Buying land - Posted by John

Real Estate Investing Real Estate Financing
1

Posted by Ed Garcia on February 25, 2001 at 13:19:54:

John,

In most cases when purchasing land, the seller carries back anyway. I would as I said before, ask the sell to subordinate their position to a construction loan. When you executed your construction loan you increased the value of the property with the improvements, which will benefit the seller. The seller now goes from 1st position into 2nd, however the property has considerably more value.

John, you don’t tell us what is owed on the $120,000 parcel. What I would like to recommend is to purchase the property with 10% down. Tell the seller your intentions and that you’re going to be spending your money on the improvement to increase the value of the subject property. You might even show them how your going to build a house on the site, what you expect it to cost, and what your anticipated value is.

When you finish, hopefully you have convinced them that your project is stable and a secure investment. There will be more VALUE with the improvements.

Ed Garcia

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Buying land - Posted by John

Posted by John on February 24, 2001 at 13:27:05:

Ed,

We are looking to buy our second home.(Buy land and build). We have over 100K equity in the house that was bought 10 years ago. The only loan is a 90K mortgage on a 250K home. We have excellent credit. Around 200K cash in the bank and combined incomes around 200k.

We are looking to buy a view lot which start around 200K. What is the best way to do this? Should we ask for owner financing on the land, a good % down with a 8% loan and a ballon payment in 3 years. Then obtain a construction loan in the near future? I would like to avoid obtaining loans from the bank twice. Any thoughts?

Thanks
John

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Re: Buying land - Posted by John A

Posted by John A on February 25, 2001 at 12:00:56:

Ed,

John is in better financial shape than me. I am also looking at buying some land to hold and build on in 1-2 years.

I have around 30k in the bank and 20k in equity in my current house. The land is around 120k.

Can you offer any advise as the best way to try to structure this?

Thanks.

John A.

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Re: Buying land - Posted by Ed Garcia

Posted by Ed Garcia on February 25, 2001 at 24:27:41:

John,

You seem to be in good shape.

Let me respond to your questions.

YOU ASK…

We are looking to buy a view lot which start around 200K. What is the best way to do this?

MY ANSWER…

A lot depends on what you want to do. I would just pay half down. The reason is with half down, I can get a land draw to do my construction loan. If you wanted to, you could ask the seller to carry and then subordinate their position to a construction loan. In your case it’s a matter of preference.

YOU ASK…

Should we ask for owner financing on the land, a good % down with a 8% loan and a ballon payment in 3 years. Then obtain a construction loan in the near future? I would like to avoid obtaining loans from the bank twice. Any thoughts?

MY ANSWER…

Again John, for you it’s a matter of preference. For you a lot would depend on how much you are going to spend on the house you build, and what do you feel you want for a monthly payment. If I were going to build right away or not, could also influence my decision.

When you say you would like to avoid obtaining loans from the bank twice, some of the larger banks will give you a construction loan, which will rollover into a take out loan.

John, in closing, I will give you some tips on dealing with a construction loan.

I have done construction loans.
What you are attempting to do is not as complicated as it seems.You will need the following.

(1) LAND: Either free and clear, or 50% paid down for a land draw.
(Note) If you wanted, you could buy a lot with NO money down, have the seller subordinate their loan to a construction loan. I know that you already have your lot Chuck; I just wanted to mention that for the benefit of others who might be reading my post.

(2) PLANS: These plans have to be approved by the city your building in.

(3) PERMITS: As you know, sometimes the City can require you to build either conforming structures or off sites, that the City wants. The will also have building standard for your area.

(4) COST: The Bank will require a COST BREAKDOWN of all of your expenses. They will want to see a cash flow chart to pay you on a VOUCHER system. As each phase is down and signed off by city inspectors, the contractor will be paid for that phase. (Note) interesting enough, the bank will take your cost break down and analyze it with their computers. If the cost is more, that will concern them, and they will cut it back. If it’s less, that will also concern them because they will think you short changed yourself in building this project. So In essence, the bank can be instrumental in verifying your cost. However, don’t ever count on anyone but yourself. Do your own, do diligence. (Note) the bank will require at least 10% liquidity on you the borrower.

(5) CONTRACTOR: If you are a Contractor, the bank will want to see your resume and you contractors license. If you are not a Contractor, then the bank will want to have a resume on your contractor as well as a copy of his license, and financial statement.

There are other considerations, but this is enough to get you thinking in the right direction. If everything is done right, you should be in the deal about 70% to 75% LTV on a NEW property. In fact I have seen better depending on area, and size of the deal.

John, I hope this post has been of some help, and I want to wish you much success in your new venture.

Ed Garcia