Financing Vacant Land

If you’re in the market to purchase a piece of vacant land, you’ll probably need a loan. This of course depends on how deep your pockets are and what the price of the land is. Obtaining financing for land is different than getting a traditional loan for a home. There are multiple ways to finance vacant land though, and in this article, we’ll go through the various options that exist.

Cash Purchase

The first option is to pay for the land with all cash. If you have the cash on hand to pay for the property without obtaining a loan, this could be a great option. Oftentimes, a Seller will be willing to provide a discount for cash purchases, because they make the transaction go quicker and easier since there is not a lender involved who must approve the deal. Even if you pay for the property with all cash to get a discount, you may want to put a loan on it after you own it to free up your cash again. There are a couple benefits of doing this. First off, you’ll likely get a cash discount from the Seller, so you’ll have a lower basis on the property already. Second, you’ll have plenty of time to shop around for a lender that will offer the most favorable terms, which will save you money on fees and interest in the long run.

Land Financing

If you’re going to get financing for vacant land, lenders need to know the risk and how to manage it. You can get a good loan by reducing the risk for the lender. Most lenders will evaluate the borrower and also the property. If you have a good credit score and a good debt-to-income ratio, a lender will view this as favorable because you’re more likely to have the ability to pay back the loan. As for the property, a lender will be using it as collateral for the loan in the event of default. They will typically want to have a survey and an appraisal completed on the property before they will fund the loan.

Another factor that will help a lender with their decision to fund the loan is if you have plans to develop the property. If you’re going to buy the land and develop it immediately and you already have approved plans, this will be enticing to the lender because you’ll be adding value to the property and at the same time making it more liquid. In the event of default, it would be easier for a lender to sell a property with a home on it as opposed to a piece of vacant land.

All lenders have one thing in common. They want to incur the least amount of risk and ensure their loan is paid back in full. The more you can prove that will happen, the better terms you will be able to get on the loan. There are various types of lenders to choose from and knowing about each type of lender will help you narrow your search for the right one to work with.

Commercial Lenders

Commercial lenders include banks and credit unions. Think Wells Fargo or Chase. If you work with a commercial lender, you’ll work with one of their loan officers to prepare your loan request.

The good thing about commercial lenders is that they have a clear process to determine whether or not they will issue a loan. The bad thing about these lenders is that they are not very flexible or creative when it comes to structuring a deal to make it work. It either fits within their guidelines based on strict criteria, or it doesn’t. If you have other assets to use as collateral aside from the vacant land, a commercial lender may take that into consideration in order to reduce risk.

Commercial lenders typically offer repayment terms of anywhere from 5 to 15 years for vacant land. However, they may extend the amortization schedule to 20 to 30 years to make the monthly payment lower. In these cases, there will be a balloon payment at the end of the term.

Owner Financing

If you’re unable to qualify for a loan from a commercial lender, another option is to see if you can get the Seller to take payments for the property. This works just like a loan, but usually involves less of an application process, if any. If the Seller doesn’t need a lump sum of cash, they may even prefer this option as it may ease their tax burden.

Most Sellers of vacant land understand that getting financing to purchase vacant land is harder than most other real estate loans. For this reason, owner financing is more common for vacant land than other types of real estate.

The way it typically works is the Seller and Buyer will sign an agreement commonly referred to as a land contract. This contract acts as a purchase agreement and a promissory note in one. It identifies the property, the purchase price, and the terms of the loan. The collateral for the loan is the property and the Seller will oftentimes keep title to the property in their name until the Buyer pays the full price of the property.

Private Money

A private lender can be an individual or a business who is willing to make a loan to purchase the property, usually completely secured by the property itself. They will consider the repayment ability of the borrower, but it’s not as important to them as the value of the property itself. They are usually taking a higher risk than a commercial lender and understand that they may need to foreclose on the property. Because of the higher risk, these lenders typically charge higher fees to originate the loan and a higher interest rate. They may also require a shorter payback period.

USDA Loan

Since it’s more difficult to get a loan from a traditional bank, the U.S. Department of Agriculture (USDA) offers various types of loans which they subsidize. This is for rural properties and agricultural land and typically the borrower falls in a low-mid-income bracket.

SBA Loans

If you own a business, The Small Business Administration (SBA) offers a couple loan programs which they will allow for the purchase of vacant land. The first option is the SBA 504 loan which is for the purpose of buying a piece of vacant land to build a structure on. The other option is the SBA 7a loan which is for commercial real estate.

Home Equity Line of Credit

A Home Equity Line of Credit is a great option if you have existing equity in your home. Banks will allow you to draw a loan from the available equity and one of the things you can do with this loan is to purchase vacant land with it.

If you’re ready to develop the land, and need financing for the development, read on for more financing information to get to a finished product.

Construction Loans

If you already have plans to build on your property, you may be eligible for a construction loan. A construction loan will effectively let you buy the land and build a structure on it. The nice thing about construction loans is that they are structured with the intent to make the loan affordable during the construction phase by charging interest only until the project is complete. The bank will need to review your plans prior to issuing the loan, but if you’re building a standard structure, this is usually pretty straightforward.