Building Your Custom Home For Dummies. Peter Economy

to as renovation loans.) Chapters 9 and 10 explain in detail the construction loan process and guidelines. You can apply the same construction loan information in this book as if you were working with a vacant lot. Simply have your seller agree to a long escrow that allows you the necessary time to design and permit your new house. Most construction lenders can fund the purchase as part of the construction loan, provided all their other guidelines are met.

Buying Your Land

      After you find your dream lot, you need to buy it. Whether you pay cash (a big no-no — Chapter 8 explains why) or finance, you can’t just write the owner a check and ask for a receipt. Okay, you can but you need to follow certain steps and make specific choices if you want to get the most for your money.

      Understanding the purchase process

      If you’ve ever purchased a home, you’re at least somewhat familiar with the process of buying real estate. Buying a lot is just like buying a house, but without all the house stuff. You can find a detailed explanation of the purchase process and the players involved in Kevin’s book What the Banks Won’t Tell You: How to Get the Most Out of Your Mortgage (Grady Parsons Publishing). For beginners, here’s a general step-by-step look at the process.

      Step 1: Determine your offering terms and price

      Using the information in this chapter about evaluating a property, you need to determine a price in your mind of what you’re willing to pay for the property. Your real-estate agent can give you additional information on the local market for land and examples of finished houses in the area. If you aren’t using an agent, you need to access this information through the local title company. You also must decide on the length of time until closing, as well as any other necessary terms, such as your desire for the owner to loan you the money in what’s called a seller carryback. This term means the seller, after transferring the property, retains a note or loan that you must pay them at an agreed time with interest. We talk more about this topic in the “Finding other land loan alternatives” section later in this chapter.

      Step 2: Present the offer and negotiate

      You or your real-estate agent has to complete an offer form accompanied with some sort of good faith deposit check from you. The deposit amount can be anywhere from 1 percent to 3 percent of the purchase price. The check is deposited in an escrow account upon acceptance of the offer and held in escrow until you close the transaction. The offer and copy of the check are then presented to the seller and negotiations begin.

You and the seller can negotiate the deal through subsequent documents called counteroffers. The seller’s willingness to negotiate is relative to how hot the real-estate market is at the time. A hot market usually translates to less willingness to negotiate. The seller isn’t obligated to accept any of your terms and can always choose to say no. Of course, you can always choose to walk away. Ideally, you’ll each give in a little and come up with a workable compromise. As Kevin’s mom, a 30-year real-estate-agent veteran, said, “An offer is an opening of a conversation.” The fewer emotions in the conversation, the more easily the negotiations proceed.

      

If the property is listed with a real-estate agent, that agent doesn’t represent your interests. Make sure you bring your own agent to represent you as the buyer. Doing so doesn’t cost you any more because the seller pays the commission. If no real-estate agent is involved, consult one for guidance. They may help you with the paperwork for a small fee. You can always check with an attorney as well, but attorneys generally charge more and sometimes make the transaction more complicated than it needs to be.

      Step 3: Make an application with your lender

      We explain various financing options in the next section. After you’ve determined which lending approach is right for you, you’ll fill out a loan application with the lender of your choice. The lender orders an appraisal from a certified appraiser. You’ll probably have to pay for this appraisal up front. The cost can vary depending upon location and the lot’s value, but usually it’ll cost between $300 and $600. You’re entitled to a copy of this appraisal, which will be based upon comparable lots in the area that have sold in the last six months to a year. The original appraisal goes to the lender along with the application and any credit documentation you provide, such as bank statements, W-2s, and tax returns.

      At this time (or likely within three days), your lender will give you the loan estimate, a document outlining all the fees and closing costs associated with your loan and the purchase transaction. The costs vary based upon the loan amount and type of loan, but you can anticipate a range of 3 percent to 6 percent of the purchase price as an estimate of all the costs involved.

      

You can save the upfront cash for closing costs by offering to increase the price of the lot by 3 percent and then asking the seller to credit you 3 percent of the purchase price for nonrecurring closing costs. Most lenders accept this agreement as long as the appraiser mentions that it has no effect on the value. Financing the closing costs in this way leaves your cash available for other important costs along the way.

      Step 4: Open escrow with an escrow company or attorney

The term escrow means depositing money and property with a neutral third party to be disbursed upon completion of all terms of a related agreement. Each state has its own process for escrow. Some states use attorneys to act as the escrow agent while others use title insurance companies. If you’re in a wet funding state, you, the seller, and the escrow agent all pick a day to meet and sign the paperwork at one time. In a dry funding state, such as California, you each execute the paperwork on your own or with a notary public over several days before the actual closing date.

      

The escrow period can be anywhere from 30 days to 6 months depending upon the needs and negotiations of you and your seller. Your real-estate agent helps guide you through the closing process. If you don’t have a real-estate agent, then the escrow agent will be your best guide. You can find good escrow agents through referrals from real-estate agents, loan officers, and friends. Most are well trained, so unless your transaction is extremely complicated, you should be able to go with someone you simply find personable.

      Step 5: Do your due diligence

      While you’re in escrow, you have a chance to complete any research on the property that can’t be done before the offer. In a hot market, you may not have had much time to research the property before putting in an offer. As soon as you have a chance, make sure the property meets your needs relative to size and value as outlined in this chapter. If you have concerns about the land, such as building restrictions or guidelines, you may want to add contingencies to the offer that allow you to pull out of the transaction if your research results are unfavorable.

      Step 6: Execute the paperwork and bring in the money

      As soon as your loan is approved, you need to bring your cash to escrow and sign the loan documents. You can wire money into escrow or bring it in the form of a cashier’s check. Bring your pen because you’ll have as many as 100 documents to sign for the escrow and the loan.

      Step 7: Close escrow and take title

      The