What are Hard Money Land Loans? Private Money Land Loans Explained

If you’re looking to buy land, you’ll need to understand financing. Hard money land loans are a way to get funding from private land lenders to purchase vacant land. Hard money lenders for land are an alternative to traditional sources of land loans, which can be difficult to find. If you find a great piece of land on a site like Zillow or LandWatch, you may be hard-pressed to find a lender willing to pay the cash so you can purchase said land. If you’re wondering, “What are hard money land loans?” Keep on reading our Private Money Lands Loans Explained Guide.

In this guide, you’ll discover: 

• Hard Money Land Loans Explained
• Advantages of Hard Money Land Loans
• Potential Drawbacks of Hard Money Land Loans
• Why Hard Money Lenders for Land are so Hard to Find 
• Things to Keep in Mind When Seeking a Private Money Land Loan
• Further Questions to Consider Before Seeking a Land Loan 
• Land Loans and Interest
• Expert Tips for Navigating Hard Money Land Loans Successfully

Hard Money Land Loans Explained

Hard money land loans stand as an alternative financing route, diverging from the well-trodden path of traditional banking. Tailored for real estate investments, these loans offer a lifeline to investors and developers in scenarios where conventional financing may fall short. 

Let’s delve deeper into what hard money land loans entail, their defining characteristics, and why they’re an appealing choice for certain real estate transactions.

Definition and Nature

At their core, hard money loans are short-term financial instruments extended by private investors or specialized lending companies. This mode of financing eschews the conventional metrics of loan approval, such as credit scores and debt-to-income ratios, that dominate traditional bank lending. 

Instead, hard money loans pivot on the value of the real estate asset being purchased. When it comes to land acquisitions, this asset-centric approach provides a crucial advantage.

Asset-Centric Financing

In the realm of hard money land loans, the focal point is the land itself. Lenders assess the value and potential of the property to determine loan eligibility. This method contrasts sharply with traditional loans, where the borrower’s financial history plays a pivotal role in the lending decision.

Bridging the Gap with Speed

Speed is a cornerstone of hard money lending. In an industry where opportunities can emerge and evaporate swiftly, the ability to close deals quickly is invaluable. Hard money lenders streamline the approval and funding process, often managing to complete transactions within a matter of days. 

This rapid turnaround time enables investors to seize land acquisition opportunities that require immediate action, a stark contrast to the weeks or even months that traditional financing routes may entail.

Flexibility as a Standard

One of the most compelling features of hard money land loans is their inherent flexibility. Given the diverse nature of real estate projects, especially those involving land, a one-size-fits-all approach to lending is impractical. 

Hard money lenders recognize this reality and often exhibit a willingness to negotiate loan terms. This flexibility extends to loan durations, interest rates, and repayment schedules, allowing for tailor-made financing solutions that align with the specific needs and timelines of each project.

Advantages of Hard Money Land Loans

Hard money land loans present a unique set of benefits tailored to the dynamic and often unpredictable landscape of real estate investment, especially when it comes to acquiring land. Below, we explore these advantages in greater detail, shedding light on why these financial instruments are favored by many in the industry.

Quick Access to Funds: The Speed Advantage

In the fast-paced world of real estate, timing can significantly impact the success of an investment. Hard money loans excel in providing rapid financial backing, a critical advantage that traditional financing methods often cannot match. 

This speed in processing and approval allows investors to act swiftly, seizing opportunities to purchase land before competitors. 

Whether it’s a prime piece of undeveloped land coming onto the market or a short-notice auction with lucrative potential, the ability of hard money loans to facilitate quick closings can be the deciding factor in securing valuable real estate deals.

Flexible Lending Criteria: Tailored Financing Solutions

Hard money lenders’ approach to evaluating loan applications brings an unparalleled level of flexibility to real estate financing. By assessing each deal individually, these lenders can offer personalized terms that align with the specific needs and circumstances of the borrower and the project. 

This flexibility is particularly advantageous for land purchases that present unique challenges or opportunities not easily quantified by traditional lending standards. 

For instance, a piece of land with potential for rezoning or development into a high-demand area may not qualify for bank loans due to current use or income generation, but a hard money lender might see the vision and the value, providing terms that facilitate the purchase and eventual development.

Opportunity for Development and Speculation: Unlocking Potential

Hard money land loans open doors for investors interested in development or speculative ventures, areas where traditional financing often falls short. 

Many banks and conventional lenders shy away from funding speculative land purchases due to the perceived risk and lack of immediate income production. However, hard money lenders, with their focus on the asset’s value and the investor’s strategy, are more willing to back such projects. 

This access to capital is invaluable for investors aiming to develop raw land into residential communities, commercial complexes, or industrial parks, as well as those betting on the appreciation of land values in emerging markets. 

By providing the necessary funds to bridge the gap between acquisition and development or resale, hard money loans enable investors to capitalize on the full potential of their real estate ventures.

Potential Drawbacks of Hard Money Land Loans

While hard money land loans offer unique advantages, potential borrowers should also be aware of their drawbacks to make well-informed decisions.

Higher Costs: Navigating the Financial Implications

The primary drawback of hard money loans lies in their cost. These loans typically feature higher interest rates than those offered by traditional banks, sometimes significantly so. The reason for this disparity is the higher risk that hard money lenders take on by focusing on the asset’s value over the borrower’s creditworthiness. 

Additionally, borrowers may encounter various fees, including origination fees, underwriting fees, and early repayment penalties, which can add to the overall cost of the loan. These increased expenses can impact the profitability of a land development or investment project, necessitating careful financial planning and analysis to ensure the project’s viability.

Shorter Repayment Terms: Planning for the Future

Another crucial consideration is the shorter duration of hard money loans. With terms typically ranging from six months to a few years, borrowers must have a solid exit strategy in place. 

Whether planning to sell the land post-development, refinance through traditional means once the project reaches a certain stage, or another strategy, it’s vital to have a clear plan for repaying the loan within the stipulated period. 

The pressure of a shorter repayment timeline necessitates meticulous project management and market timing to avoid financial strain or default.

Why Are Hard Money Lenders for Land So Hard to Find?

Like all other types of loans, risk is the key component considered by lenders before handing out a loan. As a rule of thumb, the less risky a loan is perceived to be, the lower the interest rate offered. 

Land is considered extremely risky by lenders, often so much that they will simply not offer a loan for undeveloped land. Further reading on the relationship between risk and interest rates can be found here.

Very few hard money lenders are willing to accept vacant land as collateral due to the high level of risk that comes with doing so. Above all, private money lenders want to avoid being left as the owner of a piece of vacant land, which could happen if they must foreclose.

Risk Factors

Development Costs

Vacant land is the hardest type of real estate to sell, as most buyers are unwilling to buy vacant land due to the high amount of work needed to improve it. There are very few people open to buying land, and so hard money lenders don’t want to get stuck with land that they won’t be able to sell.

Low-Income Potential

Additionally, it can be hard to make an income off land. Typically, the only way to produce any kind of income from land is for the lender to sell off the property immediately, which is difficult thanks to the reasons we’ve already discussed. If a private money lender can’t sell the property off immediately, they can get stuck paying expenses such as property taxes and will lose money in the long run. As you’ll see in our blog, there are many other alternatives that hard money lenders would consider to be sound investments with greater income potential.

Post-Foreclosure Hassles

Finally, vacant land usually needs to be developed before it can be sold. Hard money lenders specialize in loans, not land development. If a lender ends up being the sole owner of a property, they likely won’t have the necessary experience or knowledge to continue developing the land on their own, and so would need to invest even more money on improving the land so it can sell. Foreclosures in themselves are a multi-step hassle that lenders want to avoid, and the added stress of developing the land would be too much for most lenders to want to handle.

When it comes to hard money land loans, private lenders must think about the risk involved, and vacant land comes with a high level of risk. 

As you can see, vacant land is hard to sell, can turn into a money pit, and may be difficult for a lender to develop. Clearly, there are many reasons for private money lenders to be reluctant about accepting land as collateral, as the last thing they want is to end up owning the property after foreclosure. Hard money lenders for land are going to be more conservative with loans involving vacant land than loans based on improved properties as a result.

Things to Keep in Mind When Seeking a Private Money Land Loan

Purpose of the Loan

Hard money lenders for land are only willing to finance a loan if you’re looking to buy land for certain reasons. Private money land loans only come into play if you’re purchasing land as an investment. If you’re seeking a hard money land loan and want to cash out equity for vacant land, you must be using the funds for some sort of investment or business reason. 

Loan Leverage 

Whether you’re looking for a purchase loan or a refinance loan, the maximum LTV (loan-to-value) that you can find for vacant land will be 50%. There are some rare cases where private money lenders have gone up to 65% LTV for land, but these are only in exceptional situations. 

This is only possible for loan amounts of over $2,000,000 needed for commercial real estate projects in major urban areas, and even then only if you are an experienced and successful developer. However, not all lenders are willing to offer 50% LTV. Some hard money lenders for land will max out at 40%, and others are only willing to go up to 25%. 

What leverage do I need to buy land? 

To buy land, you need to have a down payment in cash ready to go, typically of 50% or more of the land’s purchase price. It’s a common misconception that you can get 100% financing for a hard money loan, but in most cases that won’t be possible – here’s why.

If you have another investment property, you can consider cross-collateralization. This is a process that some private money lenders will consider in which you use the equity from another investment property as collateral instead of using cash. If you want to learn more about real estate leverage, you can read all about that here.

How do I refinance my mortgage or cash out equity for leverage? 

You can use equity or refinancing for a maximum of 50% of the value as-is. However, make sure you are using a 1st position mortgage, as hard money lenders for land won’t accept a 2nd mortgage on vacant land. For detailed information on the typical steps involved in a cash-out refinance, click here.

What other factors can affect leverage? 

• Land types
• Location
• Status
• Potential use 

These factors are all important aspects of getting leverage and obtaining a land loan to keep in mind, as you will likely have to discuss some or all of these factors with a private money lender. It’s always helpful to be prepared with this information before attempting to obtain a hard money loan.

Land Types and Location 

There are four main types of land status. 

• Infill land 
• Timber Land
• Agricultural land
• Covered land 

Hard money lenders for land typically will only consider a loan for land in urban or suburban regions. Infill land is usually the most widely accepted by lenders, while timber land and agricultural land are less attractive to hard money lenders for land. Covered land mainly comes into play when commercial real estate deals get involved. 

Infill Land 

Infill land means that all the surrounding lots have already been developed and have some sort of buildings on them. This suggests that the area is good for development and could be a better investment for a private money lender. Hard money lenders typically aren’t interested in investing in vacant lots that are surrounded by other vacant lots. Some lenders will only invest in infill land. 

Timber Land

Timber land is full of trees and resembles a forest, hence the name. Very few lenders are willing to consider timber land, though some will if the LTV is low enough. The maximum possible LTV is typically 25% or lower. 

Agricultural Land

Sometimes referred to as “ag land”, agricultural land can be used for farming of crops and livestock. While agricultural land is preferable to timber land, due to having higher income potential, only select hard money lenders will consider the investment. If you’re looking for a private money land loan for agricultural land, be prepared to explain your plans for the land, such as what type of crop will be grown. 

Covered Land 

Covered land refers to land whose existing structures and development on the property are intended to be torn down and destroyed for new development and projects. Essentially, this land has been developed, but the current structures will not be staying there once purchased. Some private lenders involved in commercial real estate will consider bridge loans and construction loans for covered land.  

Land Status 

Land status refers to what use the land has been approved for and what stage of development the land is at. 

Entitled Land 

Entitled land has been approved by the county or city for a specific use, whether that be for a certain type of home, industrial usage, retail, or something else. Lenders often prefer entitled land because if they somehow end up owning it, it’ll be easier to sell thanks to already having a designated purpose. 

Raw Land

Raw land is a property that doesn’t have any utilities, such as water, sewer, and electricity, set up. If these utilities have been connected, it is no longer raw land, and is usually referred to as vacant land regardless of whether it’s been entitled. 

Shovel-Ready

Land is shovel-ready if approved for building and is ready for construction to begin. Some investors will buy vacant land and make it shovel-ready before selling it to an actual developer. If you’re interested in this process, a short-term bridge loan that will last until you sell the property is a good option. 

Further Questions to Consider Before Seeking a Land Loan

If your private money land loan qualifies based on the factors discussed above, lenders will have further questions about your plans and exit strategy for the property, such as:

• Are you planning to develop the property? 
• Do you intend to sell the land? 
• How are you going to pay back the loan? 
• Will you be selling a different property to pay off the land loan? 

Regardless of the property in question and any other factors, hard money lenders likely won’t offer you a land loan if you don’t have an exit strategy planned out and can answer these questions. Our lenders at Hard Money Lenders IO are more than happy to answer all your questions with a no-obligation consultation.

Land Loans and Interest 

Hard money land loans can have great variation in pricing based on location and region, but in most places interest will range from 9% to 16%, with an additional 2 to 4 points as an origination fee. 

There are some rare cases where private money land loans can go down to a low 8% interest, though this is usually only for entitled land with a very low LTV located in a prime urban area. You can use our hard money loan calculator here to test different interest rates, terms, and more.

You will typically be expected to make monthly payments for interest, regardless of hard money lender. It’s important to demonstrate early on that you are financially able to make these monthly payments, particularly as vacant land doesn’t generate any consistent income. Another option is to ask for an interest reserve to be built into the loan by the lender to avoid monthly interest payments, though not all lenders are willing to do this.

Expert Tips for Navigating Hard Money Land Loans Successfully

Navigating the world of hard money land loans requires insight and strategy. Here are expert tips designed to help borrowers maximize the benefits of these loans while minimizing potential drawbacks.

1. Understand the Full Cost

Before diving into a hard money loan, calculate the total cost, not just the interest rate. Include all fees, such as origination fees, underwriting fees, and any penalties for early repayment. This comprehensive understanding will help you assess the true cost of the loan and its impact on your project’s profitability.

2. Develop a Solid Exit Strategy

Given the shorter repayment terms of hard money loans, having a clear exit strategy is crucial. Whether it’s selling the developed property, refinancing to a loan with better terms, or another avenue, plan how you will repay the loan. Your strategy should include timelines, potential market conditions, and backup plans in case the primary exit strategy becomes unfeasible.

3. Build a Relationship with Your Lender

Hard money lenders can be valuable partners in your investment journey. Take the time to build a relationship with your lender. A lender who understands your business model and investment philosophy may be more willing to work with you on loan terms and provide financing for future projects.

4. Prepare Thorough Documentation

Even though hard money lenders focus more on the asset than on the borrower’s creditworthiness, providing thorough documentation can streamline the approval process. This includes detailed plans for the land, projected financials for the development or investment project, and evidence of previous successful projects. Well-prepared documentation demonstrates professionalism and commitment to the project.

5. Conduct Due Diligence on the Land

Before securing a hard money loan for land purchase, conduct extensive due diligence on the property. Investigate zoning laws, potential environmental issues, and access to utilities. Understanding the land’s potential and limitations will help you make an informed decision and present a compelling case to the lender.

6. Shop Around for the Best Terms

Not all hard money lenders offer the same terms. Shop around to find the best rates and fees, and don’t hesitate to negotiate. Comparing offers from multiple lenders can result in significant savings and more favorable loan terms.

7. Factor in the Loan Costs to Your Project Budget

Incorporate the loan costs into your project budget from the outset. This ensures that the project remains financially viable even after accounting for the higher costs of hard money financing. A comprehensive budget should detail all project expenses, including loan repayments, to avoid any surprises down the line.

8. Stay Proactive About Market Conditions

The real estate market is dynamic, and conditions can change rapidly. Stay informed about market trends, especially those affecting your specific project and the broader region. Being proactive about market conditions can help you adjust your project plan or exit strategy as needed to maximize profitability.

By following these expert tips, borrowers can effectively navigate the complexities of hard money land loans, leveraging them to achieve their real estate investment goals while mitigating risks and costs.

Final Thoughts

Although there are many factors to keep in mind, private money land loans are a great option to consider if you’re looking for a loan to purchase vacant land. Pay attention to the land type, status, location, and potential use, and try to find a hard money lender for land who can accommodate your intended property. Some types of vacant land will be easier to get a hard money land loan for than others, but by paying attention to the information presented in this guide, you should be prepared to find a hard money lender that best suits your land loan needs.