Although you might think that purchasing vacant land without improvements would be simpler than purchasing a house, there are other issues to consider. Before you move forward, make sure that you will be able to proceed with your plans for the land. Understanding the closing procedure makes the process a lot less stressful.
Research the Land
Before you make an offer on land without improvements — also called vacant land — do some research to make sure you will be able to use it the way you would like. For example, if you want to build a house, check with the appropriate county to find out the zoning of the land.
As long as the land is zoned residential, you will be able to build a house. If the land is zoned for agriculture, you may still be able to build a house, but you will need to learn the location of surrounding houses to determine whether the distance between your planned house and the others fits zoning ordinances. Check into any necessary improvements, such as sewer, septic system, well and road access.
The contract for a land purchase describes the transaction, listing the buyer, seller, agents, lender, title company and escrow company. The purchase contract also includes a legal description of the property, acceptance date, delivery date of proof of ownership, financing approval date and closing date. The purchase contract will also cover transaction terms, such as price, down payment, loan amount, financing terms and balance payable at closing.
Financing for unimproved land carries a higher risk for lenders because the loan does not use the land for collateral in the same way that a loan for a house would. This means that a higher down payment and interest rate might be required than for a conventional mortgage.
Title investigation occurs after a buyer gets initial approval for a loan. During this period, a title company investigates public records to learn whether the owner owns the entire property or whether the owner has liens or judgments against the title.
As long as a title search does not illuminate any issues, the title company will produce title insurance, which guarantees the seller’s right to sell the property. The lender will also order an appraisal to be sure the property is worth the value of the loan and a credit check of the buyer, as with all loans.
HUD-1 Settlement Statement
The lender will produce a disclosure statement 24 hours before the closing to list fees and costs included in the closing. The buyer may have already paid some fees disclosed on this statement — such as the appraisal fee and credit report fee. Other fees will not be payable until the closing.
On Closing Day
The buyer, seller, applicable agents or attorneys and closing agents from the lender or title company meet at the scheduled closing. The buyer and seller sign the applicable documents to agree to the terms of the financing and sale of the land.