What Do I Need to Buy Land?

Buying land differs considerably from purchasing an existing developed property. It involves a distinct set of considerations, preparations, and transactional steps. This guide clarifies the process, from initial financial planning and defining specific property needs to conducting comprehensive due diligence and navigating the complexities of the closing process.

Preparing for Land Acquisition

Before identifying a specific parcel, prospective land buyers should focus on crucial information gathering and preliminary decision-making. This initial phase involves understanding financial capabilities, defining the intended use for the land, and assembling a preliminary team of professionals.

Financing raw land presents different terms than a traditional home mortgage. Land loans often require larger down payments, commonly ranging from 20% to 50% of the purchase price. Interest rates for these loans are also higher than those for residential mortgages, reflecting the increased risk for lenders, and repayment terms are shorter, between 5 and 20 years. Buyers might explore options from local banks, credit unions, or specialized lenders like those within the Farm Credit System, which focuses on agricultural and rural land financing.

Securing pre-approval for a land loan establishes a clear budget and demonstrates financial readiness to sellers. Pre-approval involves a lender assessing your financial situation, including credit score, which needs to be in the high 600s or 700s for land loans. Beyond the purchase price, budget for closing costs, which range from 2% to 6% of the land’s value, and potential development costs such as site preparation, utility installation, and permitting fees.

Defining the intended use for the land is a primary step, as it directly influences the type of property to seek and the subsequent investigations required. Whether the land is for residential development, agricultural purposes, or commercial use, local zoning and land-use regulations will dictate what is permissible. These regulations can impact desired size, location, accessibility, and the feasibility of planned projects. A preliminary understanding of utility access, such as water, sewer or septic, electricity, and internet, is also beneficial, as the absence of these can significantly increase development costs.

Assembling a preliminary team of professionals early in the process helps navigate the complexities of land acquisition. A real estate agent specializing in land sales offers expertise in identifying suitable properties and understanding market nuances. Engaging a real estate attorney for legal guidance and a lender for financing options provides a comprehensive support system from the outset. This team can help clarify requirements and streamline the preparatory stages before a specific parcel is even considered.

Thorough Land Investigation

Once a potential parcel of land is identified, detailed due diligence is crucial to uncover any issues before finalizing a purchase agreement. This investigative phase involves professional assessments and reviews specific to the chosen property.

A title examination involves a comprehensive search of public records to trace the property’s ownership history. This process reveals any existing liens, easements, restrictive covenants, or other encumbrances that could affect clear ownership. Title insurance, purchased at closing, protects the buyer and lender against financial losses resulting from undiscovered title defects.

A professional land survey defines property boundaries, identifies any encroachments, and confirms legal access points. Survey costs range from $375 to $750 for a boundary survey on a smaller parcel, but can increase for larger or more complex properties, with ALTA surveys costing $2,000 to $3,000. The survey document provides a precise legal description of the land and its physical features.

Environmental assessments are important. Soil tests, including percolation tests, determine the land’s suitability for septic systems if municipal sewer is unavailable, and its load-bearing capacity for construction. Identifying potential wetlands or contamination issues involves a Phase I Environmental Site Assessment (ESA), which costs between $1,800 and $3,500, but can range up to $6,500 for larger or more complex sites. If a Phase I ESA identifies potential contamination, a more extensive Phase II ESA, involving sampling and testing, is necessary, with costs ranging from $5,800 to $12,000, or up to $25,000.

An appraisal determines the fair market value of the land, which is a requirement for securing financing. Appraisers consider comparable sales and the property’s characteristics to provide an independent valuation. Reviewing the property’s specific zoning classification with local planning departments is important to confirm that the intended use aligns with local ordinances, including setbacks and building codes. This review also identifies necessary permits for any planned development.

Verifying the availability and cost of connecting to utilities such as water, sewer, electricity, and internet is important. Contacting utility providers directly can clarify connection fees and timelines. Simultaneously, confirming legal and physical access to the property, whether via public roads or recorded easements, ensures the land is reachable and usable.

Executing the Land Purchase

After thorough preparation and investigation, the process moves to the procedural actions involved in buying land. These steps focus on formalizing the agreement, managing the financial transfer, and legally documenting the change of ownership.

Making an offer on land involves submitting a purchase agreement, which is a legally binding contract. This agreement outlines the proposed purchase price, any specific contingencies, and the amount of earnest money. Earnest money, a good faith deposit ranging from 1% to 5% of the purchase price, is held in an escrow account to demonstrate the buyer’s commitment. Common contingencies include financing approval, a satisfactory appraisal, successful environmental tests, and a clear survey and title review, allowing the buyer to withdraw without penalty if conditions are not met.

Navigating the closing process is the next step, where the property title is formally transferred from the seller to the buyer. This process is facilitated by a title company or a closing attorney, who ensures all legal and financial requirements are met. The buyer will review and sign documents, including the settlement statement, which details all costs and credits, and the deed, which legally conveys ownership. Funding the purchase, whether through a land loan or cash, occurs at this stage.

Recording the deed with the local county recorder’s office is a final action. This step makes the land transfer a public record, providing legal notice of the new ownership. While the title company or closing attorney handles this, it is important for the buyer to confirm that the deed has been properly recorded. Recording fees vary by county but are a standard part of closing costs.

Understanding closing costs and initial tax implications is also important for the buyer. Beyond the purchase price, buyers pay fees at closing, including title insurance premiums, attorney fees, recording fees, and property transfer taxes. Transfer taxes, imposed by state or local governments, are a one-time fee calculated as a percentage of the property’s purchase price, and their rates vary by jurisdiction. These financial details are outlined in the settlement statement, ensuring transparency in the transaction.