Looking at a lot for new construction. Not working with a realtor. What do I need to know? Ideally I'd purchase the property, then over a year or so work with an architect while saving up for the build. Any suggestions? Do I need a realtor just for the lot?

Why wouldnt you use one to buy?

You do know that as the buyer you pay zero commission right? We are paid by the seller.

You don't NEED a Realtor to buy the land, but a good one will help you avoid some headaches along the way for sure. I'd be happy to help or at least talk if you want to shoot me an email - Cody@MyRobinsonTeam.com

On the loan, not sure of your question...do you need a loan to buy the land, or are you speaking only of the loan to build the home?

you want a construction loan in place when you start construction, not before.

mgreen said:

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You do know that as the buyer you pay zero commission right? We are paid by the seller.

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paid by the seller is semantics and accounting. the money ultimately comes from the buyer. there are many good reasons to have a realtor, but from the buyers perspective, I dont accept that realtors are "paid by the seller" to be accurate or a reason to have one.

Cody, thanks for the input. I guess my pickle is if I bought the land, I would have little to no cash for a construction loan a year or so down the road. I'd also want to have cash to pay the architect/designer to be able to take my time on the details before a builder is involved. So would I finance the lot, then turn around and use the cash for a construction loan/mortgage?

I imagine this is a typical scenario so I thought the REAL ESTATE board might have some good input/discussion/advise. Thanks again Cody.

Path, thanks for the input. I agree! The buyer is the one ultimately paying for everything! When an agent doesn't get a commission, then I'll believe "it doesn't cost me anything."

The land equity is brought in to the construction loan and you need roughly 20% equity. There are loans at 15% equity but you need to find that loan before assuming on that much down. So example:

Lot paid cash at 50k

Home cost 200k

250k value and the lot is your equity. Still have to pay all the upfront design and plans cost no matter what since that is what the appraiser needs to establish 'to be completed' value.

As for construction loan down the road there are conventional construction programs with 10% down, FHA construction programs with 3.5% and VA loan (if you are a vet) with 0% down. So, more options then just 20% down. These are available as a "one time close" meaning you can buy the land and fiance the construction all at once. You very well might want to buy the land first, but you can use a one time close loan to do it all at once.

Below is a bit more info

Low down payment construction programs

SteveBott, thanks! That's the kind of info I was looking for. Trying to do as much research on my own in advance.

I guess I'm trying to understand the financing BEFORE I get involved with a realtor, especially since new home construction costs can vary so much.

As Steve mentioned the loan will be based on project cost/value so your equity in the land benefits you. The architect/design cost can be included in the contract price and be part of the financing.

I don't do a lot of these but isn't there a risk you spend on the design and plans cost but not get appraised value? Therefore not being able to roll these costs into the loan.

Sure. There is always risk when an appraisal is involved whether it's construction, purchase or refinance. The one time close is a big part of our business (~650 going at any one time) and for the most part soft costs aren't an issue.

So the one time close basically gives a budget/target cost? Seems like you could go a year paying interest before the lender spends a penny. And two years making payments before you have a place to live.

No it works this way.

1 you identify the lot. It would be best to buy it first. That way you don't spend 10k on design and plans and then not own the lot having to redesign your home.

2 pay for plans and specs.

3. Submit to a lender for a completed value. They will use an appraiser to come to a final value. They will loan whatever amount based on the lower of future value not actual cost. So in my first post value comes in at 240 and not 250. The loan would be 192 and not 200k and you pay the difference. This is the risk I asked jja79 about.

4 the bank sets up an escrow account that has negotiated draws over time. You pay interest only on the amount that is released as it is released.

5 once completed the escrow construction account is closed out with a permanent loan of your choice of terms, 30, 15 year etc.

6 the final loan rate is locked sometime in he last 60 days or so

You pay interest only on any loan funds drawn. Mortgage payments begin after completion.

If you have a lot in mind, plans and builder in place you close the lot, construction and permanent mortgage simultaneously. No new appraisal nor need to qualify again upon completion.

In your case you don't have plans or a builder so if you purchase the lot that equity transfers to the loan that finances construction and the permanent mortgage which close simultaneously.

Ah makes sense. Appreciate the feed back from both of you. The one time closing would not work in my scenario. Thanks!

It will work. Buy the land either cash or loan. Get all your ducks in order and when ready contract for the construction loan.

I would go through the pre-approval process upfront knowing you qualify when ready

As Steve said it works for you. In your case the construction loan and permanent mortgage close simultaneously as a one time close.

I've done something similar, except for amount of construction loan. I already had a builder and we had an estimated construction cost, which is what we asked for from the bank. I did not rely on the appraisal to tell me how much I needed, but an appraisal was needed for the loan.

I took out a loan for the land. it required a down payment (recovered as equity in construction loan) and closing costs (not recovered). I then did a separate one time close construction loan. equity in the land (initial downpayment) was taken into account. the construction loan included paying off the loan for the land as part of the first draw. it did require a second closing with associated closing costs. at any one time, I only had one loan associated with the build: land, then construction, then final mortgage for completed house with land. if I recall correctly, some construction loans will include some sort of process to ask for more money if you go over what you ask for, but not by too much.

couple stressful points about the process. as stated, not being able to lock a rate on your final mortgage until towards the end of construction. also, the banks let you draw down on the construction loan based on work that has been completed. this can become a problem if you need a bunch of cash to secure a sub or purchase some big ticket items or materials and cant get them on credit. I've heard of complex builds where the owner is trying to put together tens to even a
hundreds of thousands of dollars so they can complete the next phase and then submit to the bank for the next draw (and then you can repay yourself the cash). a good builder will know how to manage the draws to minimize this risk. lastly, going over budget is always possible.

A one time close does not require you to wait until late in the construction process to lock the rate. It also doesn't require a 2nd set of closing costs. Since it's a one time close the permanent mortgage is closed before construction begins. If there are big ticket items that require payment well ahead of delivery we allow a draw for 50% of that cost. In my experience that will cover the deposit required by the supplier. In this case percentage of completion does limit the draw.

my loan program may have differed, but i was not able to lock a rate at the close of the first portion of the construction loan, only closer to the end at the conversion of construction to permanent mortgage.

as for the 2 closings, that's because i did something similar to what OP is asking. i bought the land with a loan first, in advance of more detailed planning with architect and builder.

With a one time close the permanent mortgage closes simultaneously with the construction loan so the rate is locked prior to commencing construction.. That may also include the land if the plans and builder are in place at that time. You may have a different type loan.

Very informative info in this thread. Thanks to all who posted.

jja79 said:

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With a one time close the permanent mortgage closes simultaneously with the construction loan so the rate is locked prior to commencing construction.. That may also include the land if the plans and builder are in place at that time. You may have a different type loan.

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How do rates for one time close (land and construction) compare to say buying an existing home or one from a spec builder (Highland, Pulte, etc.)? And how far out in advance can you lock a rate if you're still identifying a lot/builder? I would assume not very far due to multiple variables involved.

Does it take the average ~30ish days to close a loan, or is the process a bit more drawn out?

It's a longer process since you're closing the construction and mortgage loans as one transaction. To lock you need all the variables in place - lot, builder, plans, specs, budget, etc.