I'm looking at a lot in a desirable location. The owner is open to seller financing. If I go this route can I build and sell then pay off the remaining balance?
Specialist · Ann Arbor, MI · Member since 2016 · 355 posts · 191 votes
7y
You can build on it, but you'll probably need cash for construction. Any lender is going to require you to have title to the property, so you'd have to pay off the seller and wrap the cost into a construction loan. That will be for both REI lenders/hard money as well as residential construction.
Developer · San Diego, CA · Member since 2012 · 133 posts · 114 votes
7y
Depends how it's recorded I think. You need a development and disposition agreement that will give you power of attorney to be able to be the responsible party. Consult a lawyer
Specialist · Ann Arbor, MI · Member since 2016 · 355 posts · 191 votes
7y
You can build on it, but you'll probably need cash for construction. Any lender is going to require you to have title to the property, so you'd have to pay off the seller and wrap the cost into a construction loan. That will be for both REI lenders/hard money as well as residential construction.
This is certainly doable without paying off the balance of the owner’s note, although it can be risky for the seller. Banks will not usually lend if the seller has a superior lien on the property. The way I have seen it done is that the seller must agree to subordinate their mortgage to the bank’s construction loan.
After you build and sell/obtain permanent financing on the house, the bank gets paid first then the seller gets paid. The risk for the seller is that if you default, because their mortgage is subordinate to the banks, they will have trouble recovering from the foreclosure proceeds.
Wholesaler · Sunnyvale, CA · Member since 2016 · 106 posts · 58 votes
7y
Sarah and Jay are right on target. I’m a land investor and when I sell my lots on owner financing I do not permit building. I can say that in the land investing community this a widely held position. Not all people developing their lots are as well versed in development as I presume you to be (seeing as your on BP!). The person building may build something out of code, and that’s you’re problem as the land owner. Or the builder may build without a permit, or in the wrong place, or mess up any number of things that then fall on your shoulders. While improving the property generally increases its value, it can be a detriment as well if done incorrectly.
You may be able to get a conventional (bank) loan if you have immediate plans for development. Another option that I pose to my buyers (because I prefer cash to owner financing whenever possible) is to get a loan from a company like lightstream.