How to get Stimulated about Land Financing in 2009 by Joe Andahazy

by 09 Apr 2009
Ok, let?s talk about financing land in today?s environment while everybody is in the stimulus mode. Hey, is that possible? I received a call from Russell Ward, who asks me to write about land financing for his newsletter Vacant Land Guide www.vacantlandguide.com. I tell him it?s been awhile since anyone asked me to help him finance land, but in the name of all the great financial wizards getting away with a bonus package, I submit to you a lexis of great wisdom. First, I am a scavenger of information on anything related to financing real estate. I spend hours online, on the phone, read several newspapers with eyes and ears locked on the message. I?m a networking fanatic and in doing so, clients come to me for loan counseling, loan packaging services, writing executive summaries, refining business plans, negotiating terms with lenders and in general, posture them favorably to increase their chances of capturing an acquisition or refinance loan program. Let me share with you some of my experiences related to financing real estate to help you in your search for a rural land or farm loan. Banks are being exceptionally careful about rural lending, specifically, acres of rural property. Four years ago, lenders would lend to almost anyone. Walking in the front door of the bank with your John Deer hat on was probably more than enough to qualify. But today, things have changed. Banks and lending companies are not interested in talking to you about land loans. Most common response, ?Unless you?re putting 50 percent down, forget it?. Now I?m not saying you can not find a lender to finance land at a more leveraged position, it?s just that the requirements have become more comprehensive and lenders willing, have dwindled. Mark Twain once said, ?Buy land; they?re not making it anymore.? So the best way I can help you capture a land loan in today?s questionable market is to give you some rules of engagement to optimize your success. Rule #1. Do your research. Jump online and start looking for lenders who specialize in land financing in your state and the surrounding states. Lenders prefer to work in their own backyard. Most offer informative loan information regarding rates and programs. Read everything they have to say on all pages. I have found good information and resource contacts in the FAQ log, the BLOG text, in testimonials and posted news articles. However, just be aware you may be reading old information. I have also discovered some lenders do not update their web site data very often. Some are even out of business, but their web sites are still accessible. So if you find a great site, call them to make sure they are in business. If they are, ask to speak to a loan representative to pre-qualify your request as it fits into their lending criteria. Most sites thoroughly provide not only loan data, rates and fees, but they also have specific forms to download. Some lenders are anal about using their forms. Some will not even look at your deal unless it has been submitted appropriately on their electronic stationery. I?ve compared forms from different lenders. Most are very similar and basically ask the same questions, but learning to play the lender?s game and following their protocol will expedite the process. Rule #2. Provide a Complete Loan Package. I can?t tell how many times I?ve provided a list of required documents for my clients to send me, and when it arrives, it?s incomplete. When asking for the most recent two years personal and corporate Tax Returns, this is mandatory to be followed. If asking for a Personal Financial Statement, the whole form needs to be completed! Some customers do not even bother to sign where is says SIGNATURE! I have had clients tell me, ?Oh you really don?t need that do you?? or ?Is it necessary to pull our credit reports?? Yes, all this is necessary. Now if the customer is purchasing three to ten acres in the country to build out a mini-farm, then the standard Fannie Mae form 1003 and a few disclosures, which are typically used to purchase or refinance a home, will suffice. It is pretty easy and the bank or lender can provide the forms. However, if the customer is seeking a multi-million dollar acquisition or refinance loan, and is operating as an entity [corporation, LLC etc.], you will need to package the loan application more professionally. Large loan requests typically originate from businesses operating the land for timbering, crop farming, raising livestock or some agri-business. Therefore, lenders require specific documents such as Executive Summary, Business Plan, YTD Operating Financials, Profit and Loss Projections, aerial Photos, Environmental Reports, Due Diligence Studies, Construction Estimates and any supporting evidence depending on the business, loan purpose and location. The lesson here is the request for financing and the loan submission documents are specific. They are a reflection of the customer and how he or she manages their affairs. If the loan is not packaged properly, no lender will give approval any consideration. The famous saying, ?you can take it to the bank,? will not apply if you?re loan package is not complete. Rule #3. Don?t have time to package your loan properly? ? Get Help. (this article was originally published for the consumer audience. As such, this section is written toward an inexperienced audience in the lending realm; the focus audience has been altered for the more experienced lending audience.) A good loan originator from a lender or bank will help the customer along the way. It is also true all good loan officers have a support system behind them including a sharp processing and underwriting staff. However, loan officers are also focused on working other loans in their pipeline and searching for new business as well as servicing the current client. Know this? if your client leaves it to chance that you are looking out for their best interest all the while being drilled for the lowest rate and fees, then what would be expected to receive in return? I realize everyone thinks they deserve the best deal and should debate all aspects of the loan offer. However, think of it this way, if the client wants the loan approved fast and done right, wouldn?t it be justified to pay a reasonable fee for top service? What if the financing fell through at the last minute and now the seller tears up the sales contract, keeping the client?s earnest money? Now the customer lost the land he or she so desperately wanted. You?re out. Don?t let the client take the chance of losing the deal because the loan package was given sub-par service. If you don?t have the time or the resources to package the loan properly, especially on large, high dollar commercial loans, then would it not make sense for the customer to retain the services of a professional real estate finance loan consultant? Rule #4. Consider Alternatives to Bank Financing. There are alternatives to financing land as a source of capital to use as down payment or total cash purchases. You can access capital to fund a land purchase from a financial tool called a Self-Directed IRA. Since the client is the owner of the IRA, he is in complete control of its investment purpose. Another source of capital may come from other investors seeking to execute a 1031 Tax Exchange. Investors may consider joining in on the ownership as a silent partner. They get the tax advantage of executing the 1031 exchange, and the client can access the cash needed to purchase the land. However, co-ownership of the property will need to be accepted. Farm Credit Cooperatives offer favorable terms of 20 years and 30 years. Unlike banks and traditional mortgage lenders, these lending institutions are owned by all the borrowers in the portfolio themselves. A more popular and growing alternative is asking the seller to finance the purchase on a short term basis. The owner may not need all the proceeds right away and earning an income from holding a note may be attractive to him or her. Plus, there are no lender underwriting guidelines that apply. A client is most likely to choose a lender who is knowledgeable and experienced in financing rural real estate. A lender who can offer guidance on agricultural-use tax exemptions, conservation easements, environmental factors and insurance sources that an out-of-state lender might not, is most favorable. A local lender will be familiar with land values and comparable real estate sales prices in the area, and that could result in a faster loan closing. You have now been stimulated. Joseph Andahazy is an independent real estate financing consultant and the managing principal of Fair Market Funding LLC located in the Washington DC marketplace. Joe Andahazy contact information is: www.fairmarketfunding.com 703-879-1828 email: info@fairmarketfunding.com

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