Q: We are looking into buying some empty lots, or raw land, within our city limits. I’ve confirmed they are residential lots. What else do I need to do in order to figure out if these are a good investment? We own a home in, but want another investment.
A: Vacant lots are an interesting investment. You’re betting that the value of the neighborhood will rise enough that someone will pay a lot more for the land on which they can build their own home.
Developers will often go into a neighborhood and buy up a number of parcels, and then build homes over the course of a few months or years, as demand dictates.
While you’ve done some research on your lot, and know it’s residential, you don’t know what kind of home can be built there. If you accumulate several parcels that are next to each other, you (or the developer you sell the land to someday) may be able to build a large apartment building. That could make your land much more valuable.
Visit your local building department and try to determine what type of building can be built on the property, and what the total square footage can be for each lot. You will also need to determine if there are any proposed changes to the zoning that may affect your lot and reduce its value. In some communities, zoning laws have been changed to permit only single family homes, or smaller homes or other changes that could affect the value of a vacant lot.
Finally, although it seems like real estate prices only go in one direction, they can fall. While the real estate taxes you’ll pay on a vacant lot are nominal, the neighborhood could take a turn for the worse and the value of your lot will plummet.
If this is a possibility in the neighborhoods in which you are searching for vacant lots, you may want to rethink this real estate investment.
Q: I bought one of your books and the advice was great. Here’s my question: We’re buying our first home. We don’t want to be cash poor when we’re done. A friend recommended to us that we ask the sellers if we can increase our purchase price by $5,000, then take that $5,000 back at closing to cover our closing costs, effectively rolling the closing costs into our mortgage financing.
Is this okay? I’ve heard mixed comments from people, some saying we’re trying to pull a scam, others saying it’s very common where they live.
A: Depending on how you handle this, it could well be considered a scam.
Many lenders will allow you to roll your closing costs into your loan. And, many sellers will simply pay the closing costs of the buyer. These are both reasonable ways to help you pay your closing costs.
If you have some cash for a down payment, you could also investigate getting a lower down payment loan, perhaps a zero down or 3 percent down loan instead of one with a higher down payment. That would help you reserve some cash.
You may not want to artificially inflate the sales price of the house. In some cases, the closing costs will be higher and the inflated sales price may increase your real estate taxes. You need to remember that you will have to disclose all the details of the transaction to the lender and receive their approval. If you and the seller decide to increase the purchase price and have the seller pay some or all of your closing costs, these amounts must all be shown on the closing statement and each amount must be disclosed to your lender. If you don’t properly disclose these amounts to your lender, your actions could be construed as an act of fraud against the lender and you might have unwittingly violated the law .
For more information, you should certainly consult your real estate attorney.