Buying Land To Build A House: A Guide

If you’re having trouble finding a home that ticks many of the boxes on your wish list, you may be wondering if you’d be better off building a house for yourself.

Buying land and building a home can get you exactly the home you’re dreaming of – a personal sanctuary designed to meet your particular needs. That may mean an environmentally sustainable home or a space to accommodate your interests and hobbies.

Of course, in the real world, your dream will likely encounter challenges, delays and unforeseen expenses on its way to becoming reality. Let’s take a look at the home building process, pitfalls and ultimate rewards of buying land to build the house of your dreams.

How To Buy Land In 4 Steps

Buying land to build a house is a complex enterprise. It’s important to know your state and local laws. Zoning and permitting rules can create challenges on the road to developing the property.

Here is our step-by-step guide to buying land to build a house:

1. Find Land For Sale

While designing your oasis may be a dream come true, finding land for sale isn’t as easy as strolling through a neighborhood looking for “For Sale” signs.

Here are some of our tips for finding land for your home:

Ask Around

“You’ll find the best opportunities through word of mouth, such as by reaching out to brokers in the community where you’re interested in buying or by networking within community organizations such as the Chamber of Commerce and Rotary Club,” says Kirky Galt, a real estate agent in San Diego.

Community members with a pulse on the local market or a real estate agent specializing in land will know more about upcoming zoning changes and similar events that can create opportunities.

Dig For Expired Listings

Another great way to find land for sale is by looking beyond active listings to pending or expired and withdrawn listings, according to Bruce Ailion, an attorney and REALTOR® with RE/MAX Town and Country in Atlanta. “Often people will buy land or a lot, determine the building process is too difficult and try to sell the property.”

Selling vacant land is often harder than people think. When the listing expires repeatedly, they may give up. This can be an optimal time to approach a landowner about selling.

Drive For Dollars

Ailion also suggests driving to the area where you want to live to scope out vacant property. “Once you identify potential land, find the owner in the tax records and determine if the property can be purchased.”

Ailion has found from experience that this is one of the better ways to approach the search process. On several occasions, he and buyers or home builders have identified every vacant parcel in a given area and contacted the owners with success.

Filter Out Inappropriate Lots

When you purchase land to build a house, be mindful of the cost of the land and the type of home you’re building. Building an expensive home on a cheap lot or a cheaper home on an expensive lot can affect the overall value of the property.

“You should try to build a home in the size and price range that’s common for the area and make sure there is an appropriate relationship between the price of the home and the value of the land,” says Ailion.

Ailion also suggests estimating the lot at about 20% – 30% of the finished value of the home. So, for example, if you’re expecting to pay $300,000 in construction, you should be looking at land that costs around $90,000.

2. Vet The Property

Just finding a plot of land in a desirable area isn’t enough. You should do plenty of research to ensure you can cost-effectively build what you want on the land.

Here are a few important questions to ask:

How Is The Land Zoned?

Zoning is a local planning authority's determination of how a particular piece of land can be used. Ailion explains that zoning informs your lot use, but you should also be aware that the size and shape of the house you want to build must fit within the setback of the property.

Building setbacks are restrictions on where you can build a home on a property, such as a designated required distance from the property line or curb. A simple title search can uncover any easements associated with the land that may make building a home more difficult.

“Conduct due diligence before making a binding offer, lest you get stuck with a parcel that’s zoned for something other than residential use, such as industrial or agricultural use,” notes Galt. Zoning decisions include input from a myriad of sources, from the local zoning board or planning commission to neighborhood residents, and it can be tough to change them.

Are There Utility Hookups?

If the property you’re looking at is “undeveloped land” or “raw land,” it likely will require more of an investment to connect utilities and a larger down payment to mitigate risk to the lender.

Do your due diligence to learn whether the utilities you need are available: water, natural gas, sewer, etc. Then, weigh the time and cost to install these services:

• Water: Find out if you need to drill a well or if there’s a private or public water company or a shared well agreement. You may need to haul water if none of those options are available. Many lenders won’t issue loans to people building in areas where water hauling is the only option.
• Cell service: In rural or forested areas, you’ll want to make sure there’s decent cell and internet service.
• Power: Verify what “nearby power” means in a listing. Your “nearby” power hookups could be down the road or a few miles away. The costs to run the lines will vary based on the distance and the fees your municipality and power company charge.
• Sewage: Find out if the lot can accommodate a septic system if no sewer line is available for hookup. The disposal of wastewater is highly regulated. You’ll need to be sure your plan meets the area’s strict disposal requirements.

How Much Preparation Will The Lot Need?

Clearing and grading land can be expensive. HomeAdvisor.com finds that most homeowners spend $1,377 – $5,748 to clear land to prepare it for house construction. However, costs can vary based on how heavily wooded an area is and the location of the property.

Average land grading runs between $1.30 and $2 per square foot, but that can vary based on how much work needs to be done.

If any existing structures need to be demolished, you’ll need an estimate for the demolition and debris removal. Demolition costs vary based on the size of the structures you need to remove, but you can expect to pay between $3,000 and $25,000.

How Much Time Do You Have?

Another consideration will be your timing. Building and designing a custom home for a home site is a far bigger proposition than buying a house for sale.

“Going through the permitting process, getting all the utilities to the property, doing surveys, getting bids, getting construction financing and actually getting the house built can take 2 years or more,” notes Wendi Roudybush, a real estate agent with Realty Executives in Prescott, Arizona.

3. Finance Your Land Purchase

Of course, most people aren’t prepared to pay cash for their lot. They usually need to take out a loan to finance the purchase.

Here are a few financing options you should discuss with a mortgage advisor to find the one that’s right for you:

Land Loan

A land loan finances the purchase of land. Land loans are available for land that hasn’t been improved, isn’t connected to any services and hasn’t been approved for development.

If the property is undeveloped or considered “raw land,” a land loan may be your only financing option. To qualify, you’ll need to make a large down payment and meet strict credit requirements because lenders consider land loans a riskier investment. Be prepared to pay more for a land loan.

Lot Loan

If the property is already connected to utilities, has at least been surveyed and permitted for construction and is zoned for residential use, you may be eligible for a lot loan.

Lenders consider lot loans a lower-risk investment than land loans because a raw tract of land can encounter many of the same problems on its way to development that a lot has already resolved.

USDA Rural Housing Site Loan

If your desired plot is in a rural area, consider applying for the government-backed USDA Rural Housing site loan. Government-backed loans can often be more accessible than conventional loans.

If you’re a low- to moderate-income home buyer, you may qualify for a USDA land loan based on your income, credit score, plans for the site and other qualifications.

If you can pay for the land in cash, that can ease the rest of your financing needs. “In most cases, a lender will consider the paid-for lot as the down payment on additional financing since the buyer now has equity in the property,” Roudybush explains.

Construction Loan

A construction loan is a short-term loan that typically lasts 1 year and is designed to get your project off the ground. To get one, your lender will need to see your construction plans and budget, known as the “story” behind the loan.

The loan money gets paid in stages that correspond with your construction timetable.

Construction-To-Permanent Loan

This type of loan builds on the construction loan by becoming a permanent mortgage once the house is complete. That means it’s basically two loans in one, which can lower your fees because there is only one closing.

You’ll pay the interest on the balance during the construction phase, pegged to the “prime rate,” then it will become a standard, permanent mortgage, and you can make it a fixed or adjustable-rate mortgage.

4. Prepare To Build

Once the land is ready, you should ensure your time and investments pay off with a well-built home. You’ll need to prepare yourself and your property for construction.

These are the essential steps you’ll need to follow to create your dream home the right way:

Hire The Right Professionals

Buying land and building a house can require quite a bit of juggling. You’ll likely want to assemble your team in advance to ensure the best professionals are available to build the type and size of home you want. Roudybush points out that finding a good builder can be the proverbial needle in the haystack, as many of the best builders are booked far in advance.

Before hiring anyone, ask for references, check licenses and interview each professional to make sure you’ll work well together. Building a home can be stressful. You should ensure a good rapport with your team members from the start.

Here are the professionals you should have on board:

• An architect: Unless you’re purchasing predesigned plans, you’ll want to work with an architect on the home’s blueprint. The architect is the professional who can transform your vision into reality and incorporate added features into your custom home to boost your enjoyment of the home and its resale value. Your architect will prepare the structural drawings that will allow you to get the permits you need.
• A contractor: Think of your contractor as your project manager. They will oversee all aspects of the work. They will be the “big picture” thinker who keeps all the subcontractors on schedule. Your contractor will likely be your main point of contact during the building process. They’ll also be the one to deliver bad news about cost overruns and project delays, so you must build confidence in your contractor and have a good rapport with them.
• A builder: Sometimes your builder and general contractor will be the same person, depending on their skill sets and the size of the business. When that happens, a builder may have less time to devote to project management and communication with homeowners.

Get The Permits

It’s smart to include a contingency in the purchase agreement of the land that says you’re not required to close until you have a building permit. Ailion explains, “This way you are not required to buy the property if anything prevents you from going forward.”

The contractor or builder should be your go-to person for getting the building permits you’ll need, including electrical and plumbing. They can also help estimate permit costs, which will vary depending on your home size and costs imposed by your municipality.

Once they pull the permit, they become the “responsible party” for the work. So if the contractor pulls the permit, they – not you as the homeowner – are on the hook for ensuring the permitting process was done correctly.

Clear The Land

A topographic map can help you determine the ideal flat areas to build your home. Look for spaces free of rocks or vegetation so you won’t have to invest time and labor in clearing and preparing the land.

As you plan your build, consider such features as drainage, sun direction and privacy as you determine the home’s placement.

Building Your Home FAQs

Of course, buying land is just the first step. Let’s go over some frequently asked questions about how to buy land and build your dream home.

How much does it cost to build a house?

As you’d expect, the total cost of new home construction depends on several factors, including the design, the materials and labor costs where you live.

Is it cheaper to buy or build a house?

It’s hard to say whether it’s cheaper to buy or build a house without knowing more about the location of the home you want to buy and the type of house you’re thinking of building.

According to the Federal Reserve, the median U.S. home sales price at the end of March 2023 was $436,800. And according to Home Advisor, the average cost to build a new home is between $114,567 and $488,720 not including the cost to buy land and prepare it for construction.

Of course, with inflation and skilled labor shortages, it’s harder than ever to predict how much it will cost and how long it will take to build a home.

How do construction loans work?

Another cost to consider is the cost of financing the land purchase and the cost of a construction loan. Construction loans are short-term loans – usually issued for 1 year – with a balloon payment at the end that’s paid off with the mortgage on the completed home.

There's also the possibility that you’ll need a bridge loan if construction encounters delays and the home isn’t livable.

The Bottom Line

Buying land to build a house is an extensive process but a rewarding experience that can feel worthwhile once you finally step foot into your dream home, built just for you.

If your dream home is already standing and you want to buy it, connect with an expert real estate agent and take one step closer to owning your dream home.