Boxed Out of a Mortgage? There’s Always Buying Land — Here’s What to Know

published Jun 11, 2022
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Submitting offer after offer — well above asking price — only to have the buyers go with someone else is heartbreaking and frustrating. In today’s hot real estate market, the whole homebuying process can feel like a colossal waste of time: You take all the necessary steps, follow all of the rules, put your heart and soul into each offer, and yet, you still don’t have a house.   

It’s so disheartening that you might be inclined to just throw in the towel on buying a house completely and buy a vacant plot of land instead (you can figure out the whole building-a-house thing later). 

“I’ve definitely seen a trend of buyers switching gears and looking to purchase lots and build the home of their dreams,” says Emaluisa Serhan, a real estate agent in San Diego. “The bidding wars have some of my clients worn out and tired both psychologically and emotionally.” 

But there’s a lot to consider before you take this approach, which can be even more complicated than the typical homebuying process. Here’s what you need to know if you’re contemplating buying land.

You’ll Need Special Financing

You’ll likely need a special loan to buy a plot of land. Instead of a traditional mortgage, you’ll need to get what’s known as a land loan (which further subdivides into different types, like a raw land loan and an improved land loan), or a construction loan if you plan to buy land and build a house on it right away. 

Because land is a more volatile investment, lenders view it as riskier, which means you’ll likely need to jump through more hoops (and pay a higher interest rate) than you would with a standard mortgage. And you may have to try a few different lenders before you find one that even offers a land loan.

“They most likely will require a bigger down payment, longer under-contract periods, and different terms,” says Ty Dokken, a real estate agent based in Denver. 

On top of that, you may need to start with one type of loan, then refinance into another, depending on what you plan to do with the land. Of course, you can always pay with cash, if you’ve got enough. 

Double-Check All the Details

There are a dizzying number of factors and details to look into before you buy a piece of land. 

For one, the land may be “raw,” or just a vacant plot without any hookups, which means you’ll need to go down the rabbit hole of figuring out how to get utilities to the property. What’s more, you need to check the zoning rules, which explain what can and can’t be built on the site and how the property can and can’t be used. You’ll also need to look into road access, seasonal access, height restrictions, and county regulations, among other factors, says Dokken. 

“It’s also important to get an updated survey, soils report, environmental hazard report, and other inspections while doing your due diligence,” he says. 

These are just some of the many reasons you’ll want to work with a real estate agent who has a lot of experience coordinating land purchases versus one who specializes in homes.

Credit: Pefkos/Shutterstock

You May Have to Go Rural

Developers tend to buy up desirable plots of land as soon as they hit the market (and sometimes even before) in most parts of the country. To find a piece of property to call your own, you may need to widen the scope of your search. That’s the case for buyers in the Raleigh/Durham, North Carolina, area, according to real estate agent Jonathan Owens.

In other words, don’t expect to find a pristine plot of land, right downtown, just waiting for you to come along and build a house on it.

“It’s super difficult to find land,” he says. “Most parcels are snagged by builders or developers to build homes and communities before individual buyers would have a chance. To get land, buyers are having to go further and further rural. Suburbs and communities that were available for land purchases five years ago have been snapped up by developers and land price per acre has more than tripled.” 

Serhan says the same is true in San Diego. “There are literally no empty lots out there,” she says. “If you think there’s low inventory for houses, you have no idea how many fewer options there are for vacant land. The only silver lining is that there are fewer people making offers on them, so if you’re lucky enough to find one in the area you like and at the right price, you most likely won’t be outbid for it.”

Building Is… Kind of a Mess Right Now

A big reason why home prices are so high right now is because of a lack of inventory. And behind that lack of inventory is a tangled mess of supply chain issues, high materials costs, labor shortages, and other related challenges. So if you think that building a house will be easier, faster, or cheaper than just buying one, think again.

Buying land and building a house can still be a good idea, just make sure you understand what you’re getting into and be realistic about the cost and timeline. 

“I am currently personally doing a 20-acre tract in western North Carolina,” says Owens. “The inspections, survey, attorney — everyone is super busy and super behind, and everything has cost more and taken longer than I expected or that it would have five years ago.”

But it’s not all bad news. If you hate cookie-cutter houses or you just aren’t thrilled with what’s available on the market today, one positive is that you get to envision the property from the ground up, even if it takes longer or costs more.

“A major pro of purchasing land to build a home is that you have total control over the design of the property,” says Jason Gelios, a real estate agent in Michigan.