Wondering how to finance a land purchase? We’ve got your complete guide to land loans and land financing.
Banks typically consider land loans to be among the riskiest types of loans with collateral. However, this depends on the type of land you’re looking to finance. You have a better chance of getting a good loan if you intend to use the land immediately. Here is some land financing information to consider.
1. Improve Your Raw Land
The hardest type of land financing loan to get is one for raw, unimproved land that you have no immediate plans to improve. Raw land means no structures, sewers or utilities. This type of loan can require as much as half down, and the interest rates are usually higher.
2. Construction Plans = Lower Rates
Improved land loans with further plans for construction are the easier land loans to acquire. This means that the land is zoned and has much of the features that the raw land does not. The eventual construction on the land pays off the lender, making it far less risky.
3. Know Your Stuff – Research the Land
Make sure you do all your research on the land. Survey the property, invest in title insurance and take stock of the access to the property. Using a local lender for raw land is a good choice as they likely have familiarity with the area.
Various options for land financing allow would-be purchasers to focus upon their strengths, such as construction plans for improving the land. The latitude that land buyers get from the different land financing options available also boosts the financial position of lenders and land sellers.
“The pitfalls of land loans, more often than not, come in the form of timing,” says Pete Williams, Vice President of Investment Properties and Development Services for Coldwell Banker Commercial Intermountain. “The old saying ‘time is of the essence’ most certainly holds true now more than ever. With heavy point structures and high interest rates eating away at profits daily, it’s easy to see how undeveloped land projects can become unprofitable quickly.”
One option for financing a land purchase is a third-party loan, such as one from a financial institution. However, third-party loans will likely increase the overall cost due to the third party’s requirements, which usually include:
• Title search
• Title insurance
• Land survey
• Attorneys for closing
“With traditional banks, the credit worthiness and financial strength of the borrower or entity will be paramount,” says Pete Williams of Coldwell Banker. “Loans will depend on a variety of factors: overall size of the project; the old adage of “location, location, location” will be critical; the ultimate feasibility, use, and tenancy will be analyzed in detail; and lastly, the credit worthiness and financial strength of the borrower or entity will be paramount. In short, only the very best projects will be financed in this way. Loans will likely require a 30% – 40% real cash equity position, full recourse to the borrower, and varying interest rates.”
If your project does not fall into the category above, you may have to look for other second-tier sources. “In the past, this has fallen to the community banks. Now, while some smaller banks may look at these projects, opportunity lenders have sprouted up to take advantage of this segment. An opportunity lender could be defined as some community banks, a private finance institution, a capital fund, or a financially capable individual. In these cases, the project has real merit and a strong possibility of succeeding, but lacks one or more of the critical requirements mentioned above for the traditional banks. Real equity in the deal would remain at that 30% – 40% range, but with 3% – 5% in origination points up front, and perhaps 8% – 12% interest.”
Owner financing is an alternative to Third-Party Loans. Landowners use two primary methods when financing a land purchase. One option is a land contract, also commonly known as a “contract for deed,” “agreement for deed,” “land installment contract” or “installment sale agreement.”
We are also a financial management company offering land buyers flexible owner-financing for many of the properties listed on this website making land ownership simple and affordable, and no qualifying is required. If you have the down payment, you’re approved!
With a land contract, the land buyer makes installment payments. This contract may often include a final balloon payment. With a land contract, however, buyers do not legally own the land until the purchase price is paid off, so the title will not be delivered until the full debt is paid. The seller also retains full interest in the land’s value until the purchase price is fully paid.
A mortgage/trust deed, however, offers another type of owner financing for land purchases, and allows for immediate transfer of land from seller to buyer, even when installment payments are being made. Sellers usually provide legal proof that they own the land and that other parties have no right to claim the property.
In this financing type, sellers issue a deed to the buyer for a sale, and simultaneously, buyers implement a promissory note and mortgage to the seller. The promissory note is an assurance from the buyer that money will be paid to finance the purchase, and the mortgage sets up the real property as collateral to back the promissory note.
Home Equity, 401K or IRA Loan
Consider taking out home equity to buy raw land. If you do this, the risk is less for the lender because they already have collateral in your existing property. A refinance is another option if you currently do not have equity in your home.
A 401(k) loan is a useful option for handling short-term liquidity needs. While employers are not legally required to let employees borrow money from their 401(k), many allow this type of loan.
“A loan from a self-directed IRA is another effective financing option.” says Jaime Raskulinecz, a long- time real estate investor, a licensed real estate broker (NJ) plus founder and CEO of Next Generation Trust Services, a firm specializing in providing support to self-directed retirement accounts.
Jaime Raskulinecz also says that self-direction is beneficial because it allows for a more diverse variety of investment options, such as mortgages, unsecured loans, commodities, precious metals and real estate, for example. A self-directed account presents the loan to the buyer, and terms and conditions are settled between the borrower and the IRA responsible for the lending.
In all cases of land sales, either a reputable escrow or title company, or an attorney will oversee the closing. At the close of escrow, if a deed has not been issued previously, it will be issued at this point to convey ownership from the seller to the buyer.
We offer many properties you can purchase with owner-financing, requiring just a small payment each month. If you ever have any questions about land loans or financing, feel free to contact me with the “Tell Us Your Needs Form”!