Commercial and industrial loans are loans that lenders advance to businesses, but not to individuals. The investments aim at providing working capital or financing capital expenditures. They are usually short term, and they almost always require some form of collateral. A commercial or industrial land loan is a form of financing that enables you to purchase land for commercial or industrial use. The lender will assess your credit history as well as the value of the property to determine if you qualify to buy it.
Sometimes, the process of acquiring a land loan is tedious and may take a long time. At Money Lender Loans, we have designed systems and procedures to eliminate excessive bureaucracy and delays. We focus on financing your land purchase in or around Orange County, CA, as soon as possible because in business, every second count.
The Unique Nature of Land Loans
Purchasing land to put up new business premises or to expand an existing business is a significant investment. Whether it is a small or large business, such investment often requires financing through a commercial and industrial loan by a commercial lender. However, determining how much land is worth is quite complicated because there is no collateral. Therefore, land loans are riskier for lenders. They attract larger down payments and higher interest rates. The loan to value (LTV) ratio is also lower for land than for other forms of commercial or industrial loans.
If the loan is for purchasing land, you will often begin looking for financing after you have identified a property researched to ensure that your plan is feasible. Lenders are likely to fund your loan with more favorable terms if you have a comprehensive idea of improving the land and a practical exit strategy for paying off the loan.
Land loans are less conventional than other forms of commercial loans, and you may have limited options. Many lenders steer away from land loans due to the complications of determining the value of unimproved land that has no rental income. Also, other factors may cause you to deal with shorter repayment periods, higher down payments, and higher interest rates.
If you plan on acquiring a land loan, you need to know what land loans entail and the options that can reduce your costs.
Why Get a Land Loan From a Private Lender?
Commercial private money lenders differ from banks and financial institutions in several ways. Banks and institutional lenders consider a variety of factors such as the property type, your income, and your credit history. They may deny you financing if you do not fit their criteria. Even when they approve your loan, their terms are usually within strict parameters and may not suit your specific situation.
Commercial private money lenders are primarily interested in equity. If your property has sufficient value, they will find a way to approve the loan. Valuation is the primary determinant in the approval process. Therefore, loans are approved faster and more efficiently. Commercial money lenders get funds from private investors who are only interested in two things: The safety of their investment and getting a fair return on that investment.
The private investors are extremely flexible if you need special financing terms to fit a unique situation. They will quickly approve and fund your loan if they are comfortable with your loan scenario. However, there is a tradeoff. Commercial private investors have slightly higher rates than banks, and the term is shorter. The advantage of these terms is that you obtain the loan in a few weeks, utilize the funds sooner, and the loan is cheaper in a long repayment term.
Types of Land Loans
Land loans are of different types, and each type has its qualifications that you must meet before you get financing. Also, the procedure of getting your land loan will depend on where the land is and its intended purpose.
The most common types of land loans are as follows.
Raw land loans
Raw land is the land that is still in its natural state, without any human touch. A raw land loan is the type of loan that you apply for if you need to purchase land that has no improvement on it, including roads, sewers, or electricity. Obtaining financing for this type of property can be quite tricky because raw land is harder for a lender to sell in case you default on payments. The lender views the time spent developing the area as a considerable risk. However, you can improve the possibility of obtaining a loan for raw land by having a robust development plan, good credit history, and a significant down payment.
Improved or lot land loan
Improved land is land that humans have already altered. Usually, lot land is space for constructing residential buildings in developed areas. Both enhanced and lot land already have some form of infrastructure in place. The level of improvement may vary but, but it could include water or electricity lines, driveways, or a sewage system. Lenders prefer to advance improved and lot land loans compared to raw land loans. Therefore, the initial costs are lower. However, you still need a down payment, and the payment period can be as long as 20 years.
For commercial or industrial use, the location of the land is more important than its state. Buying raw land in a prime or developing area increases your chances of reselling it at a profit.
Construction land loans are a combination of land loans and the cost of construction into one financing package. To qualify, you need to prove your creditworthiness through a good credit score, an excellent net operating income, and an evaluated value of your business plan. You will also need a downpayment and your construction plans. The lender needs to see the construction timelines, projected costs, and a qualified contractor.
To expedite the financing process, you can hire a builder with whom the lender is familiar or has recommended. Lenders release construction money over time; therefore, the lender is involved in every stage of the construction process. Also, the lender may want to inspect the land before releasing the funds.
Choose Land That Attracts Lenders
Land may become more attractive to lenders due to some factors. Usually, an area that is cheaper and easier to develop will attract more affordable financing options than land that has legal or logistic barriers to its development. The following considerations will expedite the approval process. You can either collect the information yourself or seek the services of a real estate agent or attorney to work on your behalf. If you pick someone else, ensure that the person has experience in land transactions.
- Land boundaries survey
Land surveys show the exact boundaries of your land. Most lenders usually require a survey of the borders before they approve your loan. Before you conduct a new one, ask the seller if there has been a recent survey. It is necessary that you are aware of the boundaries, and that you give accurate acreage to make valuation easier. Additionally, an investigation will be useful where boundaries are not well defined, and when you start developing the land. A survey will safeguard you from damaging disagreements with neighbors over property lines.
- Zoning and restrictions
You must establish the purpose of land zoning and ensure that it is usable for your business idea. The most common zoning classifications are commercial and residential, but you may need zoning for particular uses of land. Zoning may also determine the type of investment you put up. You need to inform the lender if any agreements bind the property or it falls under a homeowners association.
Lot land is likely to have services already in place before you purchase it. However, if something critical is missing, or it is raw land, the lender will require cost analysis and plans that include the amenities.
- Future changes
Construction plans close to your lands, such as shopping centers, schools, highways, and other improvements can have an effect on your property’s value. You need to include such developments in your plans while applying for a land loan.
- Property easements
These are groups of people such as utility companies or townships with permission to access and use a section of your land. An easement can be on any part of the land such as a cable company with permission to run their wires through the ground, or a sanitation company building or extending water or sewer pipes underground. Knowing existing easements will help you decide where to erect new structures.
- Title search
You get to know about easements on your land through title searches. You also find out the land’s history from past deeds and liens that may be attached to its title.
- Risk of flood hazard
It is critical to establish whether the land you want to purchase lies within a flood zone because extreme weather patterns are on the rise. You can check if there is a threat of floods using the free FEMA Flood Map Service Center.
Real estate agents can help you to appraise the market value of your land by comparing it with similar recent sale transactions. If appropriate comparisons are not available, you can hire an appraiser to list all the land’s features and an estimate of the total value.
Creating a Portfolio that Works in Your Favor
After you collect the vital information about the land and agree on a price with the seller, the next step is pitching to a lender. When seeking a land loan, be prepared because your down payment and interest rates will be higher. Other than the background information, your land portfolio must include:
- Your credit score and report to support your financing eligibility
- A sketch of the construction plans
- Estimates of expected expenses such as construction costs, architect’s fees, and utility installation
- Any useful features of raw land like the value of timber in the forested area.
What Lenders Look For
Before granting you a commercial land loan, lenders consider three types of requirements. These include:
The land under financing will act as collateral, which allows the lender to seize the property if you fail to remit payments on time. Commercial private money lenders usually peg their loans on the land value, with minimal reference to your creditworthiness.
Small businesses are usually run by a single owner or a small number of partners. Commercial lenders and banks check your personal credit history to see if you have past financial problems such as tax liens, defaults, court judgments, or foreclosure. A low credit score could reduce the chances of your business receiving a land loan. However, private lenders do not place a lot of importance on your credit score before approving your loan. As long as the land is viable, and has sufficient equity, they provide you with the necessary financing.
Many investors consider small businesses risky; thus, investors avoid processing loans for small businesses. The lender will check your books to ascertain that your business can maintain the necessary cash flow for loan repayment. Also, the credit score of your business will determine the loan amount and the applicable terms. Such terms include the required down payment, payback period, and the interest rates.
However, even a low business credit score does not disqualify you from getting a land loan. Additionally, your business should be a limited liability unit. Commercial or industrial loans advanced to sole proprietorships are personal loans, not commercial loans.
The Paperwork Necessary to Qualify for a Land Loan
Purchasing land is more complicated than purchasing other properties. Being prepared and as detailed as possible in your application will simplify and accelerate your loan approval.
The documents you will need to submit for approval are:
- Personal and business credit score
- Licenses, permits and essential business information
- Basic personal information
- Individual and business tax returns for the past two years
- Recent bank and of your business
- Financial statements:
- Balance sheets
- Profit and loss statement
- Cash flow statements
- Debt schedule of the business
- Documentation of collateral
- A sale and purchase agreement (where applicable)
- An exit strategy - an outline of your business strategy for the land
- Details of other existing loans
The Loan Application process
The loan application process must go through several steps before you receive the finances. If you have all the necessary documentation, the entire process of loan approval and lending can take a few weeks as opposed to banks which may drag for three months.
The steps in the loan process are as follows.
To pre-qualify for a land loan, you will supply the lender with your complete financial picture, including assets, income, and debts. The lender will review all the documents and give you an approximate amount that you can borrow. You can do your pre-qualification free of charge online or over the phone. It is quick, and it takes between one and three days for you to receive your pre-qualification letter. The pre-qualification process does not include a credit report analysis. It helps you to discuss your goals with your lender and identify the best loan options. The pre-qualified amount is not guaranteed because it is based only on the information that you provide.
- Loan application
When you apply for a land loan, the lender will require information about your debts and income. This information will help the lender to determine how much to offer you. You also work with the lender to determine the loan programs that best suit your needs. It is in this phase that you fill out the loan application.
- Loan estimate
After the lender has received your application, they will send you an estimate. The estimate will include the total loan amount, the expected interest rates, and monthly payments if you opt to take the loan. The approximation will also provide vital information about any special conditions, associated costs, and possible penalties arising from specific actions. A loan estimate is not necessarily denial or approval. It only provides clarity for important information on the loan.
- Loan processing
After you receive the information, you will decide whether or not to proceed with the process. If you choose to continue, the lender will review your application. You may also need to avail certain documents. After you provide all the necessary information and paperwork, an underwriter will evaluate it and decide whether the loan option is suitable for you. The lender will then inform you whether or not your application was approved.
If your loan is approved, the lender will give you more information about the final details of your financing. Once you receive the information, you have three days to seek any clarification before closing the deal. After the approval of all documents, you will have an opportunity to review your loan and receive an appointment to sign the necessary loan documents. You also have to pay costs relating to the funding. Afterward, you will receive the loan.
Find a Land Loan Lender Near Me
Every entrepreneur intends to grow the business. Sometimes, the land is an integral part of the business expansion plan. However, getting funding for the land is not always easy. The stringent conditions set by banks and other lending institutions make acquiring a land loan difficult. Money Lender Loans has designed strategies to bridge the gap and make land loans more comfortable to acquire. If you are looking to acquire land anywhere, call us at 949-409-4372. We will help you realize your dream of expanding your business.