Loans Answers

Frugal Land Financing

Question: With my 401(k) self-destructing, and real estate prices seeming slightly more reasonable again, I am considering the purchase of a 24 acre site with future residential subdivision & development possibilities a few years down the road. The price is attractive but still beyond my liquid cash in hand. I would need some sort of financing to pull this off. There is no possibility of current owner financing and even the maximum possible home equity loan on my current house would still leave me a bit short (and with potentially crazy future interest payments).

My bank is willing to finance any land I might purchase for building a new primary residence within a 3-year period… but will not finance land simply bought for the purpose of investment. This loan would effectively be a construction loan to be converted to a home mortgage within three years. I suppose I could tell them that I plan to build a home and worry about the consequences three years hence.

On the other hand, land development loans are amazingly rare, complicated and expensive and no one wants to touch a relatively small, inexpensive piece of land that might not be developed for 10 or more years.

I suppose one last option is converting my 401(k) into a rollover real estate IRA, but that would require me to quit my current job and find a new one… probably not a very smart move right now.

Am I missing something? Is there some better “frugal” way to help one purchase investment land? I can’t be the first person who saw an opportunity in some open land but didn’t quite have enough cash in hand to pull it off.

Answer: The only way that this idea would appeal to me is, if I was willing and able to actually do the construction-anticipation loan. Meaning that I was willing and able to actually start building a house there within the three-year time limit, presumably with plans to live in that house.

It sounds like this would also depend upon your ability to sell your current house, in order to make the payments on the new one.

You also say that the land might sit around for ten or more years before you can sell it for a profit. That is a long time, with lots of risk as to whether it will even happen. And what will that land be doing in those years (besides charging property taxes, and saddling you with mortgage payments)?

You could easily end up in a few years, with some personal crisis (unemployment, medical, etc), plus payments on a piece of land that isn’t giving any return, and which will be difficult to sell. Thus risking a severe loss due to foreclosure.

The whole thing sounds like a really, really bad idea.

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Filed under: Home Equity Loan