Buying a Vacant Land Lot in Los Angeles? 5 Things Buyers & Investors should know

If you thought building your own house on vacant land is cheaper than buying an existing home, I hate to be the bearer of bad news but… in the vast majority of cases, it isn’t.

When searching for a house, buyers sometimes wonder about vacant land or a vacant lot and having a house built instead of a traditional Real Estate purchase for an existing home. Although a project like that may be a good fit for some buyers, most of the time, especially for first-time buyers, it makes much more sense to purchase an existing home because of the costs and time associated with building a structure from the ground up and the lack of (affordable) financing available for such projects.

However, for the right buyer purchasing vacant land can be an exciting endeavor, for personal and/or investment opportunities. Whether you’re a buyer/builder interested in building a residential home for yourself, an investor building housing for rental income, developing the land for commercial use, or buying land simply to hold, it’s important to understand the basic process and requirements for building on vacant land before entering into a contract to purchase. In this post, we’ll go over the top 5 things you should keep in mind when considering a vacant land lot purchase in Los Angeles and beyond.

• As an example, we’ll pretend we are looking for a vacant lot with a budget of $1,000,000 to buy a piece of land and build a home.

1. Design: What are you building?

The saying “begin with the end in mind” is often associated with Stephen Covey’, who popularized it in his best-selling’s book, “The 7 Habits of Highly Effective People.” In the book, Covey emphasizes the importance of having a clear understanding of your goals and objectives before beginning any task or project. He argues that by starting with a clear vision of what you want to achieve, you can better focus your efforts and increase your chances of success.

Just like homebuyers, individuals interested in purchasing vacant land should have a clear vision of the final outcome they want to achieve. Are you looking to build the home of your dreams or an apartment complex for rental income? There are unlimited possibilities when starting from a bare canvas, but knowing what you want to build should definitely be amongst the first things you do, followed swiftly by reviewing your budget and finances for the build.

• Since we’re talking about Los Angeles, we will use the city of LA as an example for our ‘project’, which we have conceptualized as a 3,000 sqft home. Let’s see approximately how much this would cost and how long it can take.

2. Budgeting: How much money will you need?

This is usually where most buyers searching for vacant land change their minds.

Depending on the location, size, and zoning regulations of the vacant lot, what you can build, how much it will cost, and how long it will take can vary significantly, not only in Los Angeles but anywhere. Regulations aside, geography can also drastically change your budget and timeline. For example, building the foundation of a home or building on a flat lot is much cheaper and faster than building on a sloped lot, and that can be pretty obvious to most. But how deep your foundation needs to be is also another critical factor, and that changes for every location.

As you can see, just one difference can mean a drastically different budget and timeline to complete similar projects. Let’s take a closer look at how money and time affect a project.

• Assuming we find a suitable lot listed for $300,000, let’s take a look at what it may cost to build our project.

Money

Before you consider purchasing vacant land, it’s essential to determine your budget; or at least have an idea of how much of a project you can take on financially.

Your budget should include not only the cost of the land and building the structure, but also the fees associated with designing and planning your project by having it formally conceptualized. Having plans drawn up and submitted to the city is often done with the help of your architect. Architect fees typically have an hourly rate for design but can range from 5% – 20% of the project cost depending on the complexity of your project.

There are four main cost components to consider when buying vacant land to build on:

1. Acquiring the Land: Escrow, closing, etc. | Land cost + 1% to 2% closing costs
2. Design: Architects, designers, etc. | 5% to 20% of project value
3. Planning & Working with the City: Planning, Permits, etc. | 1% to 3% of project value
4. Construction Costs: Materials, Labor, Landscaping, etc. | $200 to $350+ /sqft

• Architect fees vary by professional, so let’s assume ours charges a10% of the project value. For a 3,000 sqft home in Los Angeles, assuming a construction cost of $350 per sqft, the valuation of the proposed construction would be around $1,050,000. The architect will design the home to your needs and submit the plans to the city for approval. Architect Fees: $1,050,000 * 10% = $105,000.

Once you have approved plans for your project, you may apply for building permits. Permit costs can add up very quickly and vary by city, so it is important to know how much you can expect to pay in permits and fees for your proposed project. Each city will have its own guidelines and process, but typically you can expect to pay 1% to 3% of the project value.

Financing Options

Financing a vacant land purchase can be done, but typically not through your normal residential mortgage lenders, who typically use the property (structure) as collateral. Lenders who finance vacant land have no property structure to use as collateral, so they are often Hard or Private Money lenders that charge much higher interest rates when compared to a normal mortgage.

Another option is a Construction Loan, which also comes with higher interest rates. The best option will depend on your current finances and how much you are willing or able to finance. In either case, you expect to pay 2% to 5% more than your typical home mortgage rate, which would increase your project cost.

• Our estimates are using the higher end of the pricing scale per square foot, so it could be possible to build a similar project for less. However, as with an actual project, you’d rather have leftover funds instead of realizing you are over budget.

Another very important commodity to consider is time, and how long it can take for your project to get approved so construction can commence.

3. Budgeting: How much time will it take?

Building timeframes vary by city, but having some idea of how much they cost and how long it will take for you to start your project beforehand can prevent you from getting into an expensive unforeseen situation. Building a home from the ground up typically ranges from 18 to 24+ months. It is not uncommon for a project to spend more than a year in planning and permits, let alone starting construction. Once construction has started, you can expect it to take between 8 and 12 months, depending on several factors such as how fast your contractors work.

• Design: 2 to 6 months
• City Permits & Planning: 12+ months
• Construction: 8 to 12 months

• On top of high costs, it can take a couple of years or more for a project to go from having the idea to getting your certificate of occupation when you finish building.

4. Search: Finding a Suitable Parcel of Land

Once you have reviewed your budget and have your finances in order, it’s time to start searching for vacant lots! Investigate the building process in each city you may be considering for your project, as you may find it is cheaper or faster to build in one city than another.

Consider factors such as intended use, location, zoning regulations, size, and accessibility when deciding on a site. Again, it helps tremendously if you know what you want to build, as that can help narrow down what parcels may work best for you and your project. Of course, this will vary from buyer to buyer based on what the intended use will be.

For example, if you are looking to build a home for yourself to live in, you may be seeking something with a view or a large lot near amenities you find attractive, such as a park, the beach, or a lake. If you want to keep large animals such as horses or livestock such as chickens, goats, or even pigs, we are going to be looking for zoning that can accommodate those things. Developers looking to build housing or commercial buildings would be looking at entirely different parcels, such as those that allow for the most amount of units to be built or what areas are the most affordable to develop.

Some investors buy land simply to hold. This can be lucrative if you purchase land in an area that will be developed in the future. Think Las Vegas, Pheonix, etc. However, even if you do not intend on building something, knowing what can be built is of great value, and can be a big asset when you decide to sell the parcel.

Once we find a potentially suitable property, we can start doing some preliminary research to find out more about its history.

5. Research: Property, History, Build Potential & Cost

Before making an offer on a potentially suitable piece of land, it’s important to conduct due diligence and research the property to ensure it will work for your intended use. Some of the most important things you would want to know about a vacant lot include:

• Zoning
• Natural and/or Environmental Hazards
• Geological & Soil conditions
  

Often a lot of information can be obtained on a parcel without committing to a purchase and entering into an escrow. Your realtor can start by verifying the zoning, requesting copies and/or any documents pertaining to the vacant land lot, which can include:

• Geotechnical Engineering Report
• Soil Report
• Survey Report
• Availability and cost of utilities
• Easements
• Architectural drawings/plans, or any other pertinent documents or reports regarding the lot
  

These reports and documents can be very valuable to whoever owns the land, as they are often costly to produce and can take several weeks to complete.

• A Geotechnical Engineering Report can cost from $5,000 to over $20,000 depending on the scope of work required for your project. Environmental tests are sometimes required if the property is located in a special zone, such as protected wildlife or coastal zones. These can be another area of unforeseen costs that could push your project over budget.
  

Working with a realtor that has experience with vacant lots sales and purchases can be a huge plus, as they will likely have the tools and experience of researching vacant lots and how what to look for to fit your needs. A realtor can also provide a title report for the parcel, which will show any liens, easements, or other encumbrances on the property.

For example, Rancho Palos Verdes and San Pedro (technically City of LA) are two neighboring towns that border the Pacific Ocean. Both of these towns offer fantastic ocean views to many of their residents. However, only Rancho Palos Verdes has a View Ordinance, meaning the view from your home, which has a monetary value, is protected from structures and buildings that may block your view. On the other hand, San Pedro has no such ordinance and offers no such protection. Research the market to ensure you can build the project you have in mind. So if you plan on building something tall to obtain a view, RPV may not be a good option for you.

As mentioned previously, having existing reports on the parcel, such as a geotechnical engineering report, can be a huge benefit to you or any potential buyer because the report give you the information needed to build your foundation, which is one of the biggest cost factors when estimating how much a project will cost. If this information is not already available, you will likely need to conduct these investigations in escrow. If we wish to investigate further, we have to submit an offer.

Make an Offer: Escrow and Negotiating

Once you have found the right parcel of land and conducted due diligence, it’s time to make an offer. Work with a real estate agent to draft an offer that includes the purchase price, deposit, and contingencies. Most land purchase escrows tend to be 45-60 days but can be as long as several months. The longer escrows are typically due to the time it takes to conduct investigations on vacant land, which can include things like geotechnical engineering investigations, which can take several weeks before you receive a report for review. If a lot you are considering does not have a report like this completed, this can be a point of negotiating a longer escrow period and/or a reduced price.

Since vacant lots often sell for cash, there rarely is a loan, which means no appraisal. This eliminates those contingencies leaving only the physical inspection, among other minor contingencies such as title and reviewing the seller’s documents. Often, it is just about inspecting the parcel and researching the zoning and buildability with the city to confirm your project conforms to their guidelines.

Closing: Complete the Transaction and Conclusion

Once you have concluded your investigations and the terms have been agreed upon, closing escrow and transferring the property works like any other real estate transaction. Work with an escrow company to ensure all documents are properly signed and recorded, and that any funds are transferred securely. After the transaction is complete and the deed is recorded at the county recorder’s office, you will be the new owner of a vacant lot, congratulations!

Purchasing vacant land in Los Angeles, and pretty much anywhere, requires careful consideration and research. Even if it seems you have a hefty budget to build, buyers often overlook the designing and permitting costs associated with having something built. In our example, our design and permit fees came in at about $126,000, but could easily be over $200,000 for certain projects. Pay special attention to these costs and investigate these potential project-killers as much as possible prior to going under contract.

If you’re considering buying or selling a vacant lot or any other type of real estate, contact us to see what we can do for you!