Should You Buy Land and Build Your Own House?
gmnicholas/Getty Images
Much of the available land in the U.S. was once agricultural or forest land. The U.S. Department of Agriculture's Land Values 2020 estimated that an average acre of farmland cost $3,160. States such as California, Massachusetts, and New Jersey tallied in above $8,400 per acre. And states such as New Mexico, Wyoming, and Montana tallied well below $2,200 per acre. But the costs to build a completely new house can range widely.
If you're planning to buy a mobile home, hook up a camper, or install a pre-fab home on a plot that already has utilities, prices are more predictable than if you're drawing up architectural plans for a custom-built mansion. To determine if the land route is the most affordable, you'll have to walk through these four steps to come up with a comprehensive price to compare against listings on the residential real estate market.
Step 1: Find land that can be built upon.
The first task is to locate land that you can build a house on. An easy way to start is by using online real estate databases, like Realtor.com, Land.com, LandHub.com, and Trulia.com. These sites generally showcase listings from the Multiple Listing Service that can be accessed by licensed real estate agents. Agents will also be able to access listings not available to the public, known as "off-market properties." These finds have an owner willing to sell, but not willing to publicly list—so the property may be distressed, but still valuable to someone with creative vision.
Land listings are usually represented by a seller's agent, so it would be beneficial to hire a buyer's agent who can secure the best deal for your budget. Pick someone who has experience in land sales rather than just normal residential property sales.
When choosing land for your home, it's also important to consider the area's utility and road access. Here are a few other things to check to make sure that you can build your dream home on a plot of vacant land.
Ask about zoning.
This dictates what the land can be used for and the types of properties that can be built on it. You must check with the local Zoning Office and make sure a residential property can be built on the land you're looking to purchase.
Consider soil testing.
If there's no sewer system on the land, you must do a percolation test. This will help you to understand the rate of water drainage before a sewage system can be installed. Other types of soil tests will show if the ground can support a house and if the soil contains harmful contaminants, like lead or arsenic. And you'll need to understand how best to access well water.
Check permit approvals.
Most cities require a construction permit approval before any work can begin. Work with a builder before you buy the land. Check that your plans follow the local rules and zoning requirements, so that you will be given permission to start the project. Getting this approval can take months, so be prepared to wait.
Step 2: Build a team.
It's essential to assemble your team before you buy the land. The team will help you sketch basic designs and understand estimated costs. That information will help you decide if you're better off buying land and building, or just waiting for the right foreclosure or low priced listing to hit the market. Experienced builders, carpenters, masons, etc. will also know the current price for materials, and you should add a 30 percent premium on top of that for last minute errors or upgrades.
You will need to hire an experienced architect or architectural designer in your area. And if you're not going to supervise the entire process, then you'll want a construction project manager who can help you choose potential contractors, check references, and run down permits. Discuss contract and payment options, including whether a lump sum contract is on the table. This can help you to avoid unexpected building costs.
It is possible to hire a design-build firm that already has the team built-in, but you should still over budget any quoted prices. Materials and labor prices are at an all-time high. Who knows what the going prices will be after titles, deeds, and permits are secured to break ground?
Step 3: Finance the sale.
Getting financial help to purchase land can be tough, as many lenders view new construction as a risk. However, there are multiple financing options available, if you can show evidence of building plans. Accessing and securing this kind of financing is different from going to your bank for a normal mortgage loan, so review all the terms and conditions, as well as repayment timelines.
Work with your agent to submit a written offer to the seller, and be prepared to negotiate. If an owner is out of town or has inherited the land, it can take time for them to assess the true value of the offer. If you're buying this home for your family to grow old in, make sure that your agent shares that with the seller, who may think that a buyer is a developer looking to low ball them to make a quick buck. Sellers may be more amenable to your budget once they know that you plan to be a long-time resident.
Step 4: Begin construction.
This is the most exciting part. You can watch your dream home come to life. But this is usually months, if not years, after the ink has dried on the purchase of the land. Once construction starts, you will need inspectors to approve different parts of the process. And there's a lot of paperwork involved in essentials, such as plumbing, dumpsters, access from the main road, etc.
Some people take time off work to become fully involved in the construction process. Others rely on their team, but there will be choices of fixtures and materials that will inevitably come your way. Keep track of construction progress and actual expenditures. Don't let enthusiasm push you too far afield of your original budget.
Add it all up…
After you work through these four steps, you'll have a good sense of the monetary and time commitment involved in building your own home. Now you can compare that with the prices of homes on the market.
Is it cheaper to buy or build? Is it better to build or buy? That very much depends on your personal preferences and the cost of available properties that meet your needs: square feet, layout, bedroom, and bathroom count. Now you can decide if you have the patience and money needed to embark on a long-term project to build your forever home.
