As a Land Broker, I often get the following question: Who do I need to talk with about financing a land purchase?
I always tell every buyer there are really three options, commercial bank, owner finance or a land bank (Farm Credit System or Federal Land Bank, Insurance Companies or Institutional Lenders). It really depends on several factors in determining what option is the best for the buyer. Below are several factors that help buyers in determining what source of lender will best suit their needs.
What are the differences between securing land finance through a commercial bank, owner finance, and land bank?
1. Down Payment – Commercial banks will usually finance with 10-20 percent down on the purchase price, owner finance will sometimes go as low as 5 percent down and the land banks usually require 30-35 percent down of purchase price.
2. Terms – Most commercial banks have terms of up to 5 years with an amortization of up to 30 years, therefore, having a balloon payment at the end of the term. At that time borrower will have to refinance the loan with the current lender or elsewhere. Owner finance is generally for a shorter term of 3-5 years with a longer amortization period. Some owners will finance on longer terms depending on their individual situation. Land Banks offer the best terms with many options up to 30 year fixed loans.
3. Rates – Commercial banks rates will be a current market rate but will be subject to changes at the end of the note and balloon payment. Rates could be higher or lower at that time of refinancing. Owner finance will greatly depend on the current market conditions. Sometimes owner finance will charge a higher rate because they know it is easier to obtain financing through the seller instead of going through an institution. The seller will not have all the requirements of a commercial bank or land bank. However, some sellers are interested in offering reasonable rates to buyers because the rate is higher than current CDs or money markets. Land banks will generally have the best options of rates from variable, adjustable and fixed rates up to the length of the loan. They will generally have a rate that will fit the needs of any borrower.
4. Transaction Size – When obtaining financing, the transaction size will also determine which lending source is best for the buyer. Commercial banks will work with buyers on most any size transaction unless it is a really large deal and they may require participation from another lender to facilitate the transaction. Owner finance is generally smaller deals with the seller financing under $50,000.00 but that is not a requirement. It is really what the seller is comfortable financing for the buyer under their terms and conditions. The land banks will vary in their transaction size. The Farm Credit System (Federal Land Bank) will finance transactions from very small to over multi-million dollar deals. Most of the Insurance Companies or Institutional Lenders focus on transactions larger than one million dollars.
5. Appraisals and Fees – Commercial banks and land banks will require an appraisal of the land to be purchased and will have loan origination fees. Owner finance deals will not require any appraisal or have any origination fees.
Which factors influence which source is better?
If you do not have large down payment funds available, then it is generally best to try and purchase through an owner finance. If you have a large down payment available and want to finance long term at a rate that works in your repayment plan, then the land banks are definitely the best option. Another item that will influence the lending source is credit strength. The land banks and large institutional lenders generally have customers with strong credit strength and good credit history. Conventional banks generally do not have the same stringent credit requirements and owner finance transactions have even less.
What should buyers keep in mind when obtaining land financing?
Don’t get frustrated, it generally is a slow process. You start with a contract, then apply for financing which requires lots of information from the borrower, an appraisal which might take 30+ days, sometimes a survey which can take 30+ days and title work to ensure a clear title. It generally takes all of these items for a land deal to take place. Many buyers are proactive and are pre-approved for a dollar amount to help them narrow the search for properties. Even if the buyer is pre-approved, the process may still be lengthy due to appraisals and other items needed for closing. If you are working with a good land broker, they will definitely help in the process and let you know what you will need and why it is needed.
What are some common financing problems buyers should try to avoid?
Buyers need to know what they can afford. If you find that perfect property, make sure you can afford it before viewing it and submitting an offer. Be aware of the costs of purchasing and financing land. There are fees and services that are required in most land purchases above and beyond the cost of the land. Work with a good lender whether it’s a conventional bank or a land bank that knows land and land transactions. There is nothing worse than dealing with a financial institution that does not understand the land business and your financing goals.