Getting a land loan can be tricky. That’s because, compared to a standard mortgage, land loans are considered riskier and less financially appealing to banks. And if you do get a loan for your land purchase, they tend to come with higher interest rates and less favorable terms than their traditional counterparts. But that doesn’t mean you’re totally at a loss when it comes to financing your deal.
There are several strategies for buying land without a bank loan. Here’s what to know about the alternatives, including notable advantages and drawbacks of each option.
1. Seller Financing:
Seller financing (also referred to as owner financing) is when the seller of the property extends credit to the buyer, not the bank. Because of this, the seller also sets down payment requirements, interest rates, repayment conditions, and any consequences of default.
Seller-financed properties tend to be more flexible than bank-financed ones, especially regarding money down. They’re also one of the easier ways to go if you can’t – or don’t want to – go the traditional land loan route, and come with low or no closing costs.
Sellers who finance deals can be just as picky as banks – or pickier if they so choose. They also may require some payments you’d avoid with a traditional mortgage, such as a due-on-sale clause to pay off their remaining land loan or a large sum balloon payment after a set number of years.
2. Lease-to-Own:
As with seller financing, buyers pay property owners instead of banks in lease-to-own deals. The main difference here is that it’s not a loan per se. Instead, it’s the owner renting out the property to the “buyer” with the option to purchase the property later. The total amount paid throughout the lease won’t go directly toward the sale, but usually, some portion will be applied.
Lease-to-own lets you lock in a rate early on, rather than waiting around to buy while prices go up. You’ll also have time to save up for a larger down payment and work out a financing plan for the remainder, all while enjoying access to the property.
Expect to pay a non-refundable fee at the outset to lock in a lease-to-own deal (usually up to 7% of the agreed-upon purchase price). Likewise, you may still end up needing financing – and face steep penalties if you end up unable to purchase.
3. Pay Cash:
If you can swing it, paying cash for land is a great way to steer clear of a land loan and make yourself a more attractive buyer. Sure, it takes some strategic saving, but you may be able to score a property for less than the asking price since the buyer is getting the payment in full right off the bat.
More market competition, plus lower closing costs and no need to worry about things like interest rates and monthly payments.
In addition to needing to save a pretty penny, you’ll also have to consider other expenses like moving fees and land maintenance. Meanwhile, you’ll miss out on land loan tax deductions, assuming you qualify.