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Raw Land Financing
Old 11-28-2006, 12:53 PM   #1
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Raw Land Financing

For you land geniuses, I have a financing question. I am selling a large tract of raw land for development (low seven figure sale, unfortunately I am only a fractional owner). This was to be a cash purchase, but at the last minute the buyer has ask for three year self-financing at 5% the first year, 6% the second and 7% the third. This seems a little low to me. What is the current commercial interest rate for borrowing money for raw land purchases? I certainly want to insist on somewhat more than a bank would charge. Advice?
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Re: Raw Land Financing
Old 11-28-2006, 12:58 PM   #2
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Re: Raw Land Financing

These folks http://www.landandcamps.com/ get double digit rates.

But it is more an issue of getting the deal done than dickering over rates in your case.
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Re: Raw Land Financing
Old 11-28-2006, 01:26 PM   #3
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Re: Raw Land Financing

Every commercial loan I've done has been 1-2% higher than the going residential rate. He's asking for a sweetheart deal.
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Re: Raw Land Financing
Old 11-28-2006, 01:28 PM   #4
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Re: Raw Land Financing

Quote:
Originally Posted by tryan
He's asking for a sweetheart deal.
He's also asking you to believe that he'll be able to make payments for three years. Good luck with that...
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Re: Raw Land Financing
Old 11-28-2006, 01:54 PM   #5
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Re: Raw Land Financing

Developers like to tie up land with only an option.

Try a substantial down payment and finance the rest for the three years, if the buyer defaults they loose the down payment. Consider whether or not the contract is assignable, as well as prohibit any use of the property until the contract is paid (you don't want enviornmental issues or leans).
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Re: Raw Land Financing
Old 11-28-2006, 02:02 PM   #6
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Re: Raw Land Financing

Quote:
Originally Posted by Nords
He's also asking you to believe that he'll be able to make payments for three years. Good luck with that...
Make sure that the note is secured by the land, so that if he defaults or goes bankrupt, you can foreclose and get the land back.
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Re: Raw Land Financing
Old 11-28-2006, 03:55 PM   #7
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Re: Raw Land Financing

Quote:
Originally Posted by Brat
Developers like to tie up land with only an option.

Try a substantial down payment and finance the rest for the three years, if the buyer defaults they loose the down payment. Consider whether or not the contract is assignable, as well as prohibit any use of the property until the contract is paid (you don't want enviornmental issues or leans).
This is what we are doing, with a 25% down payment, and three year to pay off. if He defaults, we get it back. This has actually happened once before on this same piece of land during the last land boom. Here's hoping for the best again.
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Re: Raw Land Financing
Old 11-28-2006, 03:55 PM   #8
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Re: Raw Land Financing

Quote:
Originally Posted by Gumby
Make sure that the note is secured by the land, so that if he defaults or goes bankrupt, you can foreclose and get the land back.
That is already in the proposed contract.
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Re: Raw Land Financing
Old 11-28-2006, 03:56 PM   #9
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Re: Raw Land Financing

Quote:
Originally Posted by brewer12345
These folks http://www.landandcamps.com/ get double digit rates.

But it is more an issue of getting the deal done than dickering over rates in your case.
I want to make a reaonable counter proposal, as I do want to close the deal. OTOH, I am not interested in subsidizing the developer.
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Re: Raw Land Financing
Old 11-28-2006, 04:03 PM   #10
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Re: Raw Land Financing

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Originally Posted by bbuzzard
I want to make a reaonable counter proposal, as I do want to close the deal. OTOH, I am not interested in subsidizing the developer.
Then get a minimum of 25% downpayment and a rate of at least 7% for 3 years. Also get a security interest in the property (lien). Is this a creditworthy counterparty? If not, see if you can get more money up front.
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Re: Raw Land Financing
Old 11-28-2006, 04:09 PM   #11
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Re: Raw Land Financing

The rate is too low but the question is what rate would be right. Prime today is 8.25%. The five year treasury is at 4.61%. One year LIBOR is 5.28%.

You could propose a floating rate tied to one of these indexes. How about just charging the prime rate, adjusted yearly? Or fixed at the current prime rate, his choice. Interest at prime on this kind of deal is pretty generous. Or if you are really worried about losing the deal you could do prime minus .5 or even prime less 1.
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Re: Raw Land Financing
Old 11-28-2006, 04:11 PM   #12
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Re: Raw Land Financing

Quote:
Originally Posted by Martha
The rate is too low but the question is what rate would be right. Prime today is 8.25%. The five year treasury is at 4.61%. One year LIBOR is 5.28%.

You could propose a floating rate tied to one of these indexes. How about just charging the prime rate, adjusted yearly? Or fixed at the current prime rate, his choice. Interest at prime on this kind of deal is pretty generous. Or if you are really worried about losing the deal you could do prime minus .5 or even prime less 1.
Personally, I would take a lower rate if I could get a bigger downpayment. The bigger your downpayment, the lower your risk, so the interest rate can reflect that.
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Re: Raw Land Financing
Old 11-28-2006, 08:37 PM   #13
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Re: Raw Land Financing

Where is the land located? Around my neck of the woods, prices are steadily falling. You may want to accept a lower interest rate in order to close the deal, if the price is right.
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Re: Raw Land Financing
Old 11-28-2006, 09:41 PM   #14
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Re: Raw Land Financing

You might also consider accepting their low rates, but bumping the price of the land ... cap gains, instead of ordinary income ...

Also consider not fixed rates, but increasing spreads over an index ... could be prime, 10-year swap rates, etc. ...

Actually, in AZ I've seen real estate boomerang back to the seller up to three times, and they loved the result ... allowed them to sell the same property four times, with a nice downstroke on the first three.

Best of luck ... you're in a good position.
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Re: Raw Land Financing
Old 11-29-2006, 10:39 AM   #15
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Re: Raw Land Financing

Land is in Rockwall County east of Dallas. We are counter-offering with cash or 9% interest over three years, their choice.
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Re: Raw Land Financing
Old 11-29-2006, 11:06 AM   #16
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Re: Raw Land Financing

My job is financing raw land - agricultural, timber, and warehouse raw land for developers.

When I price a loan it usually depends on the credit risk and competition.

Developers are usually at the higher end of the risk scale, but a lot depends on the real estate and local economy. That being said if the risk is acceptable, then last year you could expect to pay prime plus 50 basis points (variable and changes monthly). This year with the decreased demand, then Prime + 0 may be necessary due to competition. The yield curve is so flat that a fixed rate for 2-3 years may be obtained at a prime equivalent or less. But also keep in mind the borrower will have origination fees of 1/2 to 1% and other closing costs they will not have with you.

Also, if you for sure want out in 2-3 years have a escalation clause where the interest rate goes to a much higher rate at the end of the period you desire.

I hope this helps.
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