Most of us have heard stories about the lucky guy who bought some recreational land and then paid for it all by thinning the timber or selling the mineral rights. But in reality, that just doesn’t happen very often. For most of us, if we are going to own land, we’re going to have to figure out a way to pay for it.
But with a little know-how and some creativity, you may be closer to your dream than you realize.
Let’s look at the options.
Traditional mortgage lenders are where most of us have experience in borrowing money for real estate. Unfortunately, most of these lenders have little experience or interest in raw land. For buying land, I think you will find an easier road to borrowing if you look elsewhere.
I’ve always had good luck with smaller community banks, particularly ones where the ownership is located in the same area as the land. These people know the area and usually understand land as an asset. For someone with good credit and a steady paycheck, this is a good place to start. Loans can be structured with monthly payments, quarterly payments or annual payments, and can be set up as either interest-only or principle and interest. Rates are generally higher than those for a home mortgage, and most banks are only going to finance about 75-80 percent of the purchase price.
As far as commercial lenders go, there is no better avenue (in my opinion) than the Farm Credit system. While originally oriented toward agriculture, this network of cooperatives (which are partially client-owned) offers loans on land to anyone, not just farmers. Loan structures are similar to mortgages, with 20-year amortization and 80 percent loan-to-value being the maximum. You will be required to qualify for any loan, just as you would with a mortgage, but some loans are based primarily on credit score, dramatically reducing the paperwork and speeding up the qualification process.
Some borrowers, however, just don’t look good on paper. Whether it’s due to bad credit, being self employed, or having recently changed jobs, some people appear to be marginal candidates even though they have the means to pay for the land they want.
But all is not lost. Some landowners actually prefer to owner-finance the land they are selling. You just have to ask. Typically, owners who are willing to owner-finance have an undesirable tax consequence headed their way if they leave the closing table with a pile of cash. They can mitigate this through owner financing. You are still going to need some cash, of course, but quite often there is no credit check.
Owners usually secure their loan with your down payment and the structure of the contract. Often, they will use a “contract for deed” arrangement, where you don’t actually get title until you make the final payment. If you default on the loan, they get to keep your money AND their land. For most landowners, this is a pretty good guarantee that you will pay as promised.
One final option that most people don’t consider is using your IRA as a source of cash for your purchase. In addition to financial instruments, your IRA can also invest in land. Now, most IRA trustees or “holders” don’t allow land as an investment, but some do. If you have money sitting on the sidelines waiting for the stock market to come back, you might consider this.
Of course, be sure to discuss any of these options with your attorney and financial advisor to make sure that you fully understand all the legal, financial and tax implications for your particular situation.