There are lots of people looking for land loans these days so let me explain why they are so hard to find these days.
I recently got a call referring me in to a potential client that owned two fully entitled tracts of land in Del Mar and wanted. Their bank wanted out and they wanted to sit on the land for another year until the market to build was a bit hotter. I knew my bank would not be interested, but these were properties everyone would love to own so I reached out to my fellow bankers (25 years in SD, that’s A LOT of bankers) and not a single one was interested. The closest I got was one who said “we were doing those until about 6 months ago, and we filled our maximum allocation for that type of loan because no one else was doing them”. Here’s why:
The regulators look very critically of land loans because there is no income coming from the property to pay for interest, property taxes etc. Also, when real estate values drop, land tends to do so faster than homes or investment property. If the regulators were opposed to sunshine and puppy dogs, there is a good chance the banks would avoid them as well – after all, our very existence depends on regulatory approval. So until the regulatory bodies see land loans as a reasonable risk, you can bet that most financial institutions will avoid them to the extent possible. This , of course, become a self-fulfilling prophesy because if there are no loans to buy or carry land , then the pool of buyers (demand) drops , resulting in a farther drop in price.
The exception to this would be land loans for the purpose of immediate construction of a home or commercial project. Several banks still offer this product, provided there is a permanent loan, buyer or other “exit” out there for the construction lender.
If you want to acquire land or simply hold onto that which you already own and have a loan coming due, your best option is to negotiate an extension with lender or “carry back” financing with the seller. There are also private “hard money” lenders out there who will look at land provided the LTV is extremely low and/or there are other assets the borrower can pledge. The most cost efficient way to finance land is to use an asset that is cheaper and easier to finance (stock, a home, or income property), but not everyone is fortunate enough to be in a position to do that.
Craig A. Nelson
SVP & Regional Manager
Pacific Mercantile Bank