Understanding Real Estate Zoning Before You Buy Your Land to Build Your House as An Owner Builder

If you want to build your home with a general contractor or as an owner builder, you are almost certainly going to need financing in the form of a construction loan or an owner builder construction loan. So, before you ever commit to that dream plot of land, you better first understand the zoning implications - not just for your county's building permits but also for your owner builder loan terms.

Almost everyone who is considering being an owner builder or hiring a GC to build their home for them already knows that the zoning on the land is vital to your ability to get building permits issued. For example, if you want to build your single family residence on a piece of land that is zoned only for commercial buildings, then your county almost certainly isn't going to issue permits.

But, what if the county did allow you to build your own home as an owner builder on a piece of land that is zoned for commercial buildings? Can you do it? Yes, you can, as long as you don't need to get an owner builder construction loan. In other words, as long as you have the cash to buy the land and build the house out of your funds, then you'll be okay. But, if you need any sort of a loan, especially an owner builder loan, then you'll never get it approved.

Therefore, it's important for every owner builder to realize that the lot's zoning is vital not just to the issuance of county building permits but also to the approval of a construction loan. So, let's take a quick look at what is ideal, what is acceptable, and what just won't work.

It would be ideal for an owner builder construction lender if the borrower is building his single family residence on a piece of land that is zoned for residential single family residences (typically annotated as R-1 by the county - though every county is different). This seems pretty obvious, but it is worth pointing out that a property can also be zones for residential properties ranging from single family residences to multi-family residences. Will this be a problem for an owner builder construction loan?

You should have no problem with financing on a piece of land that is zoned for multi-family residences, as long as it is also zoned for single family residences. However, you will want to make sure as the owner builder that there are going to be other single family residences in the area. If you are the only single family home in the area, surrounded by duplexes and multi-family units, then you will have a tough time with your loan's appraisal.

What if the land is zoned commercial? Well, as mentioned above, your owner builder loan will never get approved if the land is zoned commercial instead of residential. This is true for any construction loan, not just owner builders. But, sometimes the land will be zoned to allow for both commercial and residential. Will this be okay?

Yes, you can get an owner builder construction loan approved in this case, as long as you can get a decent appraisal done. For example, imagine a piece of land that is zoned for either commercial or residential construction. There is a good chance that it is surrounded by commercial buildings instead of residential buildings. Your appraiser is not going to be able to find 3 or more comparable residential properties that have sold within the last 12 months in your immediate neighborhood/ area. Therefore, the owner builder lender is not going to be able to approve the appraisal, which spells disaster for your financing options.

But, this is not a very typical scenario. Something that is more common is a problem that often arises in rural areas. Often, land is zoned for agricultural purposes instead of residential construction, which will cause problems for any owner builder financing. Let's take a look at an approvable scenario versus a scenario that will be denied.

Financing will be possible for owner builder construction on agricultural land only if you can meet a couple of important criteria. First, you have to show that your property will not be used for anything agricultural in nature. An owner builder must be building his home and only his home. This means no livestock and no farms. If you want these features, then you technically no longer want an owner builder construction loan. At this point, you should be looking for an agricultural construction loan.

Second, you will have to show that it is common in your county for other families to build single family residences on agriculturally zoned land. These other properties cannot have any agricultural uses. For example, in some rural areas, it's common for the county to simply zone every property as agricultural. In these cases, it's pretty typical for properties to be used strictly as residential properties without any agricultural use. Therefore, an owner builder construction loan would be possible.

However, if your county has a mix of residential and agricultural zonings, then you will run into trouble trying to finance a residential construction project on a piece of land that has been specifically zoned for agricultural use. You would need to switch the zoning to residential if you wanted an owner builder loan in this case.

Owner builder construction loans are designed for residential construction only. Therefore, before you commit to buying your dream piece of land, you should take a moment to understand the property's zoning and its implications for owner builder financing.