When you acquire your residence by purchasing an existing home (either a resale or a new home in a builder's new construction community), the process is fairly straightforward. The "package" is predefined with a resale property. You don't have to find a lot and then have a home designed. In a new construction community, the builder tells you the lots that are available and provides brochures with the floor plans and features of the different house models. When you want to buy a lot and then have somebody build you a home, however, this process has a few more twists to it and additional issues come into play.
The first (and perhaps the biggest) factor is cost. Before you decide to take the plunge, you'd want to have a rough estimate of the expenses you would incur. Your project consists of three separate phases (the lot, design and construction, and the completed property). Your cash needs and project expenses are going to be related to the purchase of the land parcel, the construction on it of the improvements (e.g., house, driveway, utilities, landscaping, grading), and the final mortgage for the finished property (the new home on the lot). The starting point for determining your project cost is finding out how much money you can borrow. This will help you define the amount of cash you may need to come up with, the price range of lots you should be investigating, and a realistic budget for the construction portion of the project (Phase 2).
The section of your budget for Phase 1 (acquisition of the building site) would include the cash for the down payment on the parcel, financing fees and payments on the lot loan, closing costs, "carrying costs" and attorney's fees. Programs, features, rates, fees and requirements for lot loans vary among lenders. Not all lenders offer residential building lot loans. Although you may be able to finance only 75-80% of the purchase price of the lot, you might have the option of using some of the equity in your existing home for the down payment. Since lot loans are designed to be relatively short term, some programs specify that you pay off the loan within a certain period of time. Where there's an existing structure on the parcel, lenders may require that the value of the land-only portion of the property not exceed a specified percentage of the appraised value of the entire property.
If you've ever bought or sold a home, you know that the buyer and seller are responsible for paying certain costs when title to the property is transferred. These vary by area and marketplace. Your closing costs when you settle on the building lot should be similar in nature to those you paid as a home buyer. The amount, of course, will be different because some items (such as title insurance and realty transfer taxes) are based on the purchase price of the property. You would be responsible for any ongoing or carrying costs of the property once you take title to it. In the case of a vacant parcel, these expenses might be limited to real estate taxes and grounds maintenance. Additional expenses would apply if the property has an existing house, such as insurance, utilities, and maintenance of the structure as well as the lot.
Other costs related to acquisition of the lot would vary depending on the particular scenario. For example, if no public water and sewer were available and the seller weren't including utility permits in the purchase price, you'd need to have the parcel tested, evaluated and approved for on-site systems (e.g., well, septic, sand mound). With public sewer and water, you would have to purchase the permits unless they were provided by the seller. If the property contained an existing house, you might decide to have professional inspections and testing done (e.g., radon, termite, well, septic). The results may necessitate repair or remediation work and you might have to pay for some or all of it, depending on the provisions in your purchase offer.
If you intend to create a building lot by subdividing a larger parcel, your Phase 1 budget should include development application fees or permits and fees for engineering and environmental assessments (such as wetlands and possible contamination by toxic substances). In addition, you should increase the amount allocated for legal expense because it's likely that your attorney would be doing more work on your behalf.
The spreadsheet that you set up for the project budget will serve its purpose if it includes all of the expenses for all of the project phases. As you tweak your pro forma, you'll want to be able to see the impact on the whole picture right away. Accordingly, instead of creating separate budgets, it might be better to have one spreadsheet with a section devoted to each phase of your project.
By Nancy Chadwick
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