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More About Real Estate
by Dan Auito
Raw land as opposed to improved property is much more difficult
to finance through traditional lenders. The main reasons are
that it generates very little income, development costs can be
expensive, there are no buildings or improvements that can be
used as collateral, and it is often considered speculative.
For those reasons mentioned we find that sellers are often our
first choice regarding financing. It is typical for a seller of
raw land to accept 10 percent down and the rest to be paid over
time at a specified (below market) interest rate. This would be
an example of an installment land contract. Other forms are
contract for deed, mortgage and note and purchase money
mortgages. In these cases, a real estate attorney usually
drafts these contracts and a bank will act as an escrow agent to
facilitate verifiable records of payments received. The seller
often retains the deed until the property is paid for in full.
If you want to investigate bank financing, then you may start
out by offering 30 percent down with a seven-year mortgage, with
the bank getting an extra percentage point over and above the
current interest rates for standard loans. This may not be
accepted, but it does give you a starting point to see just
what they may be willing to do.
If you plan on building on your land, then having a development
plan with an appraised set of blue prints for the project will
help the lender in justifying your loan. If you can use equity
from other property, then paying substantial down payments may
also be an option.
Final words of caution here are to know values and don’t
overpay. Always offer less when possible and research recent
sales of comparable properties. The larger a parcel is, the
cheaper it tends to get per acre. Ask an agent what an acre of
land tends to go for in the area that you are considering; try
to buy more than one acre.
When buying residential lots, builders try to keep raw land
costs down to 10 percent of the overall value of the project.
If streets and utilities are already in place, then they will
use 25 percent as their guideline. If you can combine or
assemble parcels or achieve zoning changes with property,
you have a good chance of immediately increasing its value.
Always physically inspect the property and do your research
before obligating yourself to buy it. And try using contracts
with contingencies put in to protect yourself. In essence,
these are really options that let you control the deal while
you investigate and research the land’s potential to satisfy
your objectives. Happy Hunting and buy the high grounds!
Dan has been a real estate investor for the past fifteen years
& has bought, sold, and rented seventeen properties to date,
totaling more than $1.3 million - all on a blue-collar salary
before the age of forty
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