Raw land loans

[ClownColor]

Any one take out a raw land loan recently or know about them? I'm looking at purchasing a parcel on Leech lake. I have been pre-approved from a local bank in the area (everything I read said a local bank would be the best option) but I've also put the call out to a dozen other banks to see whats out there...still waiting for most others to respond.

So while thats happening, what can you experts tell me about these loans. I'm most curious to see if ANY bank would offer a 30 yr fixed rate...or even a 10 yr fixed rate. The best I've seen was 3.9% ARM and balloon which are fixed for only 3 yrs. I like safety/knowing and I don't see that with only 3 yrs. I won't be building in that short of time...maybe 10 years a cabin will be built but until then, i'll be in a garage / cabin (which I know won't qualify for an FHA loan).

So, any mortgage consultants out there that can help, please let me know what some options are.

Thanks,

CC

[Wanderer]

Best of luck with your purchase CC!

People (probably your realtor?) recommend local banks since financing is more likely to be approved. They can use the business plus it helps support the local economy. It's just not good business to not be able to move land in an area.

I went through a potential purchase process last year on a lot with deeded access and found non-local financing to be a bear if not impossible. Some of the banks in the MPLS area just flat told me they won't finance raw land; I'd have to have collateral for the full amount which basically meant refinancing my home. Maybe actual lakeshore property gives them more incentive.

I didn't find any local Lake County financing that didn't include a balloon payment and the interest rates were about 1.5% higher than I could get with secured financing in the Cities.

That being said, some other things to look out for:

Be sure what electrical utility serves the property you're looking at. Is it on the grid for the closest town or is it a rural utility? Call for pricing to bring service to your building site and ask what their base (maintenance) fee is. I'm currently on the Ely grid and get charged about $8-10/month but the other lot that was closer to town by mileage was on a rural utility that has a base charge of $45/month before usage charges.

Check the County's appraised value for the past 2-3 years and the forecasted value for next year. You can use that to negotiate price but you might also have a big change in value if the property was separated from a larger tract that was improved by a dwelling. In Lake Co, I know that raw land that's cut off an improved piece stays valued at the higher "Recreational" classification for two years before being downgraded to "Raw", which in this case was roughly half of the asking price. They give you two years to improve the property with a permanent dwelling or at least electric and well and septic. In our case, we would've had the purchase price and the additional expense of adding the utilities to get it back to the Recreational value which was still shy of the asking price.

Also check for any lakeshore use restrictions so you know what you can an can't do for structures such as a dock or shed by the water.

Lastly, if you have an idea what your building plans will be, get an estimate for excavating and installing a driveway before buying. There may be some surprises an excavator will see that you didn't or he might have alternate suggestions for your plans.

Again, good luck! I hope it works out for you.

[dfv87]

Typically 30 yr rates are only on the secondary market loans that are either Fannie Mae or Freddie Mac insured, and these are only 1-4 family homes meeting very specific guidelines which raw land does not even come close (no dwelling at all). Raw land of this type is typically classified either as transitional (12-24 months to be built on)or long term, which is over 24 months holding. you may find some banks willing to look at a fixed rate for up to 10 yrs right now but I would expect them to want a 10 fully amortized loana nd the payment will be higher accordingly. Most will do a 3-5 balloon/ARM with a payment amortized on 15-20 years to make the monthly payment more affordable.

The reason small banks lock rates for only 3 or 5 yrs max typically is because they get their funding from customer deposits and if you look at a rate board for CDs they can only price those for a max of 5 yrs... so if a bank locks a rate for more than that time frame they run the risk of rates increasing on their deposits beyond the rate they are getting back in on your loan... this is what happened in the 1st Savings and loan debacle in the 80s. if a bank gave you a a loan for say 4% today and locked for 30 years and interest rates rose so that they had to start paying 5% to get CD money in the bank, they would not be in business too long.

Good luck with your deal.

[BoxMN]

When I bought raw land (had a small shed/cabin and electric, but it was classified as raw land, on lake) in Crow Wing, the local bank gave me just as you are seeing and the other folks said - 3 year balloon based on 30 year ammortization(?) payments though. I paid on time every payment, and at end of the 3-year terms they just re-started it for me, no paperwork that I recall, or maybe I had to sign something, I can't even recall. He said banks would be silly to not keep a paying customer. He also gave me a free rate drop of about a percent or more, because the rates dropped drastically during that time, but I had to keep the same payment, just with lower rate. The local bank Lakes State Bank was really really good to work with.

Good luck with your purchase! We bought in 01 and built in 08. Don't regret a thing.

[dfv87]

Most banks are certainly willing to renew the balloon every 3-5 years and keep you paying it down BUT be aware that if the bank sold to new ownership and they decided not to do raw land loans. They could call the loan due at that balloon and make you find another lender or payoff the property. NOw most would not do this but it is LEGAL for them to do it. And in this day and age of mergers etc... make sure you know what you are signing and what all the ramifications could be. Prepare for the worst and hope for the best.

[delcecchi]

Also what trapped a lot of people in the past crisis with this type of loan or the option ARM was if the value of the property dropped so it couldn't be refinanced without more cash.

[Down Deep]

If you are going to buy and hold forever then this won't apply, but if you should need to sell buyers for raw land is extremely limited and can take a couple years to sell. Banks will probably ask you what your plans for the property are because they like to give loans for properties that will increase in value or may require additional future financing. It would be wise to have a tentative development plan to show them that includes a site drawing, potential cabin plan, time frame and a rough budget.