the spot during a vacation and they didn't do any home work on land or the countries laws. They may have gotten lucky but land is way different from buying homes, WAY DIFFERENT!! Reading though this article will help greatly but always go over and beyond with your research. Fact check, learn the rules, laws and restrictions of the county, country and state. In other countries, the smart investors have two lawyers that do not know each other to make sure the information was correct and not possible criminal intent.
2. Where to Buy, Look & Price Check: You can buy land from many places. Sites like LandZero, Zillow, doing FSBO and using an Agent are most popular. The buyers need for financing or not, cost of land and more determines the best route.
Land is very difficult to get loans for, so many people use owner/company financing or pay full in cash. Closing costs need to be determined as well, LandZero and sites like that do self-closing with no added cost. You can expect to pay a lot more using an agent or bank.
Overall, look for the area you want, price out the area with Zillow and other websites. Also know, land is very different from homes, you will see some major price differences with land. You should study what makes the higher priced ones that way and if the price is justified. At some point set a price range, determine what you like and keep an eye on the area. It is never good to rush in, so give it some time.Also, it is more common than you think to buy land without even seeing it. With the tools we have today you can get the full visual without even standing on the land. We did a large article about this, using Google Earth to see your land.
3. Location, Land Use Building Restrictions and Due Diligence: Land is funky, once you know your land use you should look at the site and most importantly the building restrictions. When buying homes, you see what you get because it is already there. But with land, you can be told by a real estate agent, this is a residential lot and you can build a home. However, yes it is considered R1 in the land description and supposedly build ready. But chances are they didn't call the building department to really know the land use restrictions. You could be on a hill made of sand, have a protected stream on your land, easement issue, flood zone, environmental issue, unable to put in septic or well or many other things making the land blocked from building. You can cry, yell and complain all you want after, but a return is not likely.
We would love to go over building restrictions and land use in details, but every single county is different and your land is very unique.
Here is a simple checklist of things to know before buying the land
- Zoning Classification of the land and what it means
- Does anything on this land block my zoning rights. For example, the road is too close or land is not big enough per the county so it is unbuildable
- Check FEMA flood zone map to make sure your home won't be underwater one day.
- Does the land have deed clouds, liens or any other encumbrances
- Are there environmental issues not allowing septic, well or building foundations
- Are there utilities available for your needs
- Any road easements
- What HOA restrictions are there if an HOA is present
- Property Taxes and other dues to know your annual payments
- Do any of these issues above block my intended use for the land
4. The Purchase & Finance option: If you have a bank loan and agent, it is much different then closing with a land company or FSBO. Before buying read the contracts or disclaimers provided. Ask for all costs upfront, no surprises during closing.
Understand that with land you just get a piece of paper for the most part, which is what a deed is. There are no keys to a home that you get to walk though after buying. But standing on land you own is a great feeling.
6 Specific Options for Land Loans
- USDA Rural Housing Site Loans – This is best for families with low to moderate income that want to build their primary house on a rural lot.
- Local Financial Institution Land Loans – It is great for local buyers interested to buy a building lot, recreational land, or farmland.
- Seller Financing – This is for buyers who cannot qualify for a more traditional loan for land or for cheaper parcels of land through sites like LandZero.com
- SBA 504 Land Loan – This is great for business owners who plan to buy a land for their commercial enterprise.
- Home Equity Loans – This suits buyers who already have equity in their personal homes and wish to use this to buy land.
- Land Company Loans – It is a good option for buyers who purchase through land brokers for mid range priced land and prefer to use built-in financing.
5. Change Notifications: Depending on your county it may take a while to transfer the name of ownership. Even more so getting you tax due notifications. Some counties can go years and not send this out to you. But they send it to the old owner and they don't care anymore. So learn how to pay online and save the date. The same goes for HOA payment and utility holds. You don't want to lose your land in a tax sale.
6. Insurance: Are you worried about hazards on the land or someone getting hurt on it. You can get liability insurance on the land to prevent you getting sued. If you are planing to have a bunch of workers on the land, it would be best to do this.
7. Keep an eye on the Land: Know if things change with your land. You can do this remotely sometimes or drive to your land if it is nearby. Sometimes power goes in, roads go in or any sort of thing that can happen to land when you don't watch it. For the most part you will never see anything bad happen and holding it will be out of mind.
Improving your land will be a great thing and should increase the value. Things like adding gravel to a road, installing a septic or well, clearing the land are great additions. All these really improve the land but they won't effect your tax valuations. Building a home changes your classification, your land will be considered improved and increase your tax valuations.
Building Loans and Expenses
Building loans are different then getting a mortgage, they also have different requirements to get. Often things like paying 50% down are common agreements to get a building loan. You can look at other options like equity line of credit, personal loans or even deals with the builder.
The expenses of home building is really a subject one will tell you it's worth it and another would say it's more expensive then buying a home. There is so much that goes into determining that however.
Here is an article we did about building a home cheaply Building a Home for Less
There are a few things to know and research before you start to build.
- All Building restrictions, permits and requirements
- Material Costs (wood, steal, AirCrete, interior costs...etc)
- Environmental needs (Material vs Natural Disaster Problems in Area)
- Construction company, friends or just you (who will build the home and what cost savings are there)
- Building Company reviews and costs (shop around)
- Costs + More (expect your calculated costs to be higher than expected due to unforeseen issues)
To calculate an estimate, use the Home Building Calculator below.
Home Building Calculator
Clearing Your Land
Clearing your land can go a long way when selling your land, even if you didn't build on. It can be a bit of work, but for someone to visit a nicely groomed lot vs. a lot full of trees goes a long way. This may also include clearing roads to your lot, when there is no road at all to a lot, it may not be as attractive to others.
We did a huge extensive guide on clearing land, depending on the size of the land you can do it yourself.
Water, Power & Sewer
Utility needs are different for everyone, for the most part people want to live on the grid because it's easy. But, it isn't always possible depending on the area. Many people live off grid just fine and have a comfortable life, but it's not for everyone.
So know your options when buying land because sometimes there are restrictions.
Water: Water options are pretty straight forward and overall set by your options available. You will either have on grid water options, well options, catchment tank, delivery or a combination of these.
City Water: In the cities, communities and HOAs.
Well Water: Used in more remote areas and farm lands. Requires drilling, depth of water table and maintenance. Can be done in deserts or even lush land.
Catchment Tank: Great for areas with a lot of rainfall like Hawaii, it is a system that connects to your roof to collect the rain for your use.
Delivery: Used with a catchment tank, a water delivery company will fill up the well when it is low. This is fairly low-cost but make sure a water company is near you first.
Know your filtration systems: There are many ways to make the water drinkable but you should look into the process, testing the water will help decide the filtering requirements.
Power: With power you have the options of being on grid, using solar and generator options. For city power your land may have a utility hold, meaning it is on your lot and you pay for access options already so ask before buying. Drawing power will take the help of the county, city and HOA if applicable. So ask about this cost because it may be expensive sometimes.
Solar is becoming very efficient and you can fill batteries to store the sun power. In the right areas you can live off solar quite well. A generator is not ideal but good to have for back up mostly, they are loud and require gas which can be expensive. So as a main source of energy it will be your last option.
Septic: Even you live in a nice community, have power and water. You may not have city sewer connections. So septic would be the normal system in your area, which can be a tank. With this being the case you have many septic options. Check with the county or HOA, because in some cases you have to use a particular one.
Types of Septic:
- Conventional System
- Recirculation Sand Filter
- Chamber System
- Aerobic Treatment System
- Mound System
- Cluster / Community And More
The (EPA) Environmental Protection Agency goes into all types of Septic with Pictures of them
Ready To Sell
When you are ready to sell, which may be many years, a year later or when you just need cash. Here we will go over getting you the highest amount for your land.
Reaching Full Potential Price:
If you want to make the most money you can off your land, present it like you are proud of it. Nothing is worse than seeing these lots on sites like Zillow with a one sentence description and one picture of trees. People are not interested in seeing this or looking into it further. This will fix that.
- Pictures: Everyone loves pictures, we are visual people but can't always travel to see the land in person. Putting many great pictures of your land is going to get way more interest than other listings. If you can't get out to your property, it is very easy to hire someone on craigslist to take pictures of the land. We usually pay about $60.00 each time, for this but we get flooded with people ready to go same day.
- Descriptions: Unless you purchased your land with a ton of descriptions, you may have to do some serious research if you want to list a bunch of details with it. Listing details of the land has a great deal of potential to gain more interest as well. But more importantly it will be the right kind of interest because they already know what the land is without having questions. Here is an example of good descriptions. You can find these details by going on the county websites.
Where to List - You will have several options for this, some free and some may cost you. Going the free route seems just as productive, so unless you are selling multiple parcels, free websites will be enough. Here are some free options that work quite well for selling the land yourself.
Agents / No Agents and Closing: You can sell land without agents to cut out middle man costs. However, it can be best to use an agent if you don't know what you are doing. You can push the agents costs on the buyer if you feel that your land is already priced well. An Agent will ease all closing, so there isn't much to explain with that. But closing FSBO is different and here are some ways to do it.
- List the land your self on the above websites.
- Be able to answer questions about your land and be responsive.
- Find a title company or Lawyer who will write-up the closing paperwork and deed. (you do not need an agent to close a basic cash sale of land)
- Sign a purchase agreement, use title company to escrow the money, sign the deed with witness and send the paperwork to the county.
- Fire sale: Unfortunately with land the need to fire sale happens. Some land just doesn't go up in price for many years. You may think, crap no one will buy this land and I'm stuck with it. There are land buyers who will pay cash for it regardless of value. You won't get much for the land though, they will have to put in the time to sell an undesirable lot. It's okay, you avoid future tax payments, it's off your hands and you have cash now. They also close fast and without agents, getting you cash fast.
If you don't want to sell but you also are tired of just having an investment that is currently making money. You can look into making profit off your land with some really creative methods. Skilled Survivor did a great article on the 22 Creative Ways to make money on your land.
How to Make Money With Land
Avoid Losing Your Land, Liens or Making Deed Issues.
With anything, if you don't pay for it, it will be taken away from you. You shouldn't take it lightly when you get a property tax bills. Pay them on time and keep records of it.
Tax Sales: In some states you will literally lose all ownership to your land if you don't pay your bill for a certain amount of years. California, if you are receiving your tax bill but ignore it you will not be happy later. After 5 years of non-payment your land will be put up for sale in a tax deed auction. That day, without warning, you will lose the land completely. Even if you wanted to get it back, most likely you can't. You would have to prove, using a lawyer, that you never received a tax bills and notifications and it was the states fault. Which is a rare and a difficult process. There are other options but consult a lawyer if it ever happens to you.
Liens: Allowing Liens on your land will make it almost impossible to sell. The IRS, bank or even a construction company can put a lien on your land. Which any land buyer will rarely take on, because then they are responsible and wouldn't be able to sell the land. Also, title insurance won't want to take part of any buys or sells on it till it is cleared.
Deeds: If you have a clear title, you need to maintain that. It is best to consult with an attorney for things like passing it down, giving to a family member, friend or putting it in a trust. Deeds are legal documents and you can type one up online incorrectly. A title company will questions the validity of ownership and block a sale. You will then need to get a lawyer and quiet the title, which is a pricy process. So, if you are passing it down or doing anything with a deed. Don't pull one-off line and do it yourself unless you know the process well. You will create a major headache for the person who it is passed to.
Out of Site, Out of Mind and Enjoying Your Land Ownership.
Probably the best part about owning land as a hold is the low stress. Having a hard asset that you almost don't think about much, doesn't happen with much else. You typically don't do anything but pay your annual dues.
Land can usually sustains value during a down economy, has no maintenance cost like a home and you can cash out when you want. You can't say the same about many other investments out there.
We really hope this article helped you, please do us a favor and rate the article below.
Do you have any Land Buying Tips? Comment Below.