What is an undeveloped land loan?
Undeveloped land is often purchased by a business-purpose borrower with the intent to develop a commercial real estate asset. Depending on the lender and how the land is zoned, a borrower can obtain financing to purchase the land and eventually build apartments, retail space, office space, a warehouse, a hotel or even farmland, among other things.
Undeveloped land can be classified as either raw, unimproved or improved. Raw land does not include utilities such as water, electricity or sewers. Unimproved land may provide access to some but not all necessary utilities, while improved land includes access to roads and all utilities. The type of land being purchased will influence the lender’s risk tolerance and the pricing of the loan. Undeveloped land loans may include one or more of the following characteristics:
- Higher downpayments of up to 50%
- Higher credit scores of 700 or more
- Higher interest rates of 4% to 6%
- Shorter terms of five years or less
- Interest-only structures with balloon payments
Who offers financing on undeveloped land?
Commercial real estate investors can purchase undeveloped land from a wide range of banks, nonbanks, private lenders and hard money lenders. Mortgage brokers can use Scotsman Guide’s Lender Search to find the funding source for their client’s unique scenario.