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Buying Land

Quite often, I am asked from prospective Buyers of bare land (aka "raw land" or "unimproved land") ...."Can you explain to me a little bit about how buying land works? What are the things I should be aware of and consider?"

These are both good questions. Since early 2008, financing for land has been extremely hard to come fact, it has been virtually non-existent. However recently, a few lenders have come about and are willing to finance land purchases.


Buyers have 2 options:

1. Traditional Lending*

2. Sellers who will "carry the contract"



1. Traditional Lending:

The process of BUYING land is much the same as buying a home. You will need to:

  • Get pre-approved with a lender.
  • Write up an offer and obtain mutual agreement between Buyer and Seller
  • Satisfy any contingencies.
  • An acceptable appraisal of the land will be required by your lender.
  • Complete Closing.

*please remember that this is a general overview. I encourage you to call a lender for more specific info

However, FINANCING land is a bit different than financing a home:

1. Cash down payment - Generally, a 25-30% cash down payment (based on the agreed purchase price) will be required by the lending institution at the time of closing.

2. Interest Rate - The interest rate on a land loan is always higher than a residential mortgage. The interest rate for a land loan is typically around 7-8%.

3. Length of Loan - Conversely, the length of the loan (aka contract) is always shorter than a residential mortgage. The contract can generally range anywhere from 5, 10, 15, or 20 yrs in length....whatever can be agreed upon between Buyer and Seller and is acceptable to the lender.

4. Amortization of Loan - Land loans can be amortized over the length of the contract (hence NO balloon payment would be due at the end of the contract) OR the loan amount can be amortized for a period longer than the contract (i.e. a 15 or 30 yr period) so that the Buyer's monthly payment is lower; however, in this scenario, a balloon payment would be due at the end of the contract.

5. Balloon payment - If your loan is amortized over a 30 yr period but the length of your loan (aka contract) is only 5 yrs, keep in mind that at the end of the contract (5 yrs), you will have a balloon payment due for the remainder of the purchase price.


$50,000 = Purchase price
-$10,000 = 20% cash down due at Closing
$40,000 = Amount of Loan

8% = Interest rate
180 = # of monthly payments for a 15 yr amortization (15 yrs x 12 months)
5 yr = Contract

$382.26 - Monthly payment amount

$31,888.81 - Balloon payment due at the end of 5 yr contract

Balloon Payment Calculator : Click here if you need a balloon payment mortgage calculator.

Improvements / Utilities -
Power - Land lenders, in general, prefer to have power to the lot line, however, it is not a deal breaker if there isn't. It will depend on - - - - - - - - the requirements of your lending institution as to whether they will finance a property without power to the lot line.

Perc tests - a satisfactory percolation test for an acceptable septic system will likely be required. (Usually paid for by the Buyer).

Wells and Septics - generally not required.

Site - must be deemed buildable.


List of Land Lenders


2. Sellers "carrying the contract" - Another option would be to look for Sellers who would be willing to "carry the contract" for a Buyer. In other words, the Seller becomes 'the bank' for the Buyer.

Once mutual agreement has been reached between Buyer and Seller, at Closing, a collection account at the Title Company would be set up for the Buyer to make payments to. Therefore, the Title Company serves as a neutral 3rd party agent between Buyer and Seller, who in turn, keeps an independent accounting of the payments that have been made.

Contract terms are much the same as what they would be with a traditional lender. A cash down payment of the same amount (usually 20-30% or more), rate of interest, balloon payment, etc., all still apply on a land sales contract.



If you have any questions about how this works, feel free to email or call me any time. I am always happy to answer any questions you might have!

Good luck and have fun searching for your dream parcel!


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