When applying for a hard money land loan you have to put yourself as the lender. Meaning ask yourself if you had the money, would you make the land loan and the compelling reasons to do so.
There are 6 things we consider when underwriting or considering a private land loan:
Location of the Land for Collateral: There are several moving parts when underwriting or considering a land loan such as where exactly is the property located, how is the land zoned or entitled, where are the nearest utilities, are there any tax credits involved, topography of the land, government approval process and timing just to name a few. It is vital that we understand as many details as possible to make the process not so hard.
Type of Zoning today: As you are aware different types of zoning dictate what can type of building structure and density, can be built upon certain entitled land developments. Understanding the type of zoning is critical and if the property is considered Raw Land, Unentitled, Paper Lots, Vacant, Entitled, Bank work out, are all considered.
Purchase - Refinance - Cash out: It may sound trivial but, the type of transaction makes a huge difference as to the rate and terms, if offered, of the land loan. We don't wish to write a check and become the proud new owners of the real estate.
Character of the sponsor: It's important to understand details about the borrower - Is it your first development, what experience to you have to complete, how much skin or cash do you have into the project? - Do they live in the area? How long have they lived there? What is your occupation?
History of the property: For obvious reasons, understanding the history of the property is huge. For instance we will not write a check for $1,000,000 to a borrower that just purchased the property for $700,000. Now, if the borrower purchased the same property 2 years ago, spent time and money on any number of things including: engineering, planning, horizontal improvements, or legal expenses literally, or physically improving the property by excavation work, sewer/water installation, or simply by way of improving the zoning classification we will consider the value added improvement of the developer.
Exit Strategy: Last but certainly not least is the all important question, Understanding the money is expensive than a bank, how are you going to return payment of a non traditional bank loan (hard money-private money loan)? The exit strategy of a land loan should be believable.
LOAN CRITERIA
Qualified Property Type: Raw land - Un-Entitled land - Entitled land - PUD - Mixed use - Vacant
Loan Type: Purchase, Refinance, Cash-Out, DPO, Foreclosure prevention, Bank Work Out, Stalled Sub-divisions
Lending Area: Canada , USA, Caribbean
Min - Max Loan Amount: $500,000 to $20,000,000
Term: 6 to 36 months
Interest: 8% to 13% Interest Only
Amortization: Interest Only - Interest reserve (no monthly payment)
Maximum LTV: Typically - 30-50% as is value bases upon an appraisal
Lien Position: 1st Lien only
Prepayment Penalty: Typically None
Minimum Credit Score: None - Pricing will be related to the overall risk
Origination Fee: 3% - 5% of the loan amount
Exit Fee: 0% is typical
Due Diligence Fee/Deposit: Borrower is responsible for all third party report fees. Typical range $3,500 - $9,500 after written approval.
Closing Timeframe: 4 weeks give or take a few days is typical
Submission Documents Required:
- Executive summary
- Aerial Photos or existing appraisal
- Sources and uses
- Purchase contract or LOI if acquisition
- PFS and idea of credit
- Exit Strategy - How the loan will be re-paid