Private Lending against Finished Lots?

Question

Anyone have experience lending against finished lots? Our company will be doing a raise soon to help fund a small subdivision deal. We will be buying 8 finished lots on a cul-de-sac from a land developer, then building 8 spec. homes.

I'm interested to hear about investors' experiences lending capital in this niche. Do you like finished lots, or perceive them as higher risk than lending against homes? If I can prove the value with comparable sales, does it matter from your perspective if it's just dirt w/utilities vs. an actual home? Appreciate your thoughts.

Mike Hartzog · Answer

@Jay Hinrichs agreed.  The established lenders in my area with large funds behind them will take out any existing purchase money loan, i.e., finance the land and the construction, as long as it fits into their max LTV criteria and the builder has an established track record.  Personally I don't lend or buy junior position.

Mike Hartzog · Answer

I've loaned money against lots before.  Jay is correct, the construction lender will require 1st position, so the purchase money loan must subordinate.   There are also construction lenders who will fund land purchase as part of the package.

Jay Hinrichs · Answer

how do you then get vertical loan if your borrowing on the dirt?

Pay cash for lots then get your construction loans.  Lender will require good equity

Jay Hinrichs · Answer

@Mike Hartzog  some private lenders MAY allow a subordinated debt but most experienced lenders would not.. and banks certainly won't....

reason being and I am pointing this out for the community benefit ( I know you know this  LOL) once you have subordinated debt in a default situation the first lender has a tougher time negotiating a deed in Lui.. and is forced 9 times out of 10 into a full blown foreclosure..

and it would take a very very inexperienced lender to make second loans behind construction or subordinate behind construction.. its a real no no in the HML hand book...

Gary Headrick · Answer

As a straight investor, I stay away from lots although I still have one on the books (performing). Valuation tends to be difficult, demand is far less than houses and no rental income potential. However, you are a developer building houses so the situation is more of a forecast of building/selling.

Private Lending against Finished Lots?

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