Buying land to build your dream home is exciting, but it can be expensive if you don’t plan carefully. Unlike buying an existing house, a land purchase involves additional costs and risks. Without a detailed budget, unexpected expenses can derail your plans. This guide walks you through budgeting for land purchases step by step, with practical advice for first-time home buyers.
Step 1: Include Key Contingencies in Your Purchase Agreement
Contingencies in your contract protect you from financial risk. They give you an option to exit the deal if certain conditions aren’t met. Including these in your offer is essential, especially for land, which often has unknown issues. Key contingencies include:
- Financing contingency: Exit the deal if you cannot secure a loan after making a genuine effort. This prevents being stuck in a purchase without funds.
- Appraisal contingency: Walk away if the land appraises lower than the agreed price. It ensures you don’t overpay.
- Perc test contingency: Protect yourself if soil fails a perc test, which is necessary for septic system installation.
- Water supply contingency: Avoid buying land without a reliable water source. This is critical in areas without municipal water.
- Survey contingency: Confirm boundaries and easements to prevent future disputes or legal issues.
- Zoning contingency: Ensure your planned use is allowed. Some zoning changes require lengthy approval processes.
- Design approval contingency: Needed if your plans must pass a design review committee.
Adding these contingencies may delay closing slightly, but they protect your budget and prevent costly mistakes.
Step 2: Investigate the Land Before Buying
Due diligence is essential to identify issues that could increase costs. First-time buyers often overlook these factors, which can result in delays or extra expenses. Key areas to investigate:
Zoning and Use
Check that the land is zoned for residential use. Changing zoning can be time-consuming, costly, and sometimes impossible. Also, research the highest and best use for the property to assess potential value.
Legal Access and Boundaries
Verify legal access through a public road or easement. Without proper access, you could own land you cannot reach. A professional survey confirms boundaries, identifies encroachments, and ensures no disputes with neighbors.
Property Rights
Some rights, like mineral or timber rights, may have been sold separately. These can affect your future use of the property. Confirm what rights come with ownership before budgeting.
Environmental Risks
Flood zones and wetlands require permits or flood insurance. These can add significant costs or restrict development entirely. Check federal, state, and local regulations for restrictions.
Soil and Buildability
Conduct a soil study to identify foundation issues or drainage problems. Perc tests measure soil suitability for septic systems. Poor soil may require costly engineering solutions.
Title and Liens
Perform a title search to uncover unpaid taxes, liens, or easements. Liens transfer to the new owner and can become unexpected financial obligations.
Step 3: Plan Your Financing
Land financing differs from a typical home mortgage. Lenders view land as higher risk, especially raw or undeveloped parcels. Planning financing carefully is essential for budgeting.
- Expect higher interest rates and shorter loan terms.
- Down payments are larger, usually 20% to 50%. Raw land may require higher down payments.
- Improved land with utilities generally receives better loan terms than raw land.
Financing Alternatives
If traditional loans are difficult, consider these options:
- Local banks or credit unions: Regional lenders often offer better terms because they understand the local market.
- Home equity loans: Borrow against your existing property for lower interest rates.
- Seller financing: The seller acts as the lender. Terms are negotiable, but legal review is essential.
- USDA loans: Available for rural properties under 35,000 population, often with low or no down payment
Step 4: Budget for Site Development
Site development costs can range from $100,000 to $200,000, depending on the property and its location. These costs include utilities, grading, driveways, and permits.
|
Utility/Service
|
Cost Estimate
|
Details
|
|---|---|---|
|
Electricity
|
$2,500 to $12,500
|
Depends on distance from grid and pole installation
|
|
Water Well & Septic
|
$6,000 to $20,000+
|
Well depth 100–300 ft; septic type affects cost
|
|
Septic System Installation
|
$3,500 to $20,000+
|
Conventional, aerobic, or mound systems
|
|
City Sewer/Water Connection
|
$20,000+
|
Extending lines from main city utilities
|
| Permits & Fees | $28,000 to $45,000 | Includes building permits, school fees, traffic impact |
Include these costs early in your budget. Unexpected site expenses are a common reason land projects exceed budget.
Step 5: Estimate Custom Home Costs
Construction costs depend on size, design, and finishes. For a precise budget, break your project into components:
- Living area: $225 to $400 per square foot
- Covered porches: $85 to $105 per square foot
- Attached garages: $115 to $170 per square foot
Tips to Control Costs
- Work with a design-build contractor early. They ensure your plans match your budget and reduce costly redesigns.
- Decide on your desired finish level and share examples with your builder.
- Remember that expensive rooms like kitchens and bathrooms drive costs. Additional bathrooms can add $40,000+, and a master bath can exceed $80,000.
Step 6: Include Closing Costs
Land closing costs differ from home purchases. They typically range from 2% to 5% of the purchase price. Include:
- Survey and appraisal fees
- Title search and title insurance
- Recording fees and transfer taxes
- Loan origination fees if financing
Negotiate with sellers or shop for competitive rates to save money. Review all closing documents carefully to avoid hidden charges.
Actionable Takeaways
- Contingencies protect your budget from unexpected costs.
- Perform thorough due diligence on zoning, access, soil, and environmental risks.
- Plan financing and explore alternative options early.
- Budget separately for site development, home construction, and closing costs
- Review all numbers carefully to avoid overspending.
FAQs
What is a perc test?
It measures soil drainage for septic installation. Failing the test can halt construction.
Do I need a survey before buying land?
Yes. A survey confirms boundaries, access, and easements.
Can I finance raw land like a house?
Raw land loans are harder to get, with higher rates, larger down payments, and stricter terms.
How much are permits and fees?
Expect $28,000 to $45,000, depending on location and home size.
