Buying the land for your new custom home is a whole process, meaning that you need to follow certain steps and make specific choices if you want to get the most for your money.
Step 1: Determine your offering terms and price
First of all, you must determine a price in your mind of what you’re willing to pay for the property. You also must decide on the length of time until closing as well as any other necessary terms, such as your desire for the owner to loan you the money in what is called a seller carry back.
Step 2: Present the offer and negotiate buying the land
You have to complete an offer form accompanied with some sort of good faith deposit check from you. The deposit amount can be anywhere from 1 to 3 percent of the purchase price. The check is deposited in an escrow account upon acceptance of the offer and held in escrow until you close the transaction. Also, you and the seller can negotiate the deal through subsequent documents called counter-offers.
Step 3: Make an application with your lender
After you have determined which lending approach is right for you, you’ll fill out a loan application with the lender of your choice. The lender orders an appraisal from a certified appraiser. Then, your lender will give you a good faith estimate (GFE) of all the closing costs associated with your loan and the purchase transaction.
Step 4: Open escrow with an escrow company or attorney
The term escrow means depositing money and property with a neutral third party to be disbursed upon completion of all terms of a related agreement. The escrow period can be anywhere from 30 days to 6 months depending upon the needs and negotiations of you and your seller. Your real estate agent helps guide you through the closing process.
Step 5: Do your due diligence
You can now complete any research on the property that couldn’t be done before the offer. Also, make sure that the property meets your needs relative to size and value. If you have concerns
about the land, such as building restrictions or guidelines, you may want to add contingencies to the offer that allow you to pull out of the transaction if your research results are unfavorable.
Step 6: Execute the paperwork and bring in the money
As soon as your loan is approved, you need to bring your cash to escrow and sign the loan documents.
Step 7: Close escrow and take title
The title insurance company provides you with a deed to the land and a policy insuring that it is yours. The title company pays the seller the money due and records any documents and deeds related to the transfer and new loan.
When buying the land, you can use a bank or find other land loan alternatives, such as having the property owner loan you the money or carry back paper, or using private or hard money, coming from private investors who specialize in making loans on real estate. You must weigh your choices really hard and make the decision that suits you best.
Contractors, consumers, architects, and many others often tell you that you must pay off your lot before you get a construction loan. However, paying off the lot isn’t a good idea unless it’s absolutely necessary, and here are a few reasons to keep a loan on your land until you’re ready to build:
You need cash on hand to fund your project. If you run out of money because you put all your hard-earned savings into your land, your new home can become a nightmare. Having cash in your pocket is your best protection for keeping your project moving along.
Money put in is expensive to get out. Few lenders refinance a land loan; most only let you replace an existing loan. That means that after you put money into the land, it’s gone forever.
Cash reserves are required for construction loans. Banks want you to have cash on hand before they give you a loan, the amount varying from bank to bank.
Fending off the taxman. As long as you finish the house as a primary residence or second home, you should be able to deduct the interest and points paid on the loan. That means the government will pay a good portion of the payments for you to keep cash in your pocket.
Buying the land is an important step in the custom home building process, and you must be careful in making the perfect choice to cover your needs.