If you’re seeking a mortgage secured by vacant land, a private or hard money lender may be a good alternative to a bank. However, land loans are not a common offering, even among private lenders. A very small percentage of private lenders in the United States will consider land as collateral for a loan because it’s very risky.
Private mortgage lenders always have to consider the worst-case scenario when evaluating a potential loan funding. That worst-case scenario is having to foreclose and own the subject property. No lender wants to end up owning a piece of land. Here are a few reasons:
- Difficult to Sell
Land is the least desirable type of real estate. Even if the asking price is 50% of the value, there are not many buyers out there for unimproved real estate.
- Lack of Income
Most land does not produce any income. If a lender is not able to quickly sell the property, they will have to hold it for a long term while having to pay property taxes and other expenses.
- Lack of Development Experience
Even if the land has entitlements and can be developed, a lender may not have the expertise or experience to continue the project.
In order to justify the risk of lending on vacant land, private lenders will be much more conservative than they are with loans for improved properties.
Guidelines for Private Land Loans
Private lending is only for investment purposes. If you’re buying land on which you’re going to build your dream home, that’s a consumer purpose loan, and not something a private lender will consider.
If you’re cashing out equity on a piece of land, the funds must be used for a business or investment purpose.
The maximum loan-to-value for vacant land is 50%. That’s the same whether it’s a refinance or a purchase loan.
If you’re buying land, you’ll need to have a cash down payment of at least 50% percent of the purchase price. Or some lenders will consider using equity in another investment property instead of cash. This is called cross collateralization.
If you’re refinancing or cashing out equity, the maximum is 50% percent of the as-is value. And no lender will consider a 2nd mortgage on vacant land, so it has to be a 1st position mortgage.
Not all lenders will go up to 50% LTV. Some lenders max out at 25%, and some go up to 40%. We have seen a few lenders going up to 65% LTV for land, but this is only for very experienced developers with commercial real estate development projects in prime urban areas, with loan amounts over $2,000,000.
There are a few factors which could determine the lender’s max leverage on each deal, including the location, the type of land, the land’s status, and it’s potential use.
Land Types / Classifications
It’s good to know the various loan classifications, because this will be discussed when you request a land loan. Most private lenders will only consider land if it’s in an urban or suburban area.
Some lenders only consider infill land which means the lots surrounding the subject property are developed with buildings on them. If your land is surrounded by other vacant lots, it will be less attractive for a lender.
If your land is filled with tall trees, in a forest-like setting, a very small number of lenders will consider it, but the LTV has to be extremely low, say under twenty five percent.
If the subject property is agricultural (ag) land, that’s more attractive to a lender than timber land because it likely generates income. However, ag land also has a limited pool of lenders that will consider it. If you do find a lender for ag land, the first thing they will ask is what type of crop is grown on the land.
This term is primarily used in commercial real estate deals where there is an existing structure on the property, but the plan is to tear it down once the new development project is approved. Some CRE private lenders provide bridge loans for these properties with a plan to be paid off by a construction loan.
In addition to the land classification, the lender will ask for the status of the land or the development stage. Is it entitled? Has the city or county approved it for a specific use, such as a single family home, multifamily, retail, etc.?
In simple terms, a property is entitled when the city or county has approved it for a certain use – single family home, multifamily, industrial, retail, etc. Entitled land is more attractive to a lender than untitled land because it’s easier to sell, just in case they end up owning it as a result of foreclosure.
If the property doesn’t have any utilities connected to it, it’s referred to as “raw land”. If it does have water, sewer and electricity connected, then it’s past the stage of being raw land and may just be called “vacant land” whether it’s entitled or not.
A piece of land being shovel-ready means it has building approvals and the next step is construction. Some investors will get their land to the shovel-ready stage and sell to a developer. If this is the case, a short-term bridge loan can be a good financing solution until the property is sold.
Once you’ve determined that your land loan qualifies based on the loan purpose, LTV, location and stage, the lender will want to know what your exit strategy is.
- How will the loan be paid back?
- Are you planning to develop the property and have the land loan paid off by a construction loan?
- Are you planning to sell the land?
- Will another one of your properties be sold to pay off the land loan.
If you don’t have a solid exit strategy, it will be very difficult to get a loan from a private lender, even if the subject property is not vacant land.
Interest Rates for Land Loans
The pricing for private money land loans varies by region, location and many other factors, but it typically ranges from 10% to 15% interest, plus 2 to 4 points (origination fee).
We have seen some land loans go down to 8% interest for entitled land in prime urban locations with an extremely low loan-to-value.
Most lenders will require you to make monthly interest payments. Since vacant land doesn’t generate any income, you’ll have to show the lender that you have the ability to make the payments.
To avoid having to make monthly interest payments during the loan term, you could ask the lender to build an interest reserve into the loan, but not all lenders will consider this.
How to Find Lenders for Vacant Land
You can find direct private hard money lenders right here on our website, and we have a filter you can use to easily find out which lenders consider vacant land.
- Start at the Find a Lender page
- Select one of these 4 Loan Types: Private Money, Hard Money, Residential Bridge or Commercial Bridge
(The first 3 will have similar results. Commercial Bridge tends to show lenders with a minimum loan amount of $1M.)
- Type in a state or major metro area, and click SEARCH
- Browse the list or click REFINE RESULTS in the Filters section
- From the Property Type field, select Residential Land or Commercial Land
- View each lender’s profile to learn about their guidelines, background and more
- Click the green CONTACT button and reach out to the lender directly