Additional Factors to Consider Purchasing Raw Land:
Loan-to-Value (LTV): The max LTV for many raw land loans with no development plans will hover around 50%. This is due to a few factors, namely, marketability and risk of default.
Marketability
Land as an asset class is valuable, there is a fixed supply, and unfixed demand. However, while the potential for a given piece of land may be endless until it is actually developed the property will lack marketability to sell. Many parcels of land will take 2-12 months to sell. The time to sell depends on the land and the area it is in. This is risky for a lender if they need to engage in power-of-sale as they will not be able to recuperate the principal quickly.
Additional Factors
Risk of Default
Given that most raw land will not be able to generate rental income itself, the servicing of this loan’s payments will fall on the borrower guaranteeing the loan, and not the property generating income.
Land value
An appraisal report will be required to determine the market value of the land being purchased or refinanced. Alternatively, if the raw land you are purchasing has a development plan in place, i.e. permits, a construction contract, site plans etc. The LTV of the land mortgage can hover from 65-80%.
Interest Rate
Many factors will determine the interest rate on a raw land mortgage. If we are able to secure a loan from a traditional lender, your rate would likely be around prime+2. Private lenders that offer more flexible financing options, i.e. higher LTV, and more lenient debt-service requirements can hover around 10-13%.
Available Lenders
Given the risk of lending on raw land, many traditional lenders will not extend loans on these property types at all. Local credit unions are usually the best bet for near-prime rates and terms; however, they often require some kind of plan for the property, i.e. build permits, a construction plan, etc.
For more flexible lending, there is a market for private land mortgages
These will often be capped at 50% LTV and carry interest rates of around 10-13%. Furthermore, this is dependent on the land and borrower. Expect around 3-4% in lender and brokerage fees as well.
A conversation with a trained mortgage professional can help you determine if purchasing a raw parcel of land is a good investment. Book a meeting here to discuss your options.
