Part of the American Dream is to own that place out of the city with maybe a few acres, a pond or lake, and plenty of space for horses. This was something I wanted back when I was younger and hoped to have some day. It’s still a popular dream as any of our listings with a few acres gets a lot of inquiries. But it sounds really great until you actually try to purchase your Land Dream Home.
For this blog post we are focusing on raw land, as that is what we receive so many questions on what a person needs to do to make an offer. Usually the conversation starts with “We want to make an offer, what do we need to do?” The caller is excited and doesn’t want to lose out on the opportunity to buy the first part of their Land Dream Home. But then it gets a little more complicated.
As in all purchases the ‘how you pay for it’ comes into play here. Unlike what is referred to as ‘developed land’, meaning land with a home built on it; it can be difficult to get a lender to finance ‘undeveloped land’ or raw land. Land with a home on it is much easier to place a monetary value on thus the appraisal can give a clear value on how much money can be loaned to the buyer. Raw land on the other hand often has potential value based on its possible use. Agricultural land can be used as collateral for a farm loan but the value is based on possible future crop production. Commercial land can also be valued based on future income possibilities. But with residential the value can vary greatly based on what it’s used for and what is eventually built on it. So lenders tend to stay away from loans for raw land.
The only exception is the situation where the buyer is ready to build a home. This is a type of bridge loan where the lender approves a loan based on the land value and the home to be built on it. These typically are limited to 18 to 24 months while the home is constructed. The loan is then converted to a standard mortgage once the home is completed. So the best way to approach this option is to pick out the builder and type of home you want to build and find the land to build on. If you won’t be ready to build for a few years this probably will not work for you.
Another option is to buy on contract. In this case the seller has to be willing to be the lender for a set period of time, usually limited to a few years. The buyer agrees per a ‘land contract’ to put a certain percentage down, usually 20-25% and make monthly payments like a normal loan. Typically these are limited to 2 – 4 years and at the end of the term the buyer must pay the remaining balance or forfeit the land back to the seller. Interest rates are usually higher than general rates at the time. So as you can see this type of loan strongly favors the seller for taking all the risk as they may end up having to put the land back on the market. This is not necessarily the best approach to start with your Land Dream Home.
So how does one actually buy raw land? One word: Cash. In any purchase cash is king but in this case it really is the only viable option. So we recommend that if you want to buy raw land to start the process for your Land Dream Home, start saving now to purchase in a few years. There may be other options for you to get cash such as borrowing against retirement accounts but that would be a discussion with your financial planner, not something we Realtors can advise you on. Then there are always rich relatives but again that’s outside of our advice window.
So to summarize you have 2 viable options. If you are ready to build hire a builder and work with a lender on a construction loan. Or pay with cash.
If you have any further questions or need help in locating the perfect land for your Land Dream Home give The Derrick Team a call today at 317-563-1110. Even if you are a few years out from having enough cash, feel free to contact us. We’ll help you down that long road to your Land Dream Home. You can find some land search links at our web site http://IndianaAcres.com.