Welcome to this month’s installment of Dear Urbaneer, where I answer real estate questions from both clients and followers. This month, I am assisting a new client who is considering purchasing a parcel of land to construct a dwelling.
Dear Urbaneer:
I first started looking for a property to purchase in 2021, but I took a break because prices surged by double digits and competition was fierce. Since then, I periodically resume my search, but I stop after a few months because the process exhausts me. Although I have seen a couple of properties that had several features on my wish list, I haven’t found one that truly suits me. A friend of mine suggested I explore buying a vacant lot and building a custom home, but I’m not familiar with what’s involved. What do I need to know?
Signed, Looking at Lots
Here is my reply:
Dear Lots:
Buying a parcel of land and building your own home can be an exciting option and a practical solution, especially when the existing housing stock in the area you’re considering doesn’t meet your needs. The most significant benefit of going this direction is the opportunity to customize, whether that be the space plan, the architectural styling, and/or the choice and quality of construction materials and interior finishes. For the creative mindset, this can be liberating and fun, but pragmatically speaking, an endeavour of this magnitude requires prudence, patience, and organization, a love for design and detail, and the ability to hire and manage credible, competent people. It also requires an enormous amount of compromise.
As every Buyer discovers undertaking a home hunt, the moment one has choices, it tests one’s capacity for discernment and necessitates compromise. Some Buyers love the home hunt process, while others find it draining. In your note, you mention your decision to reject the properties that, despite having several features on your wish list, you felt didn’t fully suit you. I want to be clear: I fully support a Buyer rejecting any potential property purchase for any reason. In fact, I’m known as the realtor who ‘talks you out of buying’ when I think the property you’re considering does not fully align with your search criteria. This happens because my process includes a feedback loop in which my Buyers and I assess each property together to narrow and refine the property search. The objective is that over time, the number of listings my Buyers see decreases, but the likelihood of submitting an offer increases. Furthermore, because of my experience in design, urban planning and construction, had I been your realtor at the time you considered those listings, I would have analyzed them in more detail with you to determine whether either could be modified to suit and at what cost. This is because the property that ‘ticks a lot of boxes except for a couple’ may be ‘the one’ hidden in plain sight. It may only require a shift in mindset, a deft creative hand, and, yes, money, to turn the compromise into an optimal solution. Going that route may have been a more efficient, economical solution – and minimized a process you find exhausting – than searching for an appropriate parcel of land and building a new house from scratch.
As a realtor with a healthy obsession with all matters related to real estate, housing, and home, I would happily embark on the journey of securing a parcel of land and building a dwelling from start to finish. However, it is not for the faint of heart. Custom-building a house is significantly more complex, time-consuming, and requires substantially more capital than the 20% down payment plus closing costs required to buy an existing habitable dwelling. There are way more hoops to jump through, with layers of bureaucracy requiring more paperwork than you think and a litany of fees that come fast and furious.
For example, if there isn’t a habitable dwelling on the property, you can’t get a standard mortgage, so your alternative is a land loan that requires a larger down payment and has a higher interest rate because the property, in terms of risk, is an asset that doesn’t generate revenue. Furthermore, after paying for the professional services, design fees, development charges, permiting fees, tree protection and site prep, if you think you’ll lack the funds to pay for the construction materials and labour costs, including the exterior hardscaping and interior finishes & fixtures, you should prequalify for a construction loan knowing they have a higher interest rate and they only disburse funds in stages as the build progresses. You would be wise to ensure you and your lender have a contingency plan for the unexpected, such as a shortage of trades, a disruption to the supply chain, delays in completing building inspections or in obtaining an occupancy permit.
Before you even purchase property, explore the process this journey requires from start to finish, understand the specific hoops you have to jump through, micro-analyze the real potential costs by line item, and understand that once you pass Go!, every time you make a change to the build program, the ripple effect of that decision will double the cost. For the benefit of everyone employed to see this project completed, an undertaking of this magnitude requires your household to agree that you are the only point person with the authority to make changes. You must go with the flow, breathe deep, be respectful and kind, and smize with your eyes.
It Starts With Choosing The Appropriate Parcel Of Land
Depending on how broad a net you’re casting, finding the right parcel of land can be as complicated as choosing a property ready to move into. It’s one thing to dismiss a property you’ve toured because it doesn’t tick all your boxes, but it’s another to walk a parcel of land and be certain the home you envision in your head can be constructed on it. In other words, only submit an offer that provides you sufficient time to complete your due diligence.
It starts by ensuring the property is appropriately zoned for your needs and by understanding the limitations imposed by the local municipality. For example, zoning regulations will stipulate the as-of-right uses allowed on the site, including the number of units the dwelling can have, the maximum square footage, the required setbacks for the building envelope, and the maximum height. The City of Toronto offers an interactive zoning map that provides all of this information, but if R (0.6) (x736) means nothing to you, then the easily accessible information they provide will require time and research to fully understand.
You’ll also need to determine whether there are any environmental or site-specific restrictions, and what remediation and/or paperwork are required before you proceed with a firm, binding purchase. For example, is the land near a conservation area, on a flood plain, in a heritage district, a suspect or remediated brownfield, or is there a possibility that there’s a buried oil tank original to a now-demolished house? In Toronto, you can check the Heritage register to see if the lot has a heritage designation, which could impose additional restrictions and requirements on what you are allowed to build.
Does the site have all the utilities and services you require? In an urban setting, this is probable, but the moment you leave the city limits, where properties may have seasonal road access, don’t have hydro, require a septic system, or necessitate a well being dug and its water tested to ensure it’s safe, it requires consultation and cost estimates from local firms.
If the property is part of a collection of lots sold by a developer, there may be “covenants, conditions, and restrictions” registered on title to maintain uniformity and protect property values. These legally binding rules “run with the land,” meaning all future owners must also comply with them.
Don’t forget there are a lot of additional expenses that come with building new, such as development charges and fees that come with permitting.
Engaging a Team of Professionals
In addition to enlisting the services of a realtor familiar with the area you’re interested in, there are several other professionals you’ll need to add to your team when building on a parcel of land. Some of these services are essential; others are not mandatory but nice to have. It’s a good idea to research and assemble your team early on in the process.
- Real estate lawyer
- Surveyor
- Urban planner
- Arborist
- Architect
- Engineer
- Contractor or Trades
- Interior designer
- Landscape designer or architect
- Lender
Lot Conditions
Not all lots are equal, and their viability may lie in issues beyond the surface level. A site assessment must be conducted to prepare the lot for construction, which typically involves evaluating topography, soil quality, environmental issues (particularly important if the land is part of a brownfield or similar), grading, and drainage.
Poor soil quality can increase construction costs, as the foundation may require additional reinforcement to remain structurally sound. Similarly, if soil is found to be contaminated from previous industrial or commercial use on a lot, or if the previous home had a buried oil tank, for example, soil may need to be remediated, which can add extra costs.
Topography matters because it often affects drainage. You may need to grade the lot so that rainwater doesn’t percolate towards the foundation without causing issues for your neighbours.
If the Seller didn’t provide you with an accurate up-to-date survey, you will need to order one so you know exactly what the lot’s boundaries are.
If The Lot Has Existing Permits
In rare cases, a vacant lot with approved plans and a building permit already in place will come to market, and the Seller has decided to sell rather than build for a variety of reasons. If the property is partially constructed, there may be some building components with existing transferable warranties that can be provided. Ensure the permits match the drawings provided to you, and search the title to see if any liens have been placed before you make your offer firm and binding. Doing some digging (figuratively, not literally) may give you more insight into the seller’s level of motivation.
Is There An Existing Structure On The Lot?
Perhaps you have purchased a lot with an older home that requires extensive renovations, or a home that isn’t suitable for you, but the land and location are what you are after. This is common in Toronto, where aging housing stock and urban infill account for much of the City’s new freehold development.
You’ll need to remove the existing structure, which isn’t as easy as bringing in a demolition crew. You need to obtain the proper demolition permits from the City of Toronto and ensure that all utilities are disconnected. Remember, demolition can be costly, so budget accordingly.
Are There Any Red Flags?
As with purchasing a home, there are red flags to watch for in vacant land that may hint at potential problems. As-is lots, without disclosure or with curiously low prices, can end up costing more because there is usually a reason requiring remediation, extra work, or, worst case, the land isn’t viable for building.
Look for things like encroachments, easements, shared driveways, and right-of-way access, which in and of themselves aren’t necessarily deal breakers, but could affect your use of the land or where you locate your swimming pool.
Although it is undeniably a lot of work to build on a vacant lot, the upside can be substantial, especially when you consider the total potential for customization, from floor plan to finishes. You’ll also benefit from high-tech, more sustainable materials typically used in new builds, which offer energy-efficient benefits. It’s also easier to future-proof during construction, such as for multi-generational suites, rental income potential, EV chargers, rough-ins for aging in place, etc.
Plan Timing Accordingly
One way purchasing a parcel of land and constructing a house differs from buying a resale home is that it takes much longer, so you need to plan accordingly. It may require you to sell your existing residence and rent temporary living accommodations in the meantime. Along with the time necessary to find and secure the site (which could be as quick as 6o days but typically much longer – two couples in my social world both took 2 years to find the right site to build their country homes), there is the design, planning, approvals (if required), and permit process which could be fast-tracked to 6 months but often takes a year or more, followed by construction which can take 4 months when well-organized unless you encounter delays along the way.
In a purchase requiring extra due diligence, it’s essential to have a dedicated seasoned realtor at your side to guide you through the process. With 35 years of experience navigating the Toronto real estate market, I started my career 4 weeks after the 1989 bubble that burst. For the first 6 years of my career, prices went down as my knowledge and experience grew, representing several lenders who engaged my services to liquidate properties under Power of Sale. As the market flatlined for another 4 years, it gave me a solid foundation and the confidence to launch my specialty in the Innovative Space Marketplace. Representing several developers and selling over $50,000,000 of lofts when prices were in the low $200,000 to high $400,000, I soared when the real estate market rebooted at the turn of the century. That our market cycled up for 2 decades, when market corrections historically happened every 7 to 10 years since the 1970s, ultimately fueled speculation to greater heights. When the Bank of Canada started raising interest rates 44 months ago to bring inflation down, I intuitively knew the real estate market was shifting, and since then (March 2022), it’s been painful to witness history repeating itself. As one of only 3% of Toronto realtors who have been selling real estate for over 25 years, it’s apparent that realtors who have never operated in our current market conditions are uninformed. They’ll learn, eventually, because the recovery of Toronto’s condominium market will take far longer than the 97% anticipate.
Need help? The pleasure would be mine.
Sincerely,
Steven
If you enjoyed this, here are some additional posts you may find interesting and helpful:
Dear Urbaneer: What Are The Essential Considerations When Buying Waterfront Property?
Dear Urbaneer: What Do I Do With My Dated Bungalow? (Plus A Brief History On This Housing Type)
Dear Urbaneer: Should I Replace My Vintage Windows When My House Is Considered A Teardown?
Here’s One Of The First New 4-Unit Condos Replacing Single Family Houses In East York, Toronto
Since 1989, I’ve steered my career through a real estate market crash and burn; survived a slow painful cross-country recession; completed an M.E.S. graduate degree from York University called ‘Planning Housing Environments’; executed the concept, sales & marketing of multiple new condo and vintage loft conversions; and guided hundreds of clients through the purchase and sale of hundreds of freehold and condominium dwellings across the original City of Toronto. From a gritty port industrial city into a glittering post-industrial global centre, I’ve navigated the ebbs and flows of a property market as a consistent Top Producer. And I remain as passionate about it today as when I started.
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