Land and construction financing question

3 Replies

This is a follow up to my post How to finance a rental guest unit but since the parameters have changed, I'm starting a fresh post.

We are looking at purchasing raw land adjacent to our primary residence, building a house on it and renting out our current residence. I have been speaking with lenders about wrapping the land purchase, county and infrastructure fees and house construction into one loan.

One lender has a product that would require the contractor to purchase the land, build the house and then sell it to us.

Another option is to purchase the land for the land and infrastructure costs, then pay those fees at closing. In other words, if the land value was $100k less $30k in fees and costs, the seller would net $70k at closing. We would then get a construction loan for the home to be built.

Anyone have experience in this type of transaction or care to weigh in with your opinion?

Typically you would do an acquisition and development loan then roll the A&D plus interest accumulated into to a perm loan when the house is built.

How is the A&D different from a raw land purchase? It sounds as though you are referring to a loan that includes the land purchase cost along with development costs. This is what we are looking at, but the programs I am finding that roll into a permanent loan seem to have short (6 months) time frames and that is very tight to get through subdivision approval.

Very few people actually purchase raw land outright to develop. If you do, it should be extremely soft terms. Most of the time, you get the property under contract and pay for the entitlements. If the deal falls apart, the seller gets your entitlements. If it doesn't, you can either assign the deal to a builder for a fee or do your A and D loan. 6 months isn't unreasonable for a standard build if you don't have to factor in selling it.

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