Why Are Land Loans Difficult to Come By?
Getting a bank to loan money for the purchase of land can sure prove difficult for buyers. This of course lowers the number of potential land buyers out there, but why do banks treat land buyers differently from your typical person purchasing a single-family home?! The number one reason is that banks are afraid of the future. When loaning out money, banks wait years before they get their principal back. A lot of things can go wrong when talking about years or decades into the future, and it sure is a lot easier for someone to walk away from a piece of vacant land they owe money on than their home. Banks are not in the business of selling property- especially land- and they do not want to get stuck with rural vacant land. However, it is not impossible to get bank financing for land, but it will come with a larger down payment and a higher interest rate.
As someone who may be trying to sell their land, it is important to understand the position your potential buyers are in. Many of your buyers will rely on financing to buy your land, but they may not be able to get the financing without certain pieces of information. This may include:
- Survey of Property
- Zoning Regulations
- Existing Easements
- Title Company Search
- Appraisal
- Due Diligence: Environmental, Floodplain, Perc Test, Road Access
Whether on your own or with the help of a professional, it is important, when possible, to help your buyers gather this information. Buyers should also work with an experienced attorney to aid in the process if possible. The buyer may need to present all of this to their bank. Keep in mind this can be a fairly timely process. Other info that the bank will probably request from the buyer are credit scores and blueprints along with the estimated cost of what they intend to build upon purchasing the land.
Tricks to Getting Your Land Sold
If your potential buyer still cannot obtain the financing needed to buy your land, there are some other tricks you or your agent/attorney can educate them on. Local banks can be a huge asset in obtaining a land loan. This is because they understand the local real estate market. They are familiar with the values of properties in the area and all the good and bad to be expected. Credit Unions can sometimes offer even more competitive rates on land deals.
Owner or seller financing is another option if you, as the seller, are open to acting as the bank. This form of financing allows the buyer to put down a significantly smaller down payment, and also the closing process is much cheaper and quicker for the buyer since there is no bank involved. As the seller, you may have to wait years to recoup your investment this way. Therefore, it is not the best strategy if you need to sell your land for fast cash.
The Type of Land You Own Matters
The condition of the land you are looking to sell also means a lot to the banks. Will obtaining a land loan on raw unimproved land be more challenging than a plot of land, which already has added improvements on it, such as road access, sewers, electric, gas, water, and other basic utilities? It absolutely will. This is simply because banks view raw unimproved land as a riskier investment. The costs for improvements can be substantial and unpredictable. The banks are concerned about the worst-case scenario- getting stuck with the land if the borrower walks away. Banks understand the challenges of trying to sell raw land, all while paying the property taxes.
Wrap-Up
The struggle of obtaining a land loan has wrecked many deals. In most cases, the buyer WANTS to buy the land, but the seller NEEDS to sell the land. This is why the struggle for land loans is actually more concerning for you, as the seller, than it is for the buyer. Although you are not in complete control of the outcome, you may still be able to aid the potential buyer in obtaining a loan and getting your land SOLD! By viewing the situation in the perspectives of both the bank and also the interested buyer, the process of selling your land may be less frustrating.
Thanks for reading. As always, feel free to ask any questions through our “Contact Us” tab on the top of this page!