Just yesterday, I received the following question from a "home site" buyer in Georgia who needed some advice on creative financing:
I am in a situation right now where I’d like to buy a land lot in Georgia to build on within the next year. The lot we want is $45000 and all the lending institutes I’ve spoken with want 25-45% down no matter what our credit is. By the way, our credit is good. We have plenty of money to make the monthly payments, but we don’t have the money necessary for the down payment. Also, we will be getting a construction loan in the next 6-9 months that will then pay off this land loan and add it into the new mortgage to include the house. This lot has been on the market for a long time and is a bank owned foreclosure. We were hoping to get a loan with 0-3% down and the seller pays all closing costs. Do you have any suggestions? Please email me with your response. Thanks!
So, by the numbers, I think the important points of the question are:
- Reader has good credit
- Reader has good income (can make monthly payments)
- Reader has limited cash (cannot make large down payment)
- Lot is owned by bank (bank foreclosed upon the lot)
- Reader wants to start building in 6 to 9 months
Lot Buyers Need Full Home Loan Solution
So, in a nutshell, our reader wants to know how to pull this off. I suspect it would not be hard to work out a purchase and finance plan with the bank (and we'll address that later), but first I would like to address the reader's situation as if this reader were a customer at my Tallahassee real estate office.
I would have a list of questions that I need to know from the reader, but to keep this brief, I'll limit them to the "big one." Would the reader buy the lot if the reader knew that no bank would give them a construction loan in the next 6 to 9 months? This question is important because the construction loan (as described above) would be a huge risk for the bank, and thus hard for the reader to acquire from any lender.
I do not see a bank giving a 100%+ LTV (loan to value) loan on a new home construction project. Our reader would need to have a plan to bring some equity (like 20-30%) of the entire construction and lot costs to the bank for the construction loan. Assuming the total lot and home price will be in the neighborhood of $300,000, then this project will require $60K to $80K from somebody, as the issuing lender will most likely only be willing to finance up to $240K.
Even if the bank will consider other plans, I don't see how the reader can pull this off without at least $30K (10% down). Banks are in trouble now for doing "no money down" mortgages in the past, and they are not in a hurry to do more of these.
Ultimately, I would try to convince this reader to cool her jets unless she absolutely had to have "that lot." I suspect there are many more, and more foreclosures coming (though her market area could have different conditions than we have here in the Tallahassee real estate market).
If she knew she couldn't afford to build until she raised $60K, would that change her immediate plans? If there were 100 other lots similar to this one available, I would urge her to do 2 things: Start putting a monthly payment into a savings account (as if she was buying the lot), and wait until she could qualify for a construction loan before acquiring a home site.
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Creative Financing Options For Buying Lots
First of all, I would find a great local real estate broker who could help her navigate through this process. To those of us real estate brokers who have done a lot of creative real estate transactions, this is not too difficult a process. But for somebody doing their first one, they need guidance and a local advocate.
Next, I would find out which bank has the property. If it is a local bank, then there will be plenty of ways to make this happen. If it is a regional or national bank, it will be a bit trickier as they often have non-local, centralized decision making policies that can make working with them slow and cumbersome.
Since most lot loans are local in nature, lets assume our reader will be dealing with a local bank. I would have my real estate broker prepare an offer at a value strong enough to make the bank want to be involved with the reader. The offer would be structured as follows (price is just an example):
- Offer Price: $40,000.
- Down Payment: 20%
- Bank Loan: 80%
- Buyer pays 3% in closing Costs.
Additionally, I would make it contingent upon the bank providing a 2nd mortgage on the lot for $8K (thus covering the down payment). This means the reader shows up with 3% in closing costs ($1,200) and then starts making payments on the lot.
If the bank is wise, it would be willing to just do 100% financing and let the buyer take it off their books. There is no "right" way for the reader to construct the creative offer, it will just have to be worked out within the allowable structure for the bank.
It might even require the reader to get the 80% loans from a new bank, with the existing bank (current owner) doing a new 2nd mortgage. This is why having a local expert on the ground will help the reader greatly.
Buying Foreclosures Means Proceed With Caution
My final advice to our reader is to make sure a thorough market analysis has been covered. Sometimes we get so emotionally attached to an opportunity because we think its a great deal (foreclosures often are...and sometimes not) that we lose sight of wanting to make sure we are getting a good value compared with other opportunities in the real estate market.
Get your real estate expert to confirm that this is a great opportunity. Make sure all of the foreclosures in the area are studied too, as they might be hitting the market soon. If this lot is really a good opportunity, then proceed wisely. If not, either start saving the money to cover the construction loan down payment or acquire the best home site opportunity that you can find.
Joe Manausa, MBA is a 26 year veteran of real estate brokerage in Tallahassee, Florida and has owned and managed his own company since 1992. He is a daily blogger with content that focuses on real estate analytics and providing his clients with a tactical advantage in today's challenging market.