Real Estate: Financial Considerations $$$

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 by: Dan Auito

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!

About the Author

By Dan Auito, mailto:magicbullets@alaska.com, a real estate investor for the past fifteen years & has bought, sold, and rented seventeen properties to date, totaling more than $1.3 million - all on a blue-collar salary before the age of forty. Grab your free tip sheets & more at: http://www.magicbullets.com/home.php

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