Loan Options Based on Your Stage of Construction
(a.k.a. Land Loan vs. Construction Loan vs. Home Loan)
Very often we Abundance get calls from clients who want a construction loan to buy a piece of property for future construction, but no approved plans yet. That’s pre-mature. Construction lenders will only consider a loan request when you have nearly-approved building plans. Shovel-ready, so to speak. Until then, you have other options, as listed below, with the most common scenario listed first.
Ideally, you'd want to understand your financing options before you buy, so you can factor in the carrying costs into your purchase price. We are happy to explore these options with you, so you can avoid some of the costly mistakes we made as developers and flippers.
Scenario #1 - Existing, Habitable Dwelling
If you are buying a property with a small, but safe & habitable structure that you plan to expand or re-build, consider purchasing the property with a conventional home or investment property loan first. This offers the lowest carrying cost while you get your building permits. We Abundance have access to many lenders to compete for such loans, closing escrow in 28 days or less.
Scenario #2 - Existing, Uninhabitable Dwelling
If you are buying a property with a dwelling that is not habitable (e.g., mold, foundation, heating issues) – consider a private lender’s fix & flip loan. Yes, interest rate will be higher than conventional loans available in Scenario #1; and these loans often have balloon payments. This is a great option if the sellers want “quick close” without any financing or appraisal contingencies. It’s even better if you can negotiate a slight discount in exchange the certainty of a “quick close.” We Abundance offer fix & flip loans with only 3-mo minimum interests, and can close escrow in 14 days or less.
Scenario #3 - Residential Lot, No Permit
If you are buying a piece of residential zoned lot, with no permitted dwelling, then you will need a land loan. After the challenges of the Great Recession, very few lenders offer land loans. The few who do require residential zoning and utilities to the lot line, and 50% or more down payment. Yes, we Abundance offer land loans to financially strong borrowers who have the capacity to take it to the finish line.
Scenario #4 - Approved Plans, Shovel Ready
If you are buying a property that has nearly approved or expired plans, and you plan to start construction very quickly, then yes, start with a purchase-and-construction loan. The process is similar to that of a typical construction loan, with the lender funding a good portion of your purchase as the initial draw.
Scenario #5 - Agricultural Land
If you are buying agricultural zoned land, and expecting to re-zone or sub-divide, your lender choices are very limited. You should expect to need 65% down payment, if you can even find a lender. In such cases, you may want to negotiate a “seller carry” for 2 to 3 years, as you go through the zoning, subdivision, and permitting process. While sellers often prefer a clean sale, without any “seller carry” loans, many land owners know their buyers’ choices are limited, and may be willing to negotiate.