What to Know When Purchasing Land for Redevelopment
Purchasing unapproved land and bringing it through the process of rezoning and approvals can be very profitable… but it is not for the faint of heart. There are many elements an investor/developer should consider when purchasing land for redevelopment.
Here are three key points you should consider when making a decision.
- BOUNDARIES, ZONING, LIENS
Relying on an old survey is definitely a No No. You should retain a land surveyor to perform a current assessment of the property. This prevents any legal disputes by updating boundary lines and preparing the site for construction. It’s also important to confirm the zoning district use, as well as any potential restrictions placed on the property. Contact your local planning department to inquire about any future plans in the area that could impact the value of your property and future project. Knowing all this information ahead of time gives you a better idea in measuring the future value of your potential asset. And don’t forget to order a title report to ensure the property is free of any liens.
- INTENDED USE OF LAND
Make sure you are clear about your intended use of the land you’re planning to purchase. This will be reflective to the terms of the loan, down payment and interest rate, when you approach a bank for a land/construction loan. It will also help the bank measure the level of risk based on the intended property use and cash flow to be generated from operations.
There are also raw land purchases, where the buyer anticipates the future value of a property by evaluating the developed surrounding area and its potential to increase property value with the property approvals. These types of loans typically require 50% down payment.
In any case, you’ll need to contact a builder to provide you with the construction costs for your planned project. This will help you understand the debt you will be acquiring versus the potential value (and cash flow) of your investment.
When it comes to obtaining financing for land acquisitions, you’ll need to apply for a land loan, which isn’t so simple. A land purchase can’t be leveraged with a bank the same way a stabilized commercial property can, because there are no improvements or cash flow to act as collateral for the loan. Applying for a construction loan on the other hand, provides an advantage, as the projected building serves as collateral on the loan and outlines a clear exit strategy once completed.
Local Banks and Credit Unions typically understand land loans more so than large money center banks. Due to their familiarity with their lending area, local lenders generally offer better terms. All the same, a potential borrower will still need to present a loan package with specs and plans for the land, as well as personal financial information to prove creditworthiness.
Seller Financing can be a good option for getting favorable terms. Since this is an agreement between two individuals, everything from the down payment to the interest rate is negotiable. Nevertheless, having an attorney review all the documents before signing anything is a MUST. This will avoid loopholes and unpleasant surprises for either party.
Keep these important factors in mind so you can minimize expenses, lessen the risk and earn a reward on your investment. And be sure to consult professionals along the way to help assist in the process such as: engineer, architect, land use/real estate attorney, reputable general contractor, title agent and mortgage broker.
Evan Boles is a Financial Analyst with Progress Capital and is experienced in evaluating and underwriting all commercial loan types. Evan is available to assist you with any commercial lending questions you may have.