The past few weeks we’ve talked about searching for land, narrowing your search, and questions to ask before you buy. This week we’ll get into more details on buying land and making an offer.
This is the point where you have to get a bit more strategic in the process. You have to consider all the knowledge you have on the land to make a good offer.
The important part about making a good offer is knowing it is an offer you are comfortable with that won’t be insulting to the seller.
It should be an offer that shows the seller you are serious about your interest. However, you also have to know your point at which to walk away.
The tricky part is that you don’t know where the seller is willing to settle on the price. Below are some tips on different items to consider when thinking about buying land and making an offer.
What to Consider When Making Your Offer
Popularity of Land / Area
While you are considering making your offer one of the things you need to take into account is the popularity of the land and the area the land is in.
If it is a good piece of land in a high-demand area, that could potentially change the price you want to offer on the land.
Similarly, if you know for sure that others are interested in the same piece of land, you need to think about that when you make your offer.
You have to weigh those concerns with how much you want the plot of land you are looking at.
Current Sales in Your Area
Watch the market in the location you are looking to buy. Take notice of how quickly the land sells. Or how long it sits for.
You should also look up previous sales in the area using realtor.com, trulia.com, or Zillow.com. Look for similar land for sale in your area that has sold recently and find the price.
That way you can tell what current land is actually selling for.
If you have been watching the market for a while, you can compare what the asking price was on the lot versus what it sold for. This can tell you if they were able to negotiate the price down.
Value of Land
Consider the value of the land in your eyes. You can compare it to other properties for sale in the location you are looking.
Then consider whether the land is worth that value to you. When you’re thinking about this, make sure you consider your list of what you want in a land.
Don’t have your list, check out this blog post (link blog post from last week) to see what to include.
Know Your Budget
Only you know your budget. Make sure that you know what price you have to walk away at.
If you can’t get the land for a price within your budget, be prepared to walk away.
There will be more land out there and you will eventually be able to find something you can afford.
Contingencies
There are certain stipulations you should consider making your offer contingent upon.
For land, one item to consider is to have the offer contingent upon a survey. This way you can make sure that the land is suitable for your needs before you purchase it.
Sometimes, sellers already have a survey done, so this is not required.
Another contingency to consider is having soil tests done. If the seller hasn’t done so already, the soil tests will tell you how suitable the land is for things like well and septic if it isn’t in the city.
Finally, the biggest contingency I recommend is making the offer contingent upon your financing. This way, if you don’t get approval for your loan or something else falls through, during the process, you have the ability to walk away.
Financing for Buying Land and Making an Offer
Most people can’t pay for a land purchase all in cash. If you can – awesome. If not, read on for some tips about financing.
When we were looking at lots, I found out there was a lot I didn’t know about financing a land purchase. Learning about financing was a key part in buying land and making an offer.
Minimum Down Payment
Land typically requires a 20% down payment. This can vary depending on the rules and regulations at your financial institution.
Number of Years of Loan
I was under the impression that you could finance land under a typical 30-year mortgage. At our financial institution, this was not an option.
Our options for land loans were 15 years or less.
Again, this is something that could vary by the financial institution. You should verify that with your lender so you can properly calculate your budget.
Check Rates
Make sure you look around and check rates for loans at several financial institutions. This way you know what is a reasonable rate in your area.
I checked the 3 credit unions I was most familiar with when we were looking at financing.
We ended up picking the option with a slightly higher rate just because we were more comfortable with them than the other options.
Location of Land vs Location of Financial Institution
Keep in mind that some financial institutions have requirements on where the land is located. For instance, my financial institution will not do loans on property that is located out of state.
Make sure the land you are wanting to finance is within the area that your financial institution is comfortable.
Earnest Money
Earnest money is almost always required for a sale within so many days of an accepted offer.
It is money that you put down to hold the land in your name to show that you are serious about your intent to purchase.
This money will go towards your purchase price, meaning that it will become part of your down payment on the land.
Preapproval
Preapproval for a loan only lasts for so long. The timeframe is likely dependent on your bank.
I wouldn’t recommend getting preapproved until you know that you are going to be putting in an offer on something within a few months.
The reason for this is that you don’t want to impact your credit score by having your credit pulled so many times in a short time frame.
We didn’t get preapproval until we had already told the selling realtor our intent to make an offer. In doing this, we just had to make the offer contingent upon our financing.
Appraisal
Similar to buy a house, the land will need an appraisal done on it. An appraisal will compare the land you are looking at buying to similar land that has recently sold around it.
Typically, in order to get financing, the land needs to appraise at the lower of your loan amount or the asking price of the land.
This means that if the land appraises for less than the amount of the loan you need to purchase it, then you will have to come up with other funds. Either you’d have to put more money down on the land or ask the seller to reduce their price.
If neither of those is an option, the contingency you’ve placed on financing will come into play and you can walk away from the offer.
Make Your Offer & Search for Financing
You now have much more to consider as you think about making an offer on a piece of land. Take some time to really think through all of these items and weigh them up against your list of what you want in a piece of land.
If you’re ready to do so, make an offer on some land.
You’re also ready now to start looking for financing to purchase land if you need to. Make sure you do your research and find a financial institution you are comfortable with.
Reach out to a loan officer and ask questions about the topics above to get comfortable with how the process works for their institution.
Overall, make sure you are making the choice that feels right for your family.
Buying land and making an offer can be an exciting journey and the start of something new.
Good luck out there!
