Buying & Selling Real Estate Discussion

User Stats

5
Posts
1
Votes
Jeff Klonowski
  • Downers Grove, IL
1
Votes |
5
Posts

Subdividing Land with a Mortgage already on property.

Jeff Klonowski
  • Downers Grove, IL
Posted Apr 28 2019, 09:08

I'm in negotiations to purchase a SFR on large plot of land (approx. 2.3 acres). My plan is to purchase the property then demo the house and subdivide the parcel into 3 separate lots. I will invest capital to subdivide with the county, engineer the land and run sewer/water to the lots for resale and potentially keep 1 lot to build a future house.

I'm planning to purchase the SFR with a conventional mortgage, but my mortgage broker and underwriter are telling me this will create a lot of issues both legally and with the bank once I demolish the property and try to subdivide; since the mortgage is for the full property.

My question(s): 

  • Has anyone dealt with this scenario in the past? Or can share some insider knowledge? 
  • Are there alternative/better financing options for this plan? 

Thanks! 

Jeff 

User Stats

310
Posts
271
Votes
Tyler Mullen
  • Investor
  • Kirkland, WA
271
Votes |
310
Posts
Tyler Mullen
  • Investor
  • Kirkland, WA
Replied Apr 29 2019, 04:34

When you're ready to subdivide/redevelop you will get a new loan, commercial/construction type.  Look for a small/mid size local bank that specializes in this, they will detail what you need, survey, building permit, architectural plans and a builder contracted for starters.

Or when you're ready to subdivide/redevelop you just sell to a builder and have them split the lots and transfer title to you for your smaller lot, he keeps the others and let him mess with the utilities and building.  Or he pays you less (or maybe nothing) and builds you a house on your smaller lot.

How sure are you that this lot is able to be divided as you plan?  Don't just assume or take sellers word for it.

User Stats

5
Posts
1
Votes
Jeff Klonowski
  • Downers Grove, IL
1
Votes |
5
Posts
Jeff Klonowski
  • Downers Grove, IL
Replied Apr 30 2019, 19:23

Hi Tyler, 

Really appreciate the feedback and insights... Thus far I have consulted with a mid-size, local developer contact to gauge any challenges with developing on the land and potential hurdles with subdividing. In particular any challenges with the city/county. So far, no big red flags. Specific to the county, I'm likely going to try and get a contingency in the deal to allow for due diligence and pre-liminary approval for subdividing. Not sure how successful I'll be with that, but do want to make sure there are no significant challenges subdividing.

Thanks much! 

Jeff 

User Stats

415
Posts
224
Votes
Scott P.
  • Rental Property Investor
  • Indiana...mostly
224
Votes |
415
Posts
Scott P.
  • Rental Property Investor
  • Indiana...mostly
Replied May 1 2019, 18:52

In my experience you will indeed need to get approval from whoever has jurisdiction for planning and zoning.  They'll decide if you can subdivide, what the requirements are, and what the zoning can be.  If you can submit plans, likely sealed by an architect or engineer, and get the official approval before buying, that would be safest.  I get the sense you already know this though.

As far as the mortgage goes, that has been a simple process in my area.  

1. Subdividing and/or increasing the zoning up from R1 (typical classification for SFR) only increases the appraised values in my experience. So usually no complaints from a bank on that aspect unless maybe you're at a small Savings and Loan or Credit Union.

2. In my experience, the lender doesn't care what I do on the lots as long as I pay the mortgage.  When it comes time to sell one of the three though, in my experience, I would need a "partial release of lien" if I still have a mortgage.   The Buyer wants his lot without my mortgage being attached.  You'll want to know ahead of time that the bank will do this.  They may not.  They'll likely want you to use the money you're making on the sale of the lot to partially pay down the remaining mortgage since it will be for a smaller remaining amount of property which makes sense to me from their point of view.  Now with all this said, your mortgage broker and underwriter are telling you something different and they certainly have the final say.  Perhaps check with other banks.

User Stats

22,782
Posts
12,791
Votes
Wayne Brooks
  • Real Estate Professional
  • West Palm Beach, FL
12,791
Votes |
22,782
Posts
Wayne Brooks
  • Real Estate Professional
  • West Palm Beach, FL
Replied May 1 2019, 18:58

Yes, a conventional (Fannie/Freddie) will not have provisions for partial releases. As mentioned, a bank or credit union that keeps the loan.

User Stats

6
Posts
1
Votes
Kevin Bagwell
  • Port Angeles, WA
1
Votes |
6
Posts
Kevin Bagwell
  • Port Angeles, WA
Replied May 1 2019, 21:30

In my experience you won't be able to get approval from the governing jurisdiction unless you are the property owner or have the permission of the property owner to file and get a preliminary plat approved. You can ask them about if it's possible to subdivide (long plat or short plat) and they can get you at least that far. Filing applications and getting a preliminary approval has a lot of work going into it.

User Stats

808
Posts
843
Votes
Nik Moushon
  • Architect
  • Wenatchee, WA
843
Votes |
808
Posts
Nik Moushon
  • Architect
  • Wenatchee, WA
Replied May 1 2019, 22:28

I'm in the process of doing something similar. My lender is a home loan company and not tied to any bank. They tend to keep things in house and are have a bit more freedom to do want they want in these types of situations. Luckily my lender doesnt care. He told me that technically I dont even have to report that I am going to split the lot and build a duplex on it. Its still all under one loan. Just that the duplex is now subject to the first loan and only comes into play if I need to sell either lot, do any refinancing or default on one of the loans. In any case all I would need to do is request a release of lean. They would do an appraisal on both properties. If it comes back valued more than the loan then there isnt a problem. If its less then I will have to carry the remainder of the loan and possibly be forced to pay it in full as well (or switch it to a personal loan since theres nothing to take back if I default). 

So what you want to look for is a lender that will allow you to do a release of lean on a conventional loan OR go with a commercial loan (a blanket loan is a common one for subdividing & selling lots).

User Stats

5
Posts
1
Votes
Jeff Klonowski
  • Downers Grove, IL
1
Votes |
5
Posts
Jeff Klonowski
  • Downers Grove, IL
Replied May 6 2019, 18:58

@ Scott P and Wayne Brooks - Really appreciate the additional context and feedback. I will certainly inquire about the "partial release of lien".  I'll keep everyone posted if/when this deal happens and share my learnings. 

User Stats

5
Posts
1
Votes
Jeff Klonowski
  • Downers Grove, IL
1
Votes |
5
Posts
Jeff Klonowski
  • Downers Grove, IL
Replied May 6 2019, 19:01

@ Nick & Kevin - Again, really appreciate the great insights... Plus always great to hear from the Pacific Northwest. I lived in Seattle for 5 years. Great part of the county and wonderful people! Thanks for sharing your experience. 

User Stats

4
Posts
0
Votes
Replied Jan 5 2021, 18:04

Hello @Jeff Klonowski were you able to successfully execute your plans as mentioned in this thread, if so can you please share your experience on getting loan for SFR and Subdividing into multiple plots. I am researching on doing exactly this buy SFR on a huge plot, subdivide, keep one plot to build future house and sell the rest.

Interested in learning: 

1/ If you were able to put contingency on preliminary approval for subdivision.

2/ If you were able to get conventional loan for the same. 

Thanks Much!

Sush

    User Stats

    5
    Posts
    1
    Votes
    Jeff Klonowski
    • Downers Grove, IL
    1
    Votes |
    5
    Posts
    Jeff Klonowski
    • Downers Grove, IL
    Replied Jan 6 2021, 08:25

    @Sush Girish Unfortunately, no new details on this. I had been working directly with the seller to purchase, but decided he was not yet ready to sell. Still an open dialog but no movement over the last year. Will update this string if/when the deal does happen. Hopefully, good things will come to those who are patient :)

    User Stats

    4
    Posts
    0
    Votes
    Replied Jan 6 2021, 08:51
    Originally posted by @Jeff Klonowski:

    @Sush Girish Unfortunately, no new details on this. I had been working directly with the seller to purchase, but decided he was not yet ready to sell. Still an open dialog but no movement over the last year. Will update this string if/when the deal does happen. Hopefully, good things will come to those who are patient :)

    Thanks Jeff, Appreciate your response!! Hoping it works out for you, Good Luck!!

    User Stats

    1
    Posts
    0
    Votes
    Replied Mar 31 2021, 10:57

    @Sush Girish

    Were you able to collect any new information on this subject? I am looking into purchasing a property to subdivide and partially pay for my lot. Lumber market has me on hold at the moment, but when that returns to a somewhat "normal" level I plan on getting back to this project. Have you looked into investor builders or anything like that? Thanks

    Log In or Sign Up to Reply