Hard Money Land Loans – Know What Lenders For Hard Money Land Loans Expect In 2012
It's 2012 and you've identified a prime piece of land that is optimum for commercial real estate development. But if you are in the construction or development business and looking for a land loan to purchase or refinance undeveloped land, you've most likely learned that hard money land loans are your best option. Why? Over the past several years since the recent financial crisis in the US and the world, most banks and financial institutions will not consider any land development deals in 2012 and so, hard money land loans may be the only answer.
Below are some key points that lenders and private investors are looking for when considering hard money land loans in today’s economy.
Strong location – Hard money land loans require a superb location and the old adage Location – Location – Location has never carried more weight than it does in today’s challenging real estate market. Hard money land loans are not typically approved in rural areas but the right broker with the right investors can sometimes get difficult loans funded on an "exception" basis. However, most collateral property must be located in a growing area or within the path of eminent growth. Properties identified for hard money land loans should be in a city or town and must have at least 25,000 people. There are no set guidelines however, as a general rule, the more desirable the property location is, the better the chances of getting an approved for one or more hard money land loans. The simple reason – lenders and investors for hard money land loans do not want to own an unmarketable piece of vacant land in the event that they get it back through a borrower default.
Low Loan to Value – Hard money land loan lenders by nature will minimize their exposure in any commercial raw land project. This is due largely based on the fact that recent real estate sales have reached all time high prices and consequently, an alarmingly high percentage of properties are over leveraged and underwater. As a result, most land projects have reduced equity positions as compared to a few years ago. Therefore, most, if not all lenders and investors in hard money land loans will only lend based upon a 30% – 50% loan to value based on the current "as-is" value of the collateral. The word of importance is "as-is" value or "today’s current value," not 6 months from now, or once all approvals are in place. Future values do not make a difference when considering a property for hard money land loans.
Ideal Collateral Property Zoning – Lenders and investors in hard money land loans are adamant about obtaining the ideal property zoning for the subject collateral that will offer the greatest value and security. There are many different types of property zoning in both the United States and abroad. Some classifications may include Agricultural, Residential Development, Commercial, Industrial, and these different zoning classifications may have several sub categories which further define the legally permitted uses of the land. Obtaining proper zoning of a property usually requires a number of different processes within each community. So, whether it's the city or county that governs the zoning ordinances that are necessary to gain approvals for a commercial project, one should expect that it will take considerable time to complete. Therefore, nearly all of the lenders and investors in hard money land loans will be apprehensive when considered raw land or incorrectly zoned land unless the project has significant equity to withstand the time required to successfully change the existing zoning required for the project.
Verifiable Development Experience – Lenders and investors in hard money land loans want to be assured that borrower has demonstrated his ability to bring a project to fruition in the past. It’s fair to say that if you have not had any investment or development experience in the past, your chances of getting a hard money land loan funded is slim to none. This is usually the case unless you have stumbled into the deal of the century and have an excellent team of professionals behind you to see your project through to the finish. If not, then hard money land loans are not for you rather, they are only for the experienced investor or developer in 2012.
Solid Exit Strategy – When considering hard money land loans – the most important factor to the lender or investor is a solid exit strategy. Many construction lenders have taken a "wait and see approach" and are patiently setting on the sidelines looking for a clear sense of direction in the economy. And therefore, an exit strategy is sometimes difficult to prove but, nevertheless still an important aspect of successfully obtaining a hard money land loan. Be sure to be as detailed and realistic as possible without being overbearing when discussing your project.
Loan Size – One more thing to consider is that there is typically a minimum loan amount associated with hard money land loans. Most hard money land loan lenders will not consider any loans under $500,000 in the US. Additionally, minimum loan amounts for hard money land loans in Mexico and the Caribbean typically start at $5 million but sometimes an exception can be made to go a bit lower if the deal "makes sense." So, in the interest of saving you and the lender time, be sure to ask if there is a minimum for hard money land loans before spending several minutes discussing your proposal.