How to buy land for sale is a common question of new real estate investors. While locating the property can be one task another part of the land investment picture is financing.
Banks typically consider land loans to be riskier 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 in the future.
Land Financing Considerations
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.
Construction Plans = Lower Rates: Improved land loans with further plans for construction are the easier land loans to acquire when buying gland for sale. 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.
Know Your Stuff – Research the Land: Make sure you do all your research on the land for sale and stay up to date with local investment news. 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 of land for sale 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 when purchasing Cape Coral real estate 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. 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 when buying acreage for sale. 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 to buy land for sale. 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 for sale 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 buyer’s flexible owner-financing for many of the properties listed on this website making purchasing land for sale simple and affordable! For more information on land for sale contact Asset Quest at (239) 541-8448.