How to finance land?

Investors are able to finance land through a few different types of loan structures. However, the loan that you go with depends on what you are looking to do with the land and the land’s present condition.

Land loans

Land loans are used to acquire undeveloped land for individuals looking to invest and/or develop the land.

Three options:

  • Unimproved land loan
  • Improved land loan
  • Raw land loan

Unimproved Land Loans

This loan fits properties that haven’t had a building developed on the property but already have the necessary utilities and amenities but don’t typically have direct access to roads. These loans require a robust credit score and report, experience, and a large down payment. Lenders require a timeline for the project, a structured plan and budget, and thorough due diligence. These properties are typically cheaper in comparison to other forms of land as they require more development. These loans typically require a higher-than-average interest rate.

Improved Land Loans

This loan fits investors that are looking for properties that have already had improvements made such as direct access to roads, electricity, utilities, amenities, and water. Lenders for improved land loans charge a smaller interest rate than what they would charge for an unimproved land loan as these properties have already been improved. Improved properties are seen as less risky to lenders. However, lenders will still require a large down payment, and a robust credit score and report.

Raw Land Loans

This loan fits investors who are looking to finance a property without any improvements made to the property. This means that there is no direct access to roads, utilities, amenities, water, electricity, etc. This investor or developer will be developing the property from scratch. These properties are significantly more difficult to secure financing for as they are considered high risk. These lenders will be thorough with their due diligence and will require a detailed plan, timeline and budget. In order to increase your probabilities of qualifying for these loans, the borrower should prepare by ensuring he has a track record of experience with these types of projects. These properties are significantly cheaper as they require the most investment, improvements, development and risk of all land investments.

Land loan difficulties

Investors, developers, appraisers, and lenders all struggle to assign an accurate value to raw land. This makes it difficult for lenders to determine the loan amount and difficult for investors and developers to decide if the land’s purchase price is justifiable.

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