Financial Considerations With Land
BATTLECALL GUEST EXPERT: Dan Auito, Real Estate
Magic Bullets
Raw land as opposed to improved property is much more difficult to finance
through traditional lenders. The main reasons are that it generates very little
income, development costs can be expensive, there are no buildings or
improvements that can be used as collateral, and it is often considered
speculative.
For those reasons mentioned we find that sellers are often our first choice
regarding financing. It is typical for a seller of raw land to accept 10 percent
down and the rest to be paid over time at a specified (below market) interest
rate. This would be an example of an installment land contract. Other forms are
contract for deed, mortgage and note and purchase money mortgages. In these
cases, a real estate attorney usually drafts these contracts and a bank will act
as an escrow agent to facilitate verifiable records of payments received. The
seller often retains the deed until the property is paid for in full.
If you want to investigate bank financing, then you may start out by offering
30 percent down with a seven-year mortgage, with the bank getting an extra
percentage point over and above the current interest rates for standard loans.
This may not be accepted, but it does give you a starting point to see just what
they may be willing to do.
If you plan on building on your land, then having a development plan with an
appraised set of blue prints for the project will help the lender in justifying
your loan. If you can use equity from other property, then paying substantial
down payments may also be an option.
Final words of caution here are to know values and don't overpay. Always
offer less when possible and research recent sales of comparable properties. The
larger a parcel is, the cheaper it tends to get per acre. Ask an agent what an
acre of land tends to go for in the area that you are considering; try to buy
more than one acre.
When buying residential lots, builders try to keep raw land costs down to 10
percent of the overall value of the project. If streets and utilities are
already in place, then they will use 25 percent as their guideline. If you can
combine or assemble parcels or achieve zoning changes with property, you have a
good chance of immediately increasing its value.
Always physically inspect the property and do your research before obligating
yourself to buy it. And try using contracts with contingencies put in to protect
yourself. In essence, these are really options that let you control the deal
while you investigate and research the land's potential to satisfy your
objectives. Happy Hunting and buy the high grounds!
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