Ah, the appeal of the custom-built house. For many, it’s an American dream. Finding a piece of land all your own, working with a builder (or your own two hands!) to build something specifically designed for your family, and being the first ones to call it home. Unfortunately, as with many multi-faceted projects, buying a lot of land and building a custom home can often be more difficult and time consuming than most people realize.
As a portfolio lender, construction mortgages are one of our areas of expertise. Unlike many lenders, we keep all the loans we make. And because we don’t sell our loans, we’re less confined by rigid, “standard” underwriting guidelines that hold many lenders hostage. We’re able to make more flexible, common sense lending decisions. As a result, we’ve seen A LOT of land and custom construction homes built over the past 100 years.
Over the next few weeks, we’ll take a closer look at the aspects involved in building a custom home, and we’ll help identify some of the areas where people often get stuck. But first things first, picking out the land…
Start in your price range.
This one may seem obvious, but if you’re going from shopping for turnkey style homes to empty lots, it can be tempting to get swept away by the “cheaper” price tags. Exact figures will vary, but in general, most experts agree that the cost of buying the land and preparing it should not take up than 25% of your total construction budget.
Research zoning requirements.
Zoning requirements may be the biggest hiccup in preventing you from building a home in that dream location. Trust us, a little research into a lot’s zoning requirements before you move forward will save you from a whole lot of headache later.
State and local governments classify areas of land for specific purposes. This is referred to as “zoning.” For example, if a section of land is in a commercial zone, then it can only be used for business or retail purposes. There are a variety of types of zoning classifications – residential, mixed-use, commercial, industrial, agriculture – but you’ll want to be sure your land is classified as residential before you make any commitments. It’s also worth looking into the zoning requirements of the land nearby your prospective lot, as the type of future neighbors you have can impact your future home’s value. Check with your local zoning office for specifics about your lot.
Do some number crunching.
After you’ve found a lot that you can afford and build a house on, it’s time to think about how much you’ll be paying long-term for that lot. What is the annual tax rate on the property? This varies by location, property type and value; the tax rate can dramatically impact how much you’ll pay over time on the lot. Your state’s department of revenue will be able to inform you of applicable taxes and their rates.
Where will you get your water?
This is another area that can get expensive if you don’t preplan. How easily you can - or can’t -bring water to your new home is a big deal when it comes to building a house. If you’re building a home “in town,” then you will likely have access to a municipal, or city, water supply. If the lot is in a rural location, then you’ll need to do a little more research.
If you can’t access a municipal water supply, then you may have to drill a well in order to tap into the water in the ground, but you should consult with a building professional. The requirements around building a well can vary by state and county. They often involve the well being a certain distance from drip lines, septic tanks, sewers, drain fields, or other properties, which can dramatically impact where your house can sit on the property.
Again, it’s worth checking with a home building expert or local government official about your lot’s situation, especially if you’re thinking about buying in a rural area.
Review applicable ordinances and covenants.
Depending on how rural your lot is, this one may or may not apply to you. Many lots in the “suburbs” are designed for builds that are part of a larger community, or subdivision, of homes. As such, the lot may be subject to homeowners’ association (HOA) dues and the residents may be required to follow “covenants.”
HOAs are groups of property owners. HOAs require members to pay dues in order to keep up aspects of the community, like swimming pools, parks, golf courses, etc. Depending on the type of development, these fees can vary anywhere from a few hundred dollars a quarter to $400 a month, so you’ll want to look into your specific property’s fee structure. HOAs also generally have specific rules about landscaping and design requirements, such as how often your lawn should be mowed or what color you can paint your house.
More often, lots may be part of a subdivision with covenants. For example, if you’re buying a lot from a builder in a suburb that owns 10 or 20 lots in the cul-de-sac, then the owner may have a covenant for each of the properties that are being sold. These are specific rules between the landowner and buyer for the use of the lot.
While they can sound restrictive, HOAs and covenants can be a big plus for future homeowners. You’ll have the reassurance that nearby homes will be cared for and have a similar appearance to yours – both of which can be a big blessing when it comes time to resale.
We’d love to talk with you about how we can help! For example, our short-term lot loan gives you two years to finalize your house plans and choose a builder. Then, when you’re ready to build, roll the balance of your loan into our All-in-One Custom Construction Loan. Click here to find out more about our lot loans or talk to your neighborhood loan officer today.