The term “property development” encompasses a fairly wide range of activities, most of which require financing. A good framework to think about property development loans involves the starting stage. In some cases, you’ll want to start by acquiring raw land and will need a loan for land purchase. Land loan financing is often accomplished with a hard money loan. Property development loans can also be used to develop tracts of prepared land, as well as the renovation and sale/re-lease of existing properties. These real estate development loans, often called bridge loans, frequently employ short-term hard money loans that help finance a project for six months to a year, until long-term financing can be arranged.
A land development hard-money loan is a secured advance of funds for the purpose of converting raw land into building sites ready for construction. The loan allows a developer to buy a large parcel of raw land and divide it into smaller, improved parcels ready for sale to builders or owners. Following the title search and purchase of the land, the activities (called horizontal improvements) financed by this kind of loan include:
- subdivision of land
- leveling and grading
- building roads
- installing sewers and drainage systems
- bringing water and power to the site
A property development loan that includes the purchase of the land (known as an acquisition & development loan) goes a step further, in that part of the loan is used to develop the properties on the improved land. Frequently, the developer is separate and distinct from the construction company responsible for putting up the residential or commercial properties. However, an individual might want to buy a piece of land (raw or improved) and personally manage and/or perform the construction of a home.
As mentioned, hard money loans for land and development are secured, meaning the borrower must provide collateral, often in the form of cash. Specialty Lending Group will provide hard money land development loans of up to 70 percent of the parcel’s value, with 30 percent cash from the borrower. This percentage might be different if the borrower uses non-cash collateral, such as a seller-carried second mortgage.
Hard money loans are popular with developers who participate in land development, redevelopment, renovation, or fix-and-flip projects. This popularity stems from:
- The speed and flexibility of a hard money loan
- Access to financing based upon the value of the property rather than the credit history of the borrower
- Competitive interest rates commensurate with the riskiness of the project
- No prepayment penalty
Specialty Lending Group has long experience providing development and land loans. We would be happy to discuss the financing options we provide, so contact us today and we can get started.