One of the most important components of green building is the land you choose to build your project. There are multitudes of factors that must be considered when choosing the perfect parcel of earth to develop. Making the wrong choice could cause major delays and drive up project costs.
In the real estate and finance world, it’s all about marketability. In other words, is the property desirable for the neighborhood or region; is the best use of the land optimal? Would other buyers find the property desirable or is the project too unique? The appraiser, underwriter, title insurance company and the builder will all help determine if the land conforms to the market and meets city or municipality guidelines. But doing your homework prior to lender valuations can save money and time.
Among the first criteria in the design phase is determining if the orientation of the property you are planning to build optimizes either passive or solar gain. In some cases that incredible view you want to capture may be lost due to improper building orientation; or you may incur an increase in the building costs in order to mitigate a passive design challenge that can accommodate a desirable view.
Typically, the lower the price for the land, the more likely it’s in a rural area or may have topography or entitlement issues. Land with exceptional views may be attractive, but there may be hidden costs to cure title issues; or land excavation costs could dramatically increase to the budget. Cheaper priced lots tend to be less desirable or marketable and can pose a financing challenge.
Land Acquisition – Building Design Checklist:
- Are there Title Issues? Easements or title exemptions, i.e., wildlife and agriculture exemptions pose issues that may need a special financing work around (challenging to obtain title insurance that lender will accept).
- Are there utilities? It may be necessary to develop the land and include utility infrastructure to bring in sewer, water and utility lines. Major costs to drill a well or install rainwater harvesting systems, and land excavation add to construction costs and may negate the lower price of the lot.
- How big is the lot and is it irregular? The size and shape of the lot may not conform to the area comparable sales, i.e., smaller acreage or larger acreage; irregular lots may be more challenging to design. If the area’s sales reflect 5 acre lots and the subject property is 1 acre, it may not conform to appraisal adjustments and could require additional cash down.
- Does planned square footage conform to the neighborhood? Check comparable square footage of properties with your local realtor or builder; if you are building a tiny home or a much smaller or larger home than comparable neighborhood sales dictate, you may need specialty or portfolio financing due to non-conformance with the mortgage secondary market, (Fannie, Freddie Mac or FHA) guidelines. In some cases, land owners may need to increase conditioned square footage to conform to conventional valuation guidelines. Guest houses or secondary building’s square footage may not be counted if 1) its not contiguous or the buildings aren’t connected; 2) if no other comps in the area have a guest house or second unit.
- Is the property in a rural area? Rural land is problematic whether it’s green or not; comps are too far away from each other in many cases; or lot sizes, square footages don’t conform to the subject property.
- What amenities are available in the community and surrounding region? Shopping, schools, hospitals – is the land close to community amenities? What other features does the community offer? I.e., community gardens, swimming pool, club house, etc.
- Is the land value higher than the projected cost of the property that’s being built? Excessive land value can be a financing challenge. Conventional guidelines require a ratio of at least 65%/35% of the land to house value. (The building is the higher ratio 65 %.) Some exceptions can be made if this is typical for the neighborhood.
- Have there been any natural disasters, i.e., fires, flooding, toxic waste dumping? Are there Environmental or engineering reports available? Is the property in a flood zone; does the building need to be built up (additional costs) to mitigate flooding; have there been recent fires? What is the quality of the water if city or well water? Have any environmental hazard waste reports been filed?
Financing options are limited for land acquisitions; usually local banks and credit unions offer 30, 20 and 15 year term loans. Short-term interest only loans might be offered if plans to build are within the first year of the land purchase. Most construction loans require the land be titled in the borrower’s name and, if the land is financed, it must be paid off and included in the construction loan.
Land is the one thing we can’t make more of. A cost effective strategy could entail purchasing the land up front and staging the building at a later time. This strategy could improve the equity as values appreciate or increase, adding more equity to the project valuation and potentially reducing the down payment or interest rate.
The bottom line: choose wisely, do your homework, align the right team to facilitate the land and building transaction. Choosing your builder and lender early in the process can help reduce cost overruns for design and land development. For more information on how land and construction loans work click here