How to buy a vacant lot
By Pat Curry • Bankrate.com

There is something about buying land.

Maybe a few acres of wilderness appeals to your pioneer spirit. Maybe it's a desire to build a house exactly the way you want, which means starting with an unimproved, vacant lot in a new subdivision.

Whatever the motivation, buying land is different from buying a house. Things that never come into discussion in a home purchase -- access, utilities, easements, land-use restrictions -- become extremely important in a land purchase.

"It can be a complex thought process," says Stephen Roulac, CEO of the Roulac Group, a real estate consulting firm in San Francisco. "When you buy an existing house, someone has already gone through the issues of what's allowable on the land."

Know the plan, find the zone
Just as with buying a house, first you have to decide what you want. Once that's finalized and the search area is narrowed, spend a day at the planning and zoning department.

The first item on your list should be a look at the county's long-range land-use plan. Areas will be designated for business, residential use of varying densities, agriculture and public use, such as parks and schools. It will also warn you whether a garbage dump or maximum-security prison could become your new neighbor.

While you're there, check out the traffic counts and ask about planned road improvements. If you've ever wondered why people build nice houses next to six-lane highways, chances are they didn't know the road was going to be there when they bought 10 or 20 years ago -- and now there's no way they can sell.

Once you've identified specific parcels that interest you, find out how the property is zoned.

"Depending on the zoning, your dream house may not be permitted," says Norwood Gay, senior vice president and general counsel of Attorneys' Title Insurance Fund Inc., in Orlando, Fla. "Zoning will tell you whether you can build on the site, period."

Next, determine if the land is in a recorded subdivision or is unrecorded acreage. If it's in a subdivision, ask to see the plat, plus the subdivision restrictions. This applies whether you're buying in the city or in a rural county. You want to look at both because the more modern plats will have details that aren't necessarily listed on the subdivision restrictions.

"You might want to see if that lovely wooded area behind you is your neighbor's back yard that he can cut down or a greenbelt that can't be disturbed," Gay says. "There will be utility easements shown on the plat. They won't be available for construction."

Identify the boundaries
Subdivision restrictions will tell you how much control you have over the use of the property. (If the site is acreage, these issues are addressed in the deed restrictions or covenants.) The restrictions can cover everything from the kinds of pets you can have to whether you can park a boat in the driveway. If there's a homeowner's association, you need to find out how much the annual fees are and what they cover.

"If you're looking at a gated community, you'll own the roads and you'll maintain them," Gay notes.

Also, find out whether membership in the homeowner's association -- and payment of the fees -- is voluntary or mandatory. If it's mandatory and you don't pay up, the association can put a lien on your property and even foreclose it.

Before you start thinking that this sounds burdensome, understand that limitations are not necessarily bad. If there are no restrictions, be afraid. Be very afraid. Think million-dollar houses next to doublewide trailers next to junkyards next to poultry processing plants.

"You need to pay attention to everything in your sensory corridor," Roulac says. "You might not be able to see it, but there could be noise or odors. Land-use issues are often thought of as a restriction, but restrictions can be pretty good. What restricts you restricts others."

Two more important reasons to look at the plat and the restrictions are utilities and access. Does the site have municipal water and sewage or will you have to drill a well and install a septic system? The answer could mean thousands of dollars in construction costs. Determining access could help you avoid buying land you can't get to.

"More than once we've been involved in claims where people assumed a road was a public road when it was private access," Roulac says. "You want to be absolutely certain you have dedicated access -- paved streets or a dedicated easement."

Figure out the financing
Unlike home mortgages, where competition is fierce, financing for unimproved property is an intensely local marketplace. The most common financing comes from the seller himself, Roulac says. A typical deal might require a 20-percent down payment, with the seller holding a note for the balance. The interest rate and terms of the loan are entirely negotiable.

If the purchase price isn't that large, you might also consider taking out a home equity loan on your current residence and enjoy the tax deduction.

Major banks are not big players in this market, so seek out a community bank. The real estate agents and title insurance companies in the area should know which banks will finance loans for land.

You'll have a better chance borrowing money if there are other improved properties in the area, Roulac says, and if you're planning to build a personal residence as opposed to speculating for investment. You'll win points if you have other business at the bank or if you plan to come back for a construction loan.

In years past, the standard rule was that borrowers would put at least 30 percent down on a land purchase, says Billy Sullivan, mortgage lending officer of the National Bank of Georgia, a locally owned bank in Athens, Ga. But with the increasing cost of real estate, that's not the case anymore.

"People don't have [the money] to pay that and buy a house," he says. "The old rule of thumb was that if your land was paid for, we'd loan you money to build a house. That's almost an impossibility today."

Factors that impact the terms include the location and size of the parcel, the zoning and the intended use. His bank charges the same interest rate and points for either construction or for the purchase of raw land.

"The loan on the land can be amortized for 15 years or just be interest only; it depends on the borrower's needs," Sullivan says. "If the borrower plans to build in 90 days, he might want to do a 90-day note, just pay the interest and roll the rest of it into the construction loan."

The biggest mistake he sees borrowers make is buying a lot without considering the costs of building.

"I see ignorance," he says. "People say, 'Oh, I fell in love with this lot,' and then you do whatever it takes to build the house. You can have lots that are great for a basement as it sits, or ones where you have to go in and cut land out or bring dirt in. It will be money you'll never, ever recoup. You spent it, but the market isn't going to pay for it."