Beware getting raw deal on raw land

Dear Steve,
I am considering the purchase of a lot on undeveloped lakefront property to build a home. The surrounding area is starting to be developed. The land has utility access. Is this a good investment? Will I have trouble getting financing?
-- Ryan C.

Let's start with the money. Because the value of undeveloped land is often difficult to determine, lenders are usually apprehensive about advancing a buyer much more than half of its purchase price. That's because a lender may have trouble disposing of it quickly should you default, because undeveloped land is significantly less liquid than other real estate.

In some instances, the lender will insist on a "subordination clause" that requires you to pay off the balance of the land loan before taking out a home-construction loan.

Experienced sellers of undeveloped properties know all this and will generally offer relatively liberal financing terms themselves. Realize there's a good chance you'll need a combination of seller and bank financing to make your deal work.

Be extremely thorough in researching not only the property, but the seller and the developer as well, assuming you'll be using one. What's the developer's track record? Does he have a successful history of developing raw land?

While you can usually get through routine residential real estate transactions unscathed without using an attorney, you might want to employ one here, just to make doubly sure the seller has clear title to the land, that there will be no private or public access issues with it, that water and utilities will be readily accessible at a reasonable cost, and that everything else is on the up and up. There's been a lot of fraud in raw-land sales in recent years.

Federal law, by the way, requires land companies selling undeveloped lots to give prospective buyers both a property report and financial-status report. Get these well before signing on that dotted line.

Also make sure, by checking with zoning officials in the municipality or county where the land is located, that adjacent land is not zoned, or could be rezoned, for commercial, city-service or recreational use. You may not want a publicly accessible beach or boat-launch area next door and you certainly don't want a municipal power plant on the nearby horizon.

Conversely, find out if you will have sufficient water access from your lot and free access to recreational and common facilities of the lake.

More importantly, determine if police and fire-protection services will be readily available to you. Unincorporated areas served by reciprocal agreements with the county or area townships often have slower emergency-response times.

As for the land's investment value, it's tough to estimate without having more details. Normally, good waterfront property that's reasonably close to metro areas increases in value quite well because it's in high demand.

Of course, one of the big advantages of buying undeveloped land is that you control its improvement prospects and can add value with tasteful and practical development on it.

So be thorough and don't give yourself a "raw" deal.

Good luck.