I’m so excited to share that we finally purchased land for our NEW homestead!
I won’t sugarcoat it; the offer and the closing process for our purchased land proved quite stressful! This 10+ acre parcel is situated just on the outskirts of a large city, approximately 10 minutes from our closest family members. It’s almost completely flat and comes with full water shares. Currently, it’s being farmed with corn and is surrounded by farmland. It has minimal neighbors and no HOA’s or CC&R’s, so it definitely caught our eye. It’s zoned agricultural and fits our budget perfectly. You can see what we were looking for here.
Making the offer on our purchased land
Initially, we approached the seller’s agent to inquire about owner financing. We made an offer the first day the property was publicly listed. As I arrived to view the land that day, I noticed how many people were interested in it. It was, by far, one of the best-priced properties in the area for the past year we’d been searching. I laid out the terms of the owner finance offer, but the sellers declined due to the overwhelming interest on day one. After discussing the situation with my husband, we decided to make an offer with bank financing and 50% down. Our offer was accepted, and the race against the clock to secure financing began.
From a real estate agent’s perspective, it’s not advisable to submit an offer without initiating the application process with a lending institution first. In fact, it’s quite common for both selling and listing agents to require a preapproval letter to be included with the offer. This practice serves to safeguard the interests of the buyer, seller, and the involved agent.
Financing our new homestead
So, we embarked on our financing journey, searching for a land loan for our new homestead through a large financial institution. With good credit scores, stable income, a substantial down payment, and our experience as real estate investors, we assumed obtaining a land loan would be a breeze. I started by shopping around and applied to a total of 4 different banks/credit unions. Little did I know, I would uncover some interesting information about certain lenders! First, purchasing raw land with no utilities, no buildings, and no issued building permits posed immediate challenges.
The first institution we applied to was a large local credit union that offered land loans specifically. So I began the application process. Next, I applied to an online bank that seemed incredibly convenient. However, after running our credit score, I learned that they did home loans but not vacant, land-only loans. A complete rookie mistake! Make sure a bank works with the particular property type you are looking to obtain financing for. Your credit may be pulled at much cost, but no gain! So that option was quickly ruled out. My third application was to a large nationwide bank. The application process seemed simple and smooth until we reached a fork in the road. They required a PERC test to be completed before loan approval.
PERC (PERCOLATION) Test
Now, what on earth is a PERC test? I quickly searched google, and responded that we will get one scheduled ASAP. Google made it sound simple enough. However, I quickly realized I needed more reliable information. I reached out to our local county to learn about the PERC test process and gathered the accurate details. I realized that a PERC test would not be feasible for our closing date timeline as it was currently being farmed with corn.
The loan officer at that bank was very kind and understanding. He did his own quick research on Google (sorry, Google!). He assured me that completing a PERC test wouldn’t be a big deal and that I should be able to handle it without any issues. However, I shared the specific details I had learned from my county, and we mutually decided to halt our land loan application with that institution. Both Ty and I decided that we would have to opt for a lending institution that did not require it. I’ll explain everything about PERC tests in a later post.
Questions to ask Banks/Credit Unions prior to applying
After learning the caveats of the perc test with one institution, and learning that the first credit union was giving us a hard time about their specific requirements, I started calling around to other mortgage brokers and banks. At this point I learned a few things to ask the financing institutions prior to applying with them. My first question was- do you work with land only properties? They may ask specifics if there are utilities on the land, any kind of buildings, or other questions. My answer in this case, was no. This parcel was raw, farm ground, no building on the land and no utilities whatsoever.
Armed with this newfound knowledge about PERC tests and then later running into the first credit union’s specific requirements, I started calling other mortgage brokers and banks. At this point, I had learned some key questions to ask these institutions before applying. My first question was, “Do you work with land-only properties?” They might inquire about specifics like utilities on the land or any existing buildings. In my case, the answer was no. This parcel was raw farmland with no buildings and no utilities whatsoever.
Next, I asked, “Do you require a PERC test or appraisal before loan approval?” You might wonder about appraisals; don’t all banks want one? The answer is both yes and no, and I’ll explain further down in this post. These two questions helped me eliminate another 3-4 different financing institutions during my search that would successfully help us meet our closing date. I learned that land loans aren’t frequently funded by private mortgage lenders at this time.
Secondary mortgage- for the purchased land
I decided to call our primary credit union, which isn’t well-known for land loans. To my pleasant surprise, they did offer land loans. I spoke with a loan officer who had refinanced a couple of our properties a few years back. She was extremely knowledgeable. After discussing our situation, she presented another option – a secondary mortgage!
Honestly, the term “secondary mortgage” had always sounded somewhat intimidating to me, although I’m not entirely sure why. Initially, I didn’t jump all in when I heard about this option. However, after learning about its benefits compared to starting a completely new land loan application, I became more interested. I quickly discussed this option with my husband, Ty. The credit union was running a promotion that waived all fees, including the origination fee, recording fees, and even the appraisal fee. I couldn’t have been more thrilled about this option!
Furthermore, the credit union had another option. If our loan amount didn’t exceed $100k, they could utilize tax assessments, county records, and other documents to determine the loan value in our primary home. This meant we wouldn’t need a full appraisal, which was a significant time-saver. If we had gone with a land loan for this property or another entirely new property, a full appraisal would have been mandatory.
Our loan officer swiftly guided us through the process. We submitted all the necessary documents, and they scheduled a drive-by inspection to ensure the property was in good condition and not up for sale. Everything checked out, and we were on track to closing!
Closing Day on our new homestead!
As the closing day neared, we faced some unique considerations tied to secondary mortgages. One of these was the three-day gap between receiving the closing disclosures and the signing the documents, as with any financial institution. However, with a secondary mortgage, the payout date occurs four days after signing, instead of same day or next day funding. Thankfully, Saturday counted in that timeframe! There was a possibility that the sellers might not extend the closing date, so we were in a tight spot. Ultimately, we signed early Friday morning for our bank loan and on the same day with the title company.
Knowing that we wouldn’t see the funds until the following Wednesday, I informed the title officer that although we were signing early, the funding wouldn’t happen until the next week, which coincided with the final day of our closing period per our purchase and sale agreement. We received funds from the bank directly into our bank account and then wired those funds to the title company to complete the transaction as a cash transaction through title. And just like that, we celebrated our land purchase for our new homestead!
Our journey is just beginning!
Now that we’ve acquired the land for our new homestead, our journey of research and information gathering has officially begun. Look out for future posts where we’ll delve into perc tests, permissions, permits, and the entire homestead development process. We plan to learn, make mistakes, find solutions, and overcome any barriers we may face. Given the extensive work and thorough research required, we’ve set a timeline of approximately 5 years to complete the major tasks, from purchasing the land to developing it for our new homestead. Please stay tuned for our journey; we’re excited to have you here!