Yesterday, a guy called me wanting to sell his mortgage on a small piece of land located in a desolate area, far from any population centers. The parcel had access to water (from a well) but no other improvements. He purchased the property last summer for $60K and had just sold it for $110K. Of course, he wanted us to pay him the full note balance.
Where do we even start with this real estate note? It has so many problems and red flags that no investor would even consider buying the full note. The isolation of the property and the fact that he wanted to flip what was almost certainly an overvalued note limits most note buyers to either buy a small piece of the note or, more likely, pass on it altogether.
Actually, I knew that we would pay less for this mortgage note as soon as he told me that it was collateralized by land. No matter how strong the other characteristics of the note, land notes will command a lower price than will real estate notes on houses and commercial buildings. Simply put, because bare land is usually less valued by owners than are other parcels, there is a higher likelihood of default in the minds of note buyers. Land, other than that in prime locations, takes longer to sell and can decrease in value more quickly.
Notes on land without several improvements are even harder to sell because of the additional risk. We consider improvements to include water, power, sewer or septic, paved roads going to the property, etc. These improvements all add value to the property and make it more likely that it will someday be built upon.
If you own a parcel of land and are thinking of selling it, recognize that a buyer will probably not be able to get a bank loan. Unless they can pay all cash, you will probably need to carry a note (offer owner financing). To decrease the risk of the note and to maximize the amount that you’ll receive if you later sell it, you’ll want to structure the note correctly.
Here are a few hints:
- Get as big of a down payment as you can. At a minimum, get 25% down, and shoot for 30-50%.
- Sell to a buyer who has good credit, and who has the means and willingness to cherish and improve the property.
- Ensure that the sales price is close to the actual value, as determined by an appraiser.