Buying Notes With Land As Collateral

13 Replies

Good Evening Bigger Pockets Family, 

As I continue my venture deeper into the real estate realm.... I stumbled upon notes. Ran the numbers, and they are making more sense than some of these BRRRR deals and or Fix/Flips. One I currently came across is a NOTE deal that involves 7 acres of Land in Eastern Washington. I came across little information on Note investing and when you do it is vague. I saw a lot of information on NOTES tied to single family homes, apartments, and duplexes but none that have NOTES with LAND as collateral. The property is residential and would be great spot to build a forever home, but there is no permanent structure attached . Is there any difference between buying a PERFORMING NOTE with LAND attached instead of a PERFORMING NOTE with single family home, duplex, apartment , etc... attached? Any help, information or feedback would be appreciated. If you are experienced in this field even better. Thank you and have a good night.

Anthony Minutoli

No, there is no difference other then since it's not owner Occupied, typically the underwriting does not have to abide by all the Dodd-Frank rules.  Since its vacant land, can work in your favor if you need to foreclose.  

@Anthony Minutoli

I generate notes like this. I don’t sell them, but keep them for myself. The great thing about them is that if the buyer defaults, it’s quite easy to repossess and resell the property. If it’s a higher value lot, make sure that there is a memorandum of contract or a deed of trust recorded. It’s common for these deals to simply be held in an unrecorded contract. Most of these contracts default, so make sure that you are getting into it with a good price and know what you can resell the property for.

This is my jam, so feel free to reach out if I can help.

In a technical sense, there should be no difference as Chad pointed out. I've never owned notes on vacant land myself. As a thought exercise, though, it seems riskier from a cash flow perspective. Since there's no one living there, there seems to be less incentive to pay if the borrower gets into trouble. It seems to me that there's a higher chance for a note on vacant land to go non performing than a note tied to residential property. If you don't mind the inconvenience of that risk, then there's no issue.

As mentioned by my esteemed colleague @chadu, there is no significant difference. However, there may be differences in the paper. Most institutional paper is consistent from asset to asset. The paper land or a lot is written is different. My other thought would be your intent. I can see where a land loan perhaps is a longer hold time.

Originally posted by @Andy Mirza :

In a technical sense, there should be no difference as Chad pointed out. I've never owned notes on vacant land myself. As a thought exercise, though, it seems riskier from a cash flow perspective. Since there's no one living there, there seems to be less incentive to pay if the borrower gets into trouble. It seems to me that there's a higher chance for a note on vacant land to go non performing than a note tied to residential property. If you don't mind the inconvenience of that risk, then there's no issue.

its a space we have worked in for decades.  one thing of note is the discount on raw land notes is usually far higher than owner occ or improved notes.. so the yeilds are much higher and that does mitigate risk.. the real thing to look at is how much did the buyer put down..  if its a  20k property and the buyer put 2k down  ( which is common in the land game) then that note will sell for 50% of unpaid balance with a return of at least 30 to 40% apr..  if you know what your doing its a gold mine.

Thank you folks for the responses in a timely manner! @Chad U. Great feedback, are you experienced in this field? Do you have any NOTES in FL at the moment. @Joe Schmitt Amazing feedback. The lot is valued at $55,000 and yes I signed the copy of deed of trust recorded yesterday. The owners of the land are planning on building on it by haven't yet. Thank you @Andy Mirza, I am on the market for vacant land as well so this would be right up my alley if things went wayside. It is being sold to me from an investor that is liquidating in the state of WA and relocating to TN. The land is zoned for residential and the owners plan on building, its approximately 7 acres with no home site yet. Well on property with permit to drill, as well as electricity hooked to the street. Thank you @cody cox, what are you referring to as the paper? Can I use this NOTE to show income received and utilize that income towards another property? Thank you @jay Hinrichs  for the input, I sent you a message regarding the NOTES details. Maybe you can look it over and give me your thought? Maybe? 🤔 Thanks again everyone, I appreciate the BIGGER POCKETS community more and more everyday! Have a great weekend!

@Anthony Minutoli

Chad U. is very experienced in this field. 

Typically you will not be able to use the note as collateral (especially on vacant land) to try and use the funds for other ventures. If it was a commercial property then maybe but on vacant land and/or single family residential then no. The other option would be to sell it as a partial to another investor. 

One thing to mention is land loans are higher risk as mentioned above and significantly discounted to where you should be receiving 18% yield (not ROI) on the investment. Especially wiht this one where there was a low down payment and it is a newer loan.

Originally posted by @Chris Seveney :

@Anthony Minutoli

Chad U. is very experienced in this field. 

Typically you will not be able to use the note as collateral (especially on vacant land) to try and use the funds for other ventures. If it was a commercial property then maybe but on vacant land and/or single family residential then no. The other option would be to sell it as a partial to another investor. 

One thing to mention is land loans are higher risk as mentioned above and significantly discounted to where you should be receiving 18% yield (not ROI) on the investment. Especially wiht this one where there was a low down payment and it is a newer loan.

we price these for 30% yield full stop and so do most land note investors ..  but i am a land guy  so that has its benefits when looking at this paper.. there are plus's and minus's of course.. big plus  lack of regulation .. NONE basically..   ease of getting the collateral back in case of default..  Risk is buyer can walk easier since they don't live there.. So you really need to know the TRUE resale value of the collateral and for me if its a mortgage state like FLA discount would be higher.. Trust deed state like WA it can be lower..  Plus FAR less competition for this paper  \there fore returns Far greater than the notes \90% of those in the business of buying paper chase.. 

@Anthony Minutoli Welcome to the world of note investing.  There are pros and cons to notes secured by land.  As mentioned, we can get bigger discounts and higher yields/returns.  If there is a default the process to foreclose can be easier.  If you get the property back you don't have to make repairs to a property and there's no one to evict, The holding costs are also lower when it comes to taxes and you don't have to worry about insuring buildings. 

The cons are higher value fluctuations, fewer buyers of the notes on a secondary market, higher chance of default, and a smaller pool of buyers if you get the land back.  Land is also more vulnerable to property values drops than residential properties.   In an ideal world you'd like to stay under a 50% ITV but in an economic downturn that might not even be enough to protect you (ask me about 6 lots I got back through a Deed in Lieu in 2008 that are just starting to recover their value now in 2021).

The equity/down payment, seasoning (payment history) and strength of the payor make a big difference for me. If possible I like to structure a partial purchase and buy additional payments if the note performs well.

There are also differences in land types.  A big parcel of raw land in the middle of nowhere without any improvements can be way riskier than a residential/buildable lot with access to utilities. 

Here are some of the questions we ask when evaluating a land note (in addition to the  normal questions regarding sales price, down payment, terms, buyer, payment history, etc):

Property Description: Residential, Recreational, Commercial, Other

Size: Lot Size or Amount ofAcreage

Completed Improvements (indicate all that apply)

  • Road
  • Paving
  • Curbs
  • Sidewalks
  • Well or Public Water
  • Sewer or Septic
  • Fencing
  • Outbuildings
  • Permits
  • Other

Zoning and Allowed Use

Highest and Best Use

Describe the Subdivision, if applicable

  • Age of Subdivision
  • Total Number of Lots
  • Lots Sold
  • Lots Improved
  • Structures Built

What makes this property marketable?

Neighborhood Description and History:

  1. Are most neighboring properties homes, land, or commercial?
  2. What are similar properties selling for in the area?
  3. Are values increasing or decreasing?
  4. How long did seller own property (and price paid, if possible)?

I can send you the doc if you want to DM me.

Tracy

Originally posted by @Don Konipol :

@Anthony Minutoli. Risk of land notes can be controlled to a great extent by lower LTV; the problem is that most of these notes were created at high LTV.

this is why in my experience a knowledgeable land note buyer will only transact with a very large discount.  

When I was in the logging business and then creating homesites on our logged over properties.. we sold many times on terms.. then would hypothecate our notes.. but these were quality parcels close in and in high demand.. this gave us liquidity with limited risk for my bank. 

And since the land was normally part of our profit IE the Timber paid for the entire purchase .. our downside risk was nothing more than borrowing from our bank .. takes a good banker that really knows you to pull these off is my thought. 

Bank does not typically lend on land here in Southern California. Even if you can get the loan, they usually only loan up to 50% loan to value.  If you have the approved building plan and ready to build, you might be able to get the construction loan which typically is 12 month some could extend for another 12 month.  I can only speak for the properties in California.  Don't know how other states work.  Hope that helps. 

@ don konipol @Jay Hinrichs , @Sharon Wu First off thank you for the amazing info. I would be utilizing my own capital to fund the note not borrowing. The current owners seem to have laid a slab to build a forever home for themselves and plan on building soon. I am have been looking for land in the same area to build as well so I figured if anything went south I would also have the upper hand. I also could be getting way head over heels just because I thought I found a note I could actually acquire ( something that has been quite challenging, even though I would not be borrowing ). What do you feel would be an adequate price for a loan like this. The paid off $15,000 through lease options and originally paid $60,000 during closing . Ends up to be around $116,000 after all said and done if they were to ride out the loan. Considering they are building there own home does that typically speed up the payoff amount because they would be refinancing most likely at that point? So many questions I know but might as well utilize Bigger Pockets for this great conversation.

Anthony Minutoli