New Construction Guidebook

Compilation of New Construction Information

Buyer Representation in New Construction

Many buyers often don’t realize that real estate agents can also represent them when purchasing a new home. The compensation works the same – the seller pays commission, so it is still a free service for the buyer to use a Realtor for new construction! If you work directly with the builder, the builder will have an agent representing their fiduciary interests and you will be representing yourself in the transaction. If you do not have experience with the new construction process, understanding lengthy builder contracts, and negotiating with contractors and builders, than it is highly suggested to have guidance from an agent.

The new construction process is much more complicated and risky which is why its important to have an agent walking you through the entire process, from selecting a neighborhood to closing. Working with a knowledgeable Realtor can limit unexpected surprises by asking the correct questions and provide a set of eyes and ears to constantly monitor the 3 to 4 month process. They can also negotiate to create a better deal for you!

Our agent helped us get a brand new granite bathroom counter top because the seam in ours was not in the model home we had originally viewed. After multiple people telling us “no they wouldn’t replace or fix it,” she called us to tell say she got them to agree in making the situation right. She fought for us like we were her very own family.”

-­‐New Construction Buyer

When looking at new construction homes, don’t accidentally give up your right to be represented by an agent of your choice. Be sure to thoroughly read everything you sign while visiting on-­‐site agents. If you are currently working with an agent, let them know you are represented by giving them your agent’s business card.

New Home Negotiating Techniques In a development, the sales manager’s priority is to maintain or increase the price of homes as they are build, which can make negotiating difficult. However, there may be opportunities to get certain options added for low or no cost, since they will not show up in the public records available to past or future homeowners.

Recommended Process: 1. Temporarily reserve the lot (usually with a non-­‐refundable deposit) 2. Work quickly with your agent to make a list options you desire in priority order 3. Send your agent to deliver the message, “We want to build here, but are up against our budget limit to afford the home we want. If you could provide X, Y, and Z options at your cost, we’ve got a deal.”

Please note: If the rate of sales in a development is brisk, there may literally be no room for negotiation and you may have to choose between paying the price they are asking or not building in that development.

20 Tips to Buying a New Construction Home

Buying a new construction home is a bit different than purchasing a resale home – one that’s been previously owned by someone else. You’ll need to be familiar with a few tricks of the trade, along with understanding a bit about how the process works. These 20 tips to buying a new construction home are just the starting point on your way to the new construction home of your dreams. When you’re ready, I’d be delighted to be of assistance to you!

1. Use your own Broker/Agent ALWAYS use your own Broker/Agent; doing so will help ensure that you get what you want. Understand that the sales reps you meet at a new construction community are likely really representatives of the Seller – the Builder, corporate owners, developers, whomever – that are there to present their product, answer your questions … and do the best job for the Seller that they can.

YOU want the same thing, but from your standpoint. You want to see the product, get your questions answered, but have your needs be number one. By using your own Broker/Agent, you can be assured that there’s no conflict of interest.

Most importantly, if at all possible, be sure to contract with a Broker/Agent before you start shopping. Often the policies at a community require that your agent be present at the first showing and then at every showing. If they’re not, you may find yourself working with the site rep even if you didn’t intend to do so. And your agent, who comes along later, may not get paid either – or perhaps will be paid a significantly less amount because the site rep was the person who registered you.

2. Don’t expect price reductions Yes, it does happen. But overall, remember that Builders, etc., have established a set of prices that they feel best makes their product (the houses) marketable with an expected profit margin. Furthermore, lowering the price on a house drops the comparable value of other houses in the community, thus bringing the entire suite of houses down in price.

Typically a pre-­‐sale home … one that has not yet been built … will be slightly higher in price than a home that the builder erected as a “spec” house – one that was built to attract Buyers to

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the site. Note also, that very often homes that have not sold for a period of time will not drop in price – they actually go up in price at a new home development, thus supporting the builder’s position that materials and labor costs increase.

3. Look instead for builder concessions in the form of additional upgrades Rather than price reductions, you may be able to gain a few upgrades from the Builder at no cost, or for less money. Perhaps the Builder would be willing to include a fence, landscaping, upgraded carpeting, or appliances as part of your purchase without charging you extra.

4. Builder incentives in the form of interest rates, etc., may not be coming from the builder. Lots of new communities boast incentive programs that cite things like “3.75% financing for 30 years” or “Zero Closing Costs.” What’s important to know is that the Builder may not be the one actually paying those closing costs, or reducing the interest rates. Typically, those types of incentives are coming from the Builder’s preferred lender who is counting on a sufficient number of loan transactions in order to recoup the cost of the incentives.

While Builders can’t require you to use their preferred lender in order to purchase a home from them, they can require you to use their lender in order to gain the benefit of the incentive. You’ll want to check with your own lender first to see if they’ll match the incentive or can give you a benefit in another fashion before deciding to switch gears and go with the Builder’s lender. Remember that nothing’s really free, so be a bit cautious when making decisions like this one.

5. Expect to use the builder addendum In almost every case, new construction homes require the use of a Builder’s contract or at least a lengthy addendum in addition to the typical purchase forms used by a Broker/Agent. Generally those Builder forms include language specific to the terms of the building process and can be many many pages long full of tightly packed terms. While much of the language is common sense, be sure to read the contract thoroughly yourself (as will your Broker/Agent) and then consult with a qualified real estate attorney if you have questions or concerns. Agents, even those sales reps for the Seller, aren’t allowed to (and shouldn’t) attempt to advise you or interpret what those custom forms really say.

6. Builder warranties vary Not all builder warranties are the same. Some builders warrant their work from top to bottom for several years, some only for one. Many builders will offer a warranty of up to about 10 years for structural-­‐type issues, with other warranty time frames for things like plumbing leaks. In addition, you’ll find that your new home will likely have individual warranties for appliances, roofs, windows, etc. Be sure to carefully review the warranty offered by the builder of your desired home before signing the final contract for your Purchase.

7. The floor plan isn’t the floor plan The little floor plan you see when viewing your potential home at the builder site isn’t an exact representation of what your home may look like. For example, you may see a nicely drawn oval bathtub with rounded edges on the drawing only to find out when the home is almost finished that the actual tub is rectangular. Room sizes are close estimates, but usually measurements are rounded. Sometimes the location of outlets will move around.

Sometimes your chosen particular lot requires other modifications in order to fit the home properly.

8. Rarely can you modify the floor plans

Unlike building a custom home, most community sites where several homes are being built by the same or a group of builders are based on a preapproved set of plans that have already received the stamp of approval from the local building authorities. Conversely, in a custom home situation, your set of plans can be modified prior to building or even during the construction process if you want to pay the extra associated costs.

In these preapproved communities, fewer options for modifications are generally allowed. Doing so would significantly increase the amount of time the builder wants to spend on any one house, while also increasing his/her costs. Changes to floor plans, even to add extra outlets, etc., must PPNE Rev. 2015

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be included in the particular permit and approved, which can involve new drawings and perhaps repeated permit processes. If you do want to make changes, be absolutely certain you’ve worked this out as part of your purchase contract.

9. Expect changes While everyone starts out thinking all of the choices have been made, finishes chosen and the idea that the new home will look just like the model, realistically suppliers run out of or change products or prices, thus affecting the appearance of your home.

Builders typically reserve the right to substitute materials and finishes, sometimes leading to surprises. Try to tour a finished home or two and do ask lots of questions about the sorts of things that the builder might substitute. It’s nice to know upfront what you might expect!

10. Expect about 5 months after permit or approximately 100-­‐120 days after lumber drop Every builder, City, County, etc. has different time frames that historically work for them when completing a home. For most builders in the greater Auburn Washington area, I’ve found that it takes approximately four months for a builder to complete a home after lumber drop – i.e., the date on which that huge stack of wood is delivered to your home site. Remember that lumber drop occurs after the construction permit from the city/county/etc. has been received by the builder … and after the foundation is complete. Those two tasks can add another month or even two to the process.

11. Add an extra month or so to the anticipated build-­‐out time

As part of your pre-­‐sale purchase, the Builder and/or sales rep will provide an estimated date of completion for the building of your new home.

What’s important to remember is that the estimate is just that – a projection of when the home will be complete and ready for occupancy providing everything goes according to plan.

Realistically, however, plans don’t work out exactly on time. In my experience, I’ve found it best to add about an extra month to the whole thing. Go ahead and include the Builder’s date in your contract, but in your heart expect delays.

12. Be sure to include your Broker/Agent in every walk through; cc them on all conversations, etc.

As indicated in Tip #1, your Broker/Agent is a critical part of your purchase team. With that in mind, be sure that you’ve asked your Agent to attend every walk through and

meetings with the builder, and that you’ve included them in email conversations, etc.

Note that some builders really try to restrict Agent attendance, but in my experience, you need an extra, knowledgeable set of eyes and ears to help keep things on track.

You’ll want to negotiate or handle any restrictions they may have to this at the time you work through your Purchase agreement.

13. Don’t expect perfection As much as we feel we’d like to control every piece of the building of our new home, realistically the house won’t be perfect when it’s complete. For example, the quality of wood used to frame the walls of your home is just not what it used to be. You’ll see knot holes, crooked boards, perhaps what look like curious framing practices, and so on.

Unless you see significant problems, however, remember that each step of the build process has been inspected not only by the foreman in charge of your project, but also by the local building inspector who should be keeping an eye on things to be sure that the local building codes have been met. If you do see problems, be sure to bring them to the attention of your own Broker/Agent who will assist you in working out any issues with the builder.

14. Walking the site will get you into trouble Stay away from the construction site, especially during working hours. There are a lot of physical hazards involved – workers are carrying lumber, shooting nails, stringing wires, spraying drywall compounds, etc. Most job sites require workers and visitors to wear hard hats in an attempt to prevent injuries.

Equally as important is the fact that you don’t really want to disrupt work flow. You want your house finished. By getting in the way of the current project, you’ll cause inordinate delays. Those workers can’t make changes and, as odd as it may seem, probably won’t even talk with you. They’re there to do their jobs, not chat with the Buyer.

Your purchase contract will probably state that you cannot visit the site without making an appointment with the seller rep who will then set up an appointment with the project superintendent or foreman. And then, of course, you’ll also want your Broker/Agent to also be in attendance so that there’s a good record of who said what and when. (Your Broker/Agent should also be conversant and knowledgeable enough with the process to help interpret what’s going on and what could be done to satisfy everyone involved.)

15. Be nice to the foreman!

You may only meet the construction foreman for your home build a few times, but these folks are gold when it comes to completing what you need. They’re usually very nice … but very busy … trying to coordinate several projects all at the same time and making sure that everything is done correctly. Remember, they have a critical job to do, but you want them to also be your advocate. They want the job done right too!

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16. Take lots of pictures Each time you have the chance to take a walk through of the home or when you do visit the home site, be sure to take your camera along. I can almost guarantee that you’ll want to hang a shelf on a wall at some point – and wouldn’t it be great to know approximately what’s behind that drywall? Not only that, it’ll be fun to look back at the process … later.

17. Ask for leftover paint, vinyl, granite tiles, carpet scraps, etc.

Most of the bigger builders will put together a very nice box of touch-­‐up paint for you as normal practice, but if you can, you may want to also request that leftover vinyl flooring, the sink cut-­‐out from your granite counter, and the leftover hardwood flooring pieces and carpet remnant be left for you. These can be helpful patching materials when accidents happen and it’s nice to have everything match. Note that many of the finishing steps are done by subcontractors, however, and it may just not be possible to capture any of the leftovers.

In addition, significant leftover materials may be used in other homes or even returned to the supplier. It never hurts to ask!

18. Do your own inspection More precisely, prior to closing on the purchase of your home, be sure that your purchase contract allows you to bring in a qualified home inspector to test the various workings of your home … checking outlets, plumbing fixtures, walking the roof, the crawlspace and attic, and so on. Typically the items found on your independent inspection will be repaired by the Builder, but will not affect timely close of your purchase. Builders often retain a time period after closing to repair defects.

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9. The “certificate of occupancy” is probably not a certificate at all The final step before the Builder releases the home to you for closing of your purchase will involve receiving signatures on the final inspections by the City/County, etc. thus

allowing the home to be occupied. The term “certificate of occupancy” is a phrase used to indicate that the final signature was received and you’re ready to go!

20. Move-­‐in day is the sweetest day on earth Well, of course it is for every Buyer for every home … but there’s just nothing like the unparalleled excitement that seems to surround moving in to a brand new home in which you made all your own choices. On the day before the furniture arrives, buy a roll or two of that tacky carpet protector stuff or paper to cover the walking paths on the rugs and floors so that you and the movers don’t track the great outdoors into your new home.

… And then take a moment for a big smile!

Take a few minutes to sit on the floor, on the deck, on the sofa in the middle of the room (because you can’t figure out where to exactly position it) and reflect on what you’ve accomplished. This was a BIG deal!

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Siri Stafford/Iconica/Getty Images

New home buyers don't want a used house when only a new home will do. They don't want to inherit somebody else's worn carpeting, personal taste in kitchen appliances or look at some kid's initials scrawled into once-­‐wet cement that they didn't put there. The home must be brand spankin' new, fresh and clean without so much as a finger print on the walls.

If this describes you, and you have always fantasized about buying a brand new home of your dreams, here are a few tips that can help you to protect yourself -­‐-­‐ to make the process a pleasant experience.

Hire Your Own Agent • The builder's sales agents are paid to represent the builder, regardless of what they may tell you. Many will use high pressure tactics to persuade you to sign the contract.

Due to the high volume nature of brand new home sales, lots of builder's agents are paid less than a traditional commission; some earn a salary plus incentives, so turnover is important to their livelihood.

Hire a Buyer's Agent to represent you. Most of the time, your agent will be paid by the seller, but sometimes the responsibility for the agent's fee is open for discussion.

Even if you have to directly pay your agent, you can probably add that fee to the sales price, and it would be worth it because a good negotiating buyer's agent can save you thousands more than the commission.

Your own agent will represent you, be your fiduciary and is required to disclose the positives as well as the negatives about the transaction. Builder's agents don't discuss drawbacks.

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If your contract contains a contingency to sell your existing home before buying, again, hire your own seller's agent to list your home. Be aware that buying before selling is not always in your best interest because hard bargaining goes out the window when you've emotionally moved out of your home.

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Don't Automatically Use the Builder's Lender

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Builders often prefer their own lender because the builder will be kept fully informed of your personal progress; it's one-­‐stop shopping for a builder. But a builder's lender might not offer you the best deal. Moreover, the builder may own the lending company.

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Consider alternate sources to find a lender. Your own bank or credit union might offer you very attractive rates and terms, based on your banking history with that institution. Your agent may refer you to his or her private list of wholesale lenders.

Shop around and interview your lender. Find a banker or mortgage broker whom you can trust and with whom you feel comfortable doing business.

Ask to see a copy of your credit report and FICO scores. You can order your own free credit report before shopping for a new home.

Insist that your lender guarantee its Good Faith Estimate. If the lender balks or makes excuses, go elsewhere, because reputable lenders will honor that request, even though it's not required by law.

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Obtain Legal Advice Before Buying a Brand New Home • Before you sign a purchase contract, talk to a real estate lawyer. Standard purchase agreements are designed to keep everybody out of court, but they don't necessarily contain language that protects the buyer.

• Ask questions about removal of contingencies and your cancellation rights. Make sure you understand your liability and commitments.

• Find out if the materials used by the builder contain chemicals that are hazardous to your health. If your contract contains a warning about health issues, it's probably because it's a valid concern and other buyers have gone to court over it.

Verify Option and Upgrade Pricing • Determine which options and upgrades you want. Bear in mind that for many builders, the profit margin is highest in upgrades. Some builders can sell a home for almost bare construction cost because they make the bulk of their profit in the upgrades.

• Find out whether your lender will lend on all the options / upgrades you have chosen.

If your lender will not finance 100% of your selections, you will be required to pay for it in cash.

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Ask about cancellations and whether you will be held liable for items the builder cannot return to a vendor.

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Some contracts give the builder the right to choose your upgrades if you do not submit your request within a certain period of time.

To save money, consider which upgrades you could purchase and install yourself after the escrow closes. However, realize that some upgrades such as CAT-­‐V, DSS or security wiring inside the walls are easier to do before construction.

Check Out the Builder's Reputation • If a buyer has a bad experience with a builder, the word spreads rapidly throughout a community. But you won't know if a bad rep is an isolated experience or if the builder •

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repeatedly brings bad publicity to itself without checking and verifying the public records for lawsuits.

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Talk to the neighbors and scrutinize the construction quality of surrounding homes. Is the builder consistently building identical or larger homes in the area or is construction lagging and homes shrinking in size?

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Find out whether the builder sells to investors. Some builders require all their homes to be owner occupied. Others eagerly sell as much inventory to investors as profit margins will allow. If the market suddenly dips, investors are typically the first to bail and, besides, part of the reason you are buying in a new subdivision is to be surrounded by other buyers just like you, not tenants.

Hire a Home Inspector • Always, always, always get a home inspection when you buy. And hire a licensed and accredited individual to perform the inspection -­‐-­‐ not your dad or your buddy contractor, get a real inspector. Be there for the inspection and ask questions because a new home can contain defects. The HVAC system might be too small or the plumbing could be installed backwards. Construction workers make mistakes. (And let's not even talk about the mustard-­‐stained McDonald's wrappers stuffed in wall cavities.)

• If the inspector calls for further inspection by another professional contractor, find out if the inspector is telling you there could be a serious issue or if the inspector isn't licensed to address that issue.

Written by Elizabeth Weintraub

What I Wish I Knew When I Bought My First New-­‐Construction Home Published: April 16, 2013 By: Lisa Kaplan Gordon

Building a new home lets you personalize your house for today’s needs and tomorrow’s dreams. Here’s how to plan your new home for future needs.

In a new-­‐construction home, you may opt to forego the kitchen-­‐great room combo, and instead separate the rooms. Image: The Hanover atChurchill Club by K. Hovnanian Homes

When I was designing our dream home 15 years ago, Here are things that seemed like a good idea at the time.

Kitchen/great room combo: I figured one big space would be great for watching tiny Ben while I was cooking; he’d drum on a pot while I fixed him buttered noodles. But Ben grew up and now likes to watch “Law & Order” on TV while I talk on the phone with my mom, and my husband runs the disposal after dinner. The room sometimes sounds like Grand Central, and I now dream of a separate family room and a little less togetherness.

Two main-­‐floor bedrooms: We downsized our master suite to squeeze in a second bedroom next to us — perfect for soothing a preschooler’s nightmares. Turns out kids outgrow nightmares, but skimpy closet space is forever.

A pass-­‐through instead of cabinets: I gave up two kitchen cabinets to cut a pass-­‐ through from the kitchen to our mud-­‐cum-­‐crafts room so I could keep an eye on Ben’s finger-­‐painting sessions. Ben hasn’t dipped a finger in paint in 12 years, and I could really use that storage now.

The Future is Now -­‐ If I were buying a new home today, I’d do things differently: I’d crystal ball my thinking and plan for my future needs. That’s the beauty of buying new construction: You can focus on want-­‐to-­‐dos, rather than to-­‐dos — even if you can’t anticipate all your wants.

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Luckily, builders know the life of a new home is a journey, and have consultants who help you fast-­‐forward your thinking about features you can install now that will make life easier later.

I brainstormed with a couple of executives from Toll Brothers and Ryland Homes about some forward-­‐thinking, new-­‐home options.

A main floor den that could be converted into another bedroom as your family grows.

On a related note, see how people are reinventing their living rooms.

Bedroom soundproofing to ensure privacy.

Credit: Toll Brothers, Inc.

Roughed-­‐in plumbing and electric for an eventual attic or basement bathroom and kitchenette. If you don’t have the resources now, this is a great way to plan ahead. This extra living space not only could accommodate elderly parents or boomerang kids, but will increase the value of your home when it’s time to sell.

A double-­‐deep, tandem garage that can fit three cars now, but can be walled-­‐off later to add indoor space for an extra bedroom or bathroom.

More: Attic conversions | Garage conversions Upgraded structured wiring throughout that can handle a souped-­‐up Internet connection and other tech revolutions. Handy if you telecommute.

Temporary partition walls that attach to hardwood flooring, rather than subflooring. If you eventually want to combine bedrooms — kids move out — you’ll only have to do a floor repair and refinishing, rather than patch a gaping hole.

Plywood sheathing behind drywall and tile in bathrooms. These sheets of plywood let you attach grab bars anywhere without hunting for studs.

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Credit: Mosby Building Arts

Grab bars aren’t just for our later years. They’re also good for kids and aching weekend warriors who need a little help getting into and out of a tub.

An addition. If you can site your home to accommodate a bigger footprint later, plan to run conduit through exterior walls for future electrical and plumbing needs.

Credit: CQ Surveying

Unless you’re psychic …

You’ll never know today exactly what you’ll need in the future: It’s hard for me to imagine life beyond next Tuesday.

But choosing options for tomorrow is one perk of buying new. These forward-­‐thinking selections can mean years of enjoyment as your family changes, and can make it easier to sell if moving — and buying new again — turns out to be the best alternative PPNE Rev. 2015

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Buying a Lot to Build On

Designing Your Home You can normally choose, purchase, and bring your own plans to the builder for further modification. Hiring an architect to design from scratch is much more expensive and very rare these days. It is good to start doing research on your ideal home design early so you can be sure to choose a lot that fits the plans and a builder who is comfortable building it. There are endless options for finding home plans online now, including homeplans.com, dreamhomesource.com, and eplans.com.

Choosing Your Builder Buying a lot to build on allows you to choose your builder of choice. We recommend finding a builder by referral, because you need someone you can trust. Be careful of “family friends”, or being your own general contractor. The unexpected pitfalls can be many and expensive.

A good real estate agent will be able to recommend to a trusted area builders that meet your criteria. We suggest interviewing about 3 and then making a selection based upon the best fit for your family.

The construction contract will detail your relationship with your builder including all the job specifications and details in addition to provisions for cost overruns, punch-­‐list items, and time frames for completion. Having an attorney review the contract ensures you are fully protected!

The Challenging Task of Finding the Right Lot Builders are constantly analyzing available lots to purchase, so typically, if a lot is still available, it is very likely to be overpriced or seriously flawed in some way.

Possible issues to be aware of: • Lack of sewer or water access • Unstable soil • Buried heating oil tanks • Excessive slope • Impervious surface regulations • Undefined adjacent development

Be careful and get an expert opinion!

You will want to be sure to have a survey and check government zoning regulations, flood maps, and any possible HOA covenants and ordinances. You will also need to fully understand how electricity, water, and sewage will be installed and dealt with during the building process. Before buying a lot to build on, you will want the builder to look at the lot to determine if they can build your home plan on it.

Arranging Financing In most cases, it is imperative that your chosen builder be willing to purchase the lot and finance the construction. You will need to put down a hefty deposit, but they control the risks and they should carry the loan until the home is finished.

Managing the Construction Process The three common choices include: 1. Pay more for an experienced, trustworthy builder to manage the process independently 2. Hire a general contractor to keep tabs on the process 3. Stay connected to the construction process yourself, if you have the experience and know-­‐how.

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8 TIPS FOR BUYING RESIDENTIAL LOTS AND LAND FOR A NEW HOME

So you’ve decided you want to build your next home from the ground up. We’ve got eight “must-­‐dos” before you buy that residential lot.

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Decide your community style: Just like buying an existing home, think up front about the kind of community and location that suits your style. Whether you want sidewalks, bike paths, schools and shopping within walking distance or the nearest neighbor a mile away, no other path to home ownership gives you as many options as buying your own lot.

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Choosing a Builder: Buying your own building lot also means choosing your own builder…usually. Check out potential builders as much as you check out the property.

Do you want a completely customized home, the convenience of choosing a stock plan or the choice of a builder in a traditional development? Or does your perfect lot come with a particular builder already attached?

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Check out the lot from satellite to street: This is really an area where technology is your best friend. From the satellite photos of properties you find right here on LotNetwork.com to Google Street View, you can see what’s two miles away as easily as what’s next door. That beautiful vacant lot for sale might be bargain priced because there’s a pig farm just down the road.

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Double check property conditions: You absolutely, positively have to do a site visit and walk the entire property. Putting the patio right there will be perfect for watching the sunset…if it’s not in a wetland. That “gentle stream” may become a raging river in a heavy rain. A big dead area with no grass might mean hidden environmental problems. Things can happen: We learned a $100,000 lesson when a seller failed to disclose the hidden oil tank on a property we bought for development.

5. Confirm the status of infrastructure and utilities: Make sure there are no hidden fees for connecting to water and sewer. If you will need to install a septic system, make sure it passes a “perc test”, which measures the absorption rate of the soil where a proposed septic system will be installed. Is cable television and high-­‐speed Internet a must? Do your homework.

6. Review roads and access: You’re generally going to want land that fronts directly on or has vehicular access to a public road. If it doesn’t, make sure the proper easements and rights of way are in place.

7. Research restrictions and site limitations: Check a property’s use restrictions to ensure you can use the site and build the home the way you want. Restrictive covenants, HOA rules, historic districts and environmental conditions like wetlands all affect your use of a property. Check out restrictions related to front and side setbacks –

we know a guy who had to seek a special exemption from the county because the builder put the house 18 inches too close to the road.

8. Work with professionals: Your brother-­‐in-­‐law is a great guy, but unless he’s also a buyer’s real estate agent or broker with experience and expertise in representing BUYERS of residential property don’t completely trust his advice. If possible, have your builder or architect involved before committing to a lot or land.

Steve Sanders is an entrepreneur and author, who also is an experienced real estate developer and corporate/real estate attorney. He is a Founder ofLotNetwork.com, the nation's premier web site for buyers and sellers of residential lots and land.

LAND & LOT LOANS: THE DIRT ON FINANCING YOUR PROPERTY PURCHASE This article gives you some more information about the particulars of Land and Lot Loans.

It’s safe to say that loans for vacant land are different than “purchase money loans” for buying already-­‐built homes, and there are a number of reasons why banks treat land and lot loans differently. In this article we describe what those differences mean from a borrower’s perspective, including details about the loan terms, additional underwriting requirements and other characteristics of lot and land loans.

Lenders may Distinguish Between Lot Loans & Land Loans Although we’ve included loans for lots and land in the same discussion here, there even can be differences in a lender’s loan terms and requirements based on whether the property is a finished lot in a platted subdivision or is a vacant, undeveloped parcel of land.

The loan terms and underwriting for a formal lot with a road and utilities may be less rigorous than loans for undeveloped land. A finished lot can give the lender more comfort, as it is another step closer to being ready for a new home (the preferred form of collateral for most residential lenders).

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which can affect your loan terms. Requirements can vary by lender, but a larger undeveloped parcel is more likely to be considered vacant land. Note that undeveloped land that is being bought with no expectation of building a home or adding site improvements can be particularly hard to finance using the residential lot and land loans discussed here.

Terms for Land & Lot Loans So from a borrower’s perspective, what are some of the differences between lot and land loans and standard purchase money loans for existing homes? Loan terms can vary greatly depending on the financial institution, the borrower and the lending market conditions, but borrowers are likely to see differences in the following areas: • Availability • Down Payment/LTV • Loan Length • Amortization • Interest Rate • Collateral • Underwriting & Processing

Availability Banks treat land and lot loans differently, and prefer to process purchase money loans for existing homes over land and lot loans. Whether it’s because of a bad history with lot loans, regulatory restrictions, market conditions or the fact that lot and land loans are “nonconforming”, some banks simply do not offer lot and land loan programs. Because of this, borrowers will find that it is harder to get this type of financing. Less lending competition also means a borrower will have fewer options and less room to negotiate on terms when evaluating loan packages. Read our related article that describes some tips for finding a lender for a lot or land loan.

Down Payment/LTV Land and lot loans often require higher relative down payments from borrowers. The amount of the loan – and the corresponding balance to be paid by the borrower as a down payment – is determined by the lender using a Loan-­‐to-­‐Value (LTV) ratio. The LTV is calculated by dividing the loan amount by the property’s value (or its purchase price, if lower).

A borrower getting a lot or land loan will likely see a lower LTV ratio used by the lender when compared to a purchase money loan for buying a home, and a lower LTV means a higher percentage down payment is required from the borrower. For purposes of comparison (a) a borrower for an existing home purchase may see LTVs as high as 100% (which equals no down payment), (b) borrowers under loans for finished lots can see

LTVs up to around 90% (down payment of 10% of value) and (c) borrowers that are buying undeveloped, vacant land may be limited to a maximum LTV of around 70% (down payment of 30%). Some borrowers will find that banks that are not fond of lot and land loans may even propose LTV ratios as low as 50%.

Loan Length Land and lot loans usually are short term loans. Many consumers are familiar with 30 year home mortgages for buying existing homes, but unfortunately that type of loan term length typically is not available for a lot or land borrower.

A lot loan may be restricted to a payoff date of a few years (or even months), in the lender’s anticipation that the borrower will be building a home on the lot in the near future and paying off the lot loan with a construction or permanent loan. In addition, a borrower for a lot or land loan may be required to commit in writing a statement of intent that they will begin building a home on the property by a certain date. If they fail to start building or meet deadlines by the maturity date, the borrower may need to refinance, find a new lender or just pay off the loan altogether.

Amortization Likewise, lot or land loans also may be required to be amortized over a shorter time period, which results in higher monthly payments when compared to a longer amortization period. Amortization can be described as a calculation that is done to determine the monthly payment amount (principal and interest) and payment schedule for the life of a loan using a chosen amortization time period. For comparison purposes, your choices may be limited with a land or lot loan to being amortized over 10 to 15 years, instead of even having an option for the 30 year amortization period that is available for most home loan borrowers.

Interest Rate Interest rates can vary greatly, but by comparison land and lot loans often have higher interest rates than purchase money loans for buying a home. Some lenders will allow borrowers to make interest-­‐only payments on a lot loan.

Collateral Most home loans only are secured by a mortgage on the property, which means the lender is using the value of the land and home as its collateral for the loan. When you are seeking a lot or land loan, you may find that the lender wants you to provide additional collateral or personal guarantees. Some banks will want you to have banking deposits and other liquid financial assets at their bank in case you default on the lot or land loan. In addition, a bank may seek to cross-­‐collateralize other real estate that you own as supplemental security for your lot or land loan.

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Underwriting & Processing Land and lot loans are structured and documented similar to purchase money loans for buying a home, but lot and land loans undergo more rigorous, hands-­‐on underwriting by lenders. This means borrowers will need to do more paperwork and spend more time getting approved for their lot and land loans. Read more about why lenders treat lot and land loans differently.

Lenders also may require closing items and documentation that are not always required with purchase money loans for buying homes. For example, because the dirt is the primary on-­‐site asset for a lender under a land loan, detailed property surveys usually are required before the bank will fund a loan to buy a lot or vacant land. While surveys are wise to get for any property purchase, full surveys are not always required for buying existing homes. Sometimes a lender will accept a recently filed subdivision plat in lieu of a survey with loans for buying finished lots.

Borrowers also should be aware of “points” and other fees being included in their loan terms. Some lenders will add loan points and fees to lot and land loans that can have a real impact on the borrower’s transaction costs.

When can you skip the Lot Loan?

As we noted in our first article, a lot or land loan is ideal if you have found the perfect property but are not quite ready to build your home. But there may be some scenarios where a potential lot buyer that is not quite ready to build should consider seeking a construction loan instead of a lot or land loan.

For example, if you already have completed much of the design and planning work for your new home, but do not quite have final design documents or a construction contract in place that you would need to get a construction loan, then you still may be able to skip the separate lot loan process. Consider putting the land under contract first and having your lot purchase agreement include a period of time for you to get your plans completed, your contractor ready and your construction financing approved.

Then, you could close on the lot purchase at the same time as the construction loan.

This will not work for many buyers because the seller may be unwilling to tie up its property with so many conditions to closing. However, some buyers – like those who are buying from family members who are both patient and trusting – can benefit from this strategy. This unique scenario can help you avoid duplicating the transaction costs you would experience if you had both a lot loan and a construction loan.

Hopefully this helped you understand more about the details and terms for lot and land loans. You also may find it helpful to read our related article about why lenders treat land and lot loans differently.

Steve Sanders at LotNetwork.com November 18th, 2014