Land Loans

It makes a huge difference whether your land loan request is a purchase money request or a refinance. For example, if an experienced developer is buying the land for his next project, there are many banks and hard money land lenders who will finance up to 70% of the purchase price of the land.

The thinking behind such a highly-leveraged land loan is that (1) the value of the land has been established in the open market as opposed to by a highly-questionable appraisal; (2) the developer is putting cold, hard cash down (no second mortgages would be allowed in this scenario); (3) the development of the land will serve as the exit strategy for the lender; and (4) the experienced developer will be adding value by either improving the zoning or by adding horizontal improvements (bringing utilities to the site, installing streets, gutters, etc.).

On the other hand, if the land loan is a refinance, land lenders will typically underwrite the deal much more conservatively. Loan-to-value ratios on land loan refinances typically are limited to just 40% to 55% LTV. Fifty percent loan-to-value is a very common ceiling for land loans.

If the proceeds of the land loan, however, will be used to add value to the land, then the typical land lender can often be much more aggressive. Suppose you own a $1 million piece of land and you want to borrow $700,000 against it to bring utilities to the site, the land lender will probably use the improved value of the land in his loan-to-value calculation.

But the deal that is tough is the guy who pays $200,000 for a piece of land and through mere luck watches his land increase in value to $500,000. If he wants to pull out more than $250,000 in cash to pay off his credit cards and his personal debts, and he personally has done little to increase the property's value (he didn't help get the property up-zoned, for example), he will face considerable resistance from most land lenders.