Whether you’re considering a land purchase for commercial development or a land purchase for residential purposes (your own house or for building a property for investment), it is a decision that can pay off big time. People who bought up land in rural or semi-rural areas on the cheap in the past, only to watch nearby cities grow closer and closer, have found that their investments have paid off many times over. Land in the outlying areas surrounding cities from Vancouver to Montreal, and many in between, has turned into financial bonanzas.
Things to know before buying raw land
When you make a raw land purchase in an area zoned for agriculture, or you make a land purchase in a partially developed area, then you could face an uphill battle getting your land zoned for a more marketable purpose. It can take years to accomplish, though – so understanding the zoning of your land is crucial before you sign on the line. Provincial governments will only commit to development plans that last five years, and when the right people ask for change, those plans can change in the blink of an eye. One example of that was the Oak Ridges Moraine, a swath of land between Rice Lake and the Niagara Escarpment. Because Toronto, Mississauga, and other cities in the Golden Horseshoe were growing that direction, investing in land there seemed like a no-brainer. However, in 1989, some petitions went up from several groups to protect that land from development. So it was tied up in court for 12 years, and the Ontario government finally protected it. So those investors had found their land now protected from development by a conservation act – and other investors with land around the greenbelt now saw their land shoot up in value.
So when you’re checking out land purchase, whether to subdivide or develop in a different way, consider the proximity to city infrastructure, such as existing services for water and sewer, because that land is more likely to gain approval for development later. Land that is easy to access and/or nearby major routes for transportation are better investment choices as well, because you won’t have to wait for commuter infrastructure to be put in place.
As you might imagine, getting financing for vacant land is not always easy. It’s one thing to finance a house, or a multi-unit residential building, a factory or a vehicle. After all, if you default on one of those loans, the bank has something tangible that it can seize and sell to cut its losses. The bank can take over land, but it’s much tougher for the bank to recoup its losses.
The elevated risk for the lender means that you will face higher interest rates and fees as a part of the loan. If you’re going to be developing the land right away, expect to put a down payment of around 25% as part of moving toward a construction and development loan. If development is in the plans for further down the road, expect to put as much as 45 to 50% down, in addition to any applicable closing costs or fees – and that’s in an urban market. If you’re buying land in a rural area, the down payment will be even higher.
Land development financing is often much easier to secure than vacant land financing. If you have a plan for putting together a residential development, a golf course, a casino, a hotel, a factory, or even storage sites and self builds, that can go a long way toward helping you put together a financing proposal that will get you the funding you need. Lenders like to work with people who have thorough plans put together and can show them where their investment will pay off.
So if you’re looking to purchase vacant land, the cheapest way is to pay cash. Taking out a home equity line of credit (HELOC) is cost effective if you have to finance some of it. Dealing with a local credit union or bank that you have a strong relationship with is a good way to keep your costs down. If you can’t find a traditional lender to work with you, then Amansad Financial can secure financing with a private lender in the DLGN (Direct Lender Group Network), but you can expect higher interest rates and (in many cases) a higher down payment.
There are some other ways to finance the purchase. You can take what is known as a vendor take back, or seller finance, where the land owner provides the financing. This can work when the seller does not need the cash right away and if you provide a sizable down payment. You can also combine a private loan with a vendor take back. Another solution is to use another piece of property as a form of security for this loan.
Sometimes people purchase land without looking at some of the legal encumbrances tied to the property. Zoning laws influence what you can build on the property, and depending on where the land is, the cost of setting up utilities and services is prohibitive.
You’ll also want to have a soil test done to make sure that there are no environmental factors in the area. Consider the horror story of Hollace Wong, Norman Rothberg and Michael Kibride. These three investors sunk $2.2 million into land on the east side of downtown Toronto. They had performed a market analysis and found that the land was undervalued and would yield a huge profit if they simply flipped it to a developer, who would front the costs of getting the zoning changed from industrial to residential development. What they did not know, though, was that an auto wrecker had once used that site for its business, and their hazardous waste was still on the property. These environmental problems made their property toxic – not just literally but in the sales market as well. While they were pondering what to do next, the bottom fell out of the real estate market, and the investors took a huge loss – even after taking the seller to court.
You’ll also want to bring in professionals to handle the construction and development, rather than trying to handle that yourself, unless that’s your area of expertise. You’ll also want to see the land yourself. There’s a perspective that comes with seeing the land in person, rather than going sight unseen or even relying on Google Maps’ street view feature. That can help you decide whether to buy the land in the first place, or whether to purchase it and subdivide it. In some cases, you can buy a larger lot with a single home on it, tear down the house and replace it with two smaller properties, dividing the property to sell it to two different parties, and increasing your profits. You’ll want to find out, of course, from the city or province, whether subdividing is allowed there.
In summary, there is much to consider when buying land. If financing has become a burden and it’s determined that you can’t secure bank type financing, contact Amansad Financial for private financing alternatives.