Can we bring back the Land Loans now?
In speaking with bank officers recently, particularly those from solvent institutions with good cash reserves, I’ve heard complaints about the inability to invest funds and receive decent returns. One president told me he was reluctant to sell and convert his REO assets to cash and would rather wait until values come back because he could only get a 1-2% return on his funds.
How about using some of those reserves to bring back lot loans? I’m not talking about the type of lot loans that got banks into trouble like the 100% Loan to Value , 3 year adjustable with a questionable borrower. I mean a 75% -80%LTV, 20-25 year amortized loan at a fair interest rate of say 7% to a well qualified buyer on a realistically appraised property. At the beginning of 2009 there were 4 lenders making these loans. Today in Tucson I’m aware of only one institutional lot loan and it’s at 11% with 40% down and a 10 year amortization. Not a realistic alternative to a prudent buyer. Private lenders are even worse, charging as much as 15% interest and 4-5% closing costs. For years, lot loans were the staple of conservative lenders and certainly should be again. Today’s typical lot buyer wanting to build a custom home is business savvy with a strong job or retired, and excellent credit. Making a loan to this type of borrower is far from a risky loan.
A land buyer’s options are currently limited to paying cash, negotiating a seller carryback, or for someone planning to build immediately, delay a closing until a construction loan can be approved and put in place. (A few years back, before lot loans were available, closings delayed 90-120 days to accomodate a construction loan were the norm. So, until banks get back into the market, we’ll have to be creative and figure out ways to help buyers take advantage of some of the great land deals in our marketplace.
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Perhaps we need to find investors with cash who would be willing to pool funds.
I had a lot and an FHA commitment but could not find a construction loan. Each local bank backed away saying they were ‘risk adverse’. What risk?
Private capital needs to step away from banks with their 1% and 2% ‘returns’ and make the money available so that not only can they get a much better return on their money but so that the economy can begin to revive at the grass-roots level.
Comment by Mark Bahti — October 13, 2009 @ 3:07 pm
Thats a great idea. I think the tough part is to get private money to accept a reasonable rather than an astronomical return. Typically these lenders border on predatory. But you’re right, there is a great opportunity to put together investors with borrowers. As to the lack of construction loans, I’m doing business with Priority Lending, that is currently offering a 90%LTV construction loan at under 6%.
Comment by rick — October 13, 2009 @ 5:55 pm