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Real Estate Financial ConsiderationsReal Estate Financial Considerations Copyright 2004, Dan Auito
Raw land as opposed to improved property is much more difficultto finance through traditional lenders. The main reasons are that it generates very little income, development costs can beexpensive, there are no buildings or improvements that can beused as collateral, and it is often considered speculative. Real Estate Financial Considerations For those reasons mentioned we find that sellers are often ourfirst choice regarding financing. It is typical for a seller ofraw 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. Real Estate Financial Considerations 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. Real Estate Financial Considerations If you plan on building on your land, then having a developmentplan with an appraised set of blue prints for the project willhelp the lender in justifying your loan. If you can use equityfrom other property, then paying substantial down payments mayalso be an option. Final words of caution here are to know values and don’toverpay. Always offer less when possible and research recentsales of comparable properties. The larger a parcel is, thecheaper it tends to get per acre. Ask an agent what an acre ofland 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! Real Estate Financial Considerations 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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