Last Updated on August 5, 2021
What Are Hard Money Land Loans? Private Money Land Loans Explained:
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 www.zillow.com or www.landwatch.com, you may be hard-pressed to find a lender willing to pony up the cash so you can purchase said land.
In this guide, we’ll discuss:
- Why Hard Money Lenders for Land are so Hard to Find
- Purpose of the Loan
- Loan Leverage
- Land Types and Location
- Land Status
- Further Questions to Consider Before Seeking a Land Loan
- Land Loans and Interest
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.
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.
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. For example, if you’re trying to buy land to keep for yourself and build a house on, private money lenders won’t want to get involved (Look for a consumer purpose loan instead! Check out our guide on types of loans for more information). 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.
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.
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. The typical process for a cash-out refinance can be found here.
What other factors can affect leverage?
- Land types
- Potential use
These factors are all important aspects of 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 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 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.
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 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 refers to what use the land has been approved for and what stage of development the land is at.
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 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.
Land is shovel-ready if it has been 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. 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 www.hardmoneylenders.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 10% to 15%, 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.
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.
Adam Smith has spent the last 5 years in the Private Money Lending world helping real estate investors secure financing for their non-owner occupied real estate investments. When he’s not thinking about real estate, Adam is an avid Jazz music fan and fisherman.