Getting hard money loans on land is usually more difficult than on properties with improvements.
Many lenders simply say, “Nope, we don’t do land,” and call it a day. At Little City Investments, we do provide purchase and refi hard money loans on land, but extra due diligence and risk reducing measures are almost always required.
The bottom line is that land in central Austin, Houston, San Antonio and Dallas/Fort Worth is quite valuable and the development activity in those areas is high. With our personal experience as developers, we feel that we can identify red flags and safely provide hard money loans on land in many circumstances. In some cases, in order to adjust risk, we will lend at a lower LTV, or require more pre-payment of interest, but ultimately if we feel the land can be liquidated appropriately, we’ll do the deal.
If you are considering applying for hard money loans on land here are four things to consider
- Location, location, location. For us to be able to lend on land, it has to be in a very desirable central area with a lot of comparable sales. In this way, land is no different than any other piece of real estate. If the market is strong in the area, and we can prove value, then we’ll lend on it.BUT, as soon as you move even a little outside of the urban areas of Texas, land values plummet and days on the market skyrocket. Our minimum loan amount is $150,000, so that disqualifies many parcels outside of the cities. Plus we have to value the property at a price point that would cause it to sell in 30 days or less, further reducing the value. So, run your own comps, and if you see a lot of active parcels at over 100 days on the market and very few sold comps, know that those are red flags to lenders like us.
- Borrower skin in the game helps–a lot. Generally, borrowers getting a hard money loan on land intend to develop it. The more cash a borrower has to put into the deal, or the more equity they have, the more likely we are to say yes. Getting the initial loan to value down to 50-60% drastically improves the chances we’ll be able to lend on land. It all about risk reduction here.
- Try to get one loan for land purchase and construction. If at all possible, try to secure one loan for the entire project. This will simplify the process, reduce your closing costs and could also reduce your interest payout. If you can pull down the land with your own cash, that’s ideal: You won’t have to pay interest until you’re ready for construction. But of course that’s not always possible, and the next option would be to get one loan for pulling down the land, then another for construction.
In order for us to fund purchase and construction with one loan, we need a very clear idea of what will be built. You will need to provide floor plans, elevations, site plans and detailed budgets. But we understand that those things take time and shouldn’t be a disqualifying factor in pulling down a desirable parcel of land. We’ve been there ourselves and will work with you to determine the best way forward.
- Know absolutely everything about the property. Is it in the floodplain? Are there easements? What are the development restrictions in the area? Where are the protected trees? Some logistical issues can be avoided or minimized. Others are complete deal breakers. Knowing development impediments can get you a better deal on the purchase and keep you from being mired in a disastrous project. Of course we look at all of this too, and often stop borrowers from making a big mistake, but please be nice to us and do your own homework. Here are some helpful links for Austin developers:
Looking to pull down or refinance development land? Get your project funded with us!