Raw land and lot loans

Jim Porter

Solano Real Estate Scene: Jim Porter

Article By: Jim Porter – May 24, 2024

I often use Mark Twain’s famous quote, “Buy land, they aren’t making it anymore.”

A veteran can buy a house for $3 million with nothing down and a NON-VA first time homebuyer can buy a house up to a sales price of $780,000 with nothing down, but when it comes to buying raw land, a substantial down payment is required.

This little bit of info I am sharing is not about income-producing agricultural farmland, commercial or large swaths of land zoned for new residential development. Here are some facts and ideas about lots ranging from the 6,000 square feet to the 40-acre-parcel out in the country where a buyer can buy the raw land and the building authority will allow the buyer to build a new home and potentially two additional ADUs on the property.

Seller financing can be an option, but most sellers will require a large down payment and buyers better be careful because the lender (seller) will not require an appraisal and this could be bad if, down the road when you are trying to get a construction loan, you find out you paid substantially above the value of the raw land, or worse, you find out a home cannot be built on the land.

Some mortgage companies, banks, credit unions and private money lenders do land loans. Most of us offer loans on property like this for buyers that plan to build within 1 to 5 years with 25 to 50% down payments required.

The mortgage company’s goal is to finance the lot and then do the construction loan a few months later and ultimately the 30-year permanent financing after the home is completed.

In some cases, the lender can help the buyer finance the lot and the construction loan simultaneously, but this is rare because most of the time the buyer is not ready to break ground with a general contractor signed contract with approved architectural plans.

If a seller is willing to give a buyer the time to get the entire land and construction loan closed, then this is best for the buyer. Most lenders have a limit of 10 to 20 acres, but some will consider a lot-loan up to 40 acres. Most buyers that can achieve this dream pay cash for the lot or they borrow against their equity in other real estate owned because raw land loans are more expensive than a REFI or a HELOC on an existing home.

Like seller financing, with no appraisal required on a cash deal, it’s a good idea to have a professional real estate broker or licensed appraiser confirm an estimated value and a trip to the building authority is a darn good idea to make sure you can build the dream house.

Utilities, a water source, sewer-septic and permit costs are obviously an important part of the decision-making process and nowadays, a buyer better get a fire insurance quote, too.

The cost of building is more than most think, manufactured housing is becoming more popular over the years, but even that isn’t cheap. One thing for sure for those of you that can afford to build a custom home, I have never heard any of my clients that have done this over the last 35 years regret achieving the dream.

Jim Porter, NMLS No. 276412, is the branch manager of Solano Mortgage, NMLS No. 1515497, a division of American Pacific Mortgage Corporation, NMLS No. 1850, licensed in California by the Department of Financial Protection and Innovation under the CRMLA / Equal Housing Opportunity. Jim can be reached at 707-449-4777.

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