Building a House in 7 Steps | Step 1: Finding a Lot

Step 1 of the 7-step series: how we look at land before we buy, and what makes a lot actually buildable.

Step 1 of the seven step series. People say there is no land left, and what they mean is there is no cheap land left on the MLS. There are only two ways to buy a lot, on the market or direct to the owner, and roughly 80% of what we do is the second one. Here is how both work, and the math that tells you what to search for in the first place.

Decide what the land can cost before you look at land

Start at the loan, not the listing. Say you are pre-approved for a $600,000 construction cost. At 5% down that is $30,000, plus about 2% in closing costs, so 7% or roughly $42,000 out of pocket. If the finished home is worth $750,000, the rule of thumb is that the land should be about 20% of that finished value, so around $150,000.

Using the MLS: filters, not a buyer’s agent

Arthur has never closed a deal that a buyer’s agent found for him. He finds them himself on the public portals and then sends them to his agent to write the offer. The skill is filtering. Search a county and you get a thousand listings you cannot underwrite. Instead: draw two or three zip codes on the map, set the lot size you actually want, set the price band you just calculated, watch days on market, and turn on instant alerts so new listings hit your email or phone the day they post.

The MLS is used car shopping. You know you want a 2015 F-150, so you look at a hundred of them hoping two are deals, and the moment you call on the good one there are three other people scheduled to see it. Good land goes pending in one to three days. The listings that sit for six months sit because they are overpriced, which is exactly why an aggressive offer on a stale listing sometimes works.

Why off market wins: terms, not just price

Direct to seller removes the telephone game, removes the competing offers, and gives you the one thing that actually matters on a personal house build: control of the closing date. The 5% down owner builder loan requires approved building permits in hand before you can close, and permits take one day in St. John, Indiana, 60 days in Vancouver, Washington, and six to twelve months in Portland, Oregon. You cannot win that with a seven day cash close.

An owner who has held a lot for ten years and was not planning to list it does not care about 90 extra days. That conversation is simple and honest: I can pay you this price, and I need 60 to 90 days because my loan requires approved permits before it funds.

The two offer strategy

Put both offers in front of the seller. Offer A is $120,000 with a fast close. Offer B is $140,000 and you need 90 days for permits. Arthur has never had a seller take the lower one. Spread them further if you want, $40,000 to $50,000 apart, and the quick close stops being tempting at all. You cannot run this play against multiple cash offers on the MLS, which is another reason off market is where the leverage lives.

Seller finance and long term contracts

Seller finance means the owner carries a note, recorded on title, while you own the land. On a recent $480,000 property, hard money would have wanted 20% to 25% down and about 10% annual interest. Instead of guessing at a percentage, Arthur asked the seller how much cash he actually needed. The answer was $20,000. The deal closed at $20,000 down and 6% annualized paid monthly, interest only, with the balance paid off when the project closed out.

The long term contract is the other route, and it is the one that risks the least. You write a 15 to 30 day feasibility window, then a closing that happens three days after permits are approved, with a hard outside date such as 90 days. Until then the only money out of your pocket is earnest money in escrow, plus what you spend on plans. The seller holds the land while you get it approved.

The honest tradeoff

The con is time. Six to twelve months, assembling a team, learning a process you have not run before, and getting creative on closing terms while somebody else waves a seven day close. The pro is $100,000 to $250,000 of equity on day one, and on a personal home the IRS exempts up to $250,000 of gain if you file single and $500,000 if you file jointly. You also pick your own finishes, which is worth more than people admit.

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Common questions