Have you ever considered land as an investment, or would like to find some land to build your own home. If so you may have come across the the roadblock of how to pay for it. Most land is sold for full price in cash, which isn't always attainable for your average person.
This is where banks and lending come in, they do it for homes all the time offering a traditional mortgage in return for monthly payments at a certain APR percentage. But there's an issue here, they don't offer the same opportunity for raw land. So what are your options to buy land without having a huge amount of money?
The issue with traditional lending is that the banks or government backed mortgages don't have a way to secure their investment in you. They get to make sure they get their money should you default. If you can't pay your mortgage in a traditional home purchase, that home is subject to being repossessed. This ensures the bank that they can at least get most of their money back should you not be able to pay their loan back. You would lose everything you paid to date and your home will be sold so the bank can get the loaned money back.
Banks have an already difficult time when they have to reposes a home, their primary business is not in the home selling market. They don't specialize in listing and showing homes, they don't want to deal with it, they just want their money back. Sometimes they even write off the loss on a perfectly good home if the value isn't worth it to them.
Given banks aren't necessarily in the real estate business, they pretty much refuse to price the value of land as collateral. There are a few higher risk lender that will though, but the requirements can be daunting.
Land Loans can be given by community or nation wide banks if they are willing to review and determine the investment as valid. They often want a full plan of use for the land before loaning the money, this means you may have to timeline a construction date or show a construction loan. Even then, you will have to put a significant amount of cash up front, sometimes up to 50% of the loan and have a great credit history. Your APR percentage will also be much more than a traditional home loan.
Likewise, banks willing to lend this money for land will review the whole story of the land you are interested in. Is it raw land, unimproved land or improved land. This can be determined by utilities, roads and other construction nearby. Generally, improved land with full utilities in a robust area will lower your down payment and APR percentage.
Another option is putting up collateral like your own current home for the loan. The risk being, if you default on your land loan, they can literally take your home and sell it to recoup their money. That's pretty scary and either way the process is not favorable compared to a traditional home loan.
Owner Financing is one of the best options for those who can't do all the requirements above. In general, the owner of land is willing to sell it the same way a loan would work. This means they will sell you the land for an agreed upon monthly payment including interest. Should you keep up with payments and pay off the agreed upon price, the land will be deeded to you after all terms are met. They also won't require any of your plans for the property, you can hold as an investment without any time to build requirements.
Just about every owner financed property will be subject to a land sale agreement contract. This ensures the owner of the land will keep their property should you not pay. However, it also protects the person buying the land ensuring the owner keeps their promise to sell it to you, plus keeping the land in good standing so you can pay it off free and clear without some lien or loan on the property while you are paying.
It's important to understand the land sale agreement, it needs to be fair and some are not. While there are predatory lending laws, it's the owners land and they can add language to default on you in a flash. No one would lend anyone property on an owner financed loan if they don't pay, so it makes sense for a contract to protect the seller like this.
Contracts can differ though, some land contracts can add ballon payments and require the full amount of the property paid should you miss one payment. This would essentially push you out of the contract unless you had the full amount. Maybe a tragedy happened, you missed a payment one month and now you're in this situation of pay it all or lose it all.
In a land agreement, just like a bank, the owner of the land keeps all previous money paid. They wanted to sell it, they can't let a buyer lock up their property for free during that time. Think of it as rent paid, you won't get it back and rightfully so. A seller can't do things for free, they gave you the opportunity to own it, locking up their property from selling to others. So there has to be some protection for a defaulting buyer, but a ballon payment requirement can something to consider before getting the land.
It should also be noted, owners can put really high interest rates on these financing agreements. This is especially true when it comes to someone that just owns a property here and there. Websites like ours, LandZero, strive to stay the most competitive so APR rates and contracts are more in favor to the buyer. We operate the same as owner financing, except all the land is owned outright by the business and it offers more protection given its the speciality of the business, it helps knowing the financing comes from a company rather than a random person.
Another great thing about owner financing is that even if your credit is bad, you can still be approved for the financing of the property. While deemed high risk to lend to people with bad credit, the land sale agreement protects the seller as they keep the deed and will not transfer it unless the buyer pays. So good credit or not, it's still up to the buyer to pay or they won't get the land deed. This isn't always the case, there are a lot of land selling companies or individuals that prefer to run a credit check first.
City Backed Loans
You may have seen headlines on articles saying "How to Get Free Land". And it's true, you can get absolutely free land, but there's a catch.
Cities want more property tax payments and more growth, they have learned how to incentivize this. Thus bringing in more businesses and increasing property valuations if they can attain it. This is where free land comes in, also known as the land bank. Cities offer this land with stipulations, the most common being time to build. If you want this free land, you need to build on it within 2 to 5 years and can't sell the land before then. It's expected you build a home and the home must be up to the standards they expect. Should you fail to build the home after they gave you free land, they will take it back.
It's essentially a loan of a different type, they loan you the land and the payback is that you build on it or you don't get to keep the land. This often times still means you need a traditional loan, like a construction loan. It shows you are serious about building, so sometimes this is required upfront before getting the land. As they say, if it sounds too good to be true, it probably is.
Sites of Interest for Loans
If you don't have large collateral, great credit and a big down payment you can make, owner financing is the best bet. However, should you wish to try and continue with a traditional bank loan there are different options. It's best to shop around because as we said previously, your rates may be very high and the down payment will differ depending on the lender. These are some of your options when searching a traditional land loan.
- Credit Union or National Bank (Most Standard Option)
- USDA Loans (Program for Lower to Mid income levels seeking primary resident)
- SBA Loans (Commercial loans, allows you to buy land and build on commercial zoned properties)
We wish you the best of luck in your search for land, it's a great investment that will grow as time goes on.
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