Unlocking Land Ownership Through Creative Financing

REALTOR ERIN BROWN WARREN of Boring, Ore., ranks in the top 1 percent nationally in real estate sales, but where she really finds excitement is in making "deals." She and her husband Greg live on a 5-acre parcel with their two dogs and three horses.
   
My husband and I just signed the papers on a beautiful piece of land that I never thought we'd be able to afford.  In fact, we were about to give up on our three-year search for "five acres and a nice house" in our price range when our realtor found us a 32-acre parcel of incredible land-- perfect for horses, and in just the right location.  You may be wondering how we could swing the payments on 32 acres, when five seemed out of reach?  We never thought it would be possible.  All it took was some creativity-- and a little bit of risk.

If your dream is to own horse property, but a quick monthly review of your checkbook reveals that you can barely make the payment on your $185,000 suburban home, you may be afraid to even consider the possibility of purchasing land.  But wait-- don't give up so easily.  If you have the motivation, and are willing to be creative, you might be surprised to discover what you can do.  We certainly were!

I asked our realtor, Erin Brown Warren of Oregon City to share with you how to make your dreams become reality through creative financing.  She outlined four scenarios that illustrate how the apparently impossible property purchase can become reality.  While these examples might not work for every situation, one may work for you, and they'll show you why it's worth the effort to consider all your options before giving up your dream of owning land.

Scenario #1: Dividable Parcels

How it works:
You buy a parcel of land that can be divided into one, or several pieces.  You divide, and sell the other parcel (or parcels) to help finance your purchase.  Ideally, the land you purchase will have a home on one parcel that you plan to keep.  Another variation on this theme includes purchasing dividable property with a friend.  Just be sure to negotiate ahead of time who gets which piece.

What you need:
Cash for an initial down payment, and the ability to make payments until you can divide and sell.

The Pros:

Resale of a parcel can help you generate enough cash to significantly reduce the payments on the property you intend to keep.

A dividable parcel sold as a single piece of property is normally priced as a single piece.  It will be worth much more money when it's divided, meaning that you get a better buy.

The Cons:

You may cringe at the notion of dividing land into smaller and smaller pieces.  Realize that in most situations it's zoning laws that make the difference.  If a piece of land can legally be divided, you can bet your bottom dollar that it will be-- whether it's you or someone else behind the deal.

You may have to calculate the costs for improvements (water, septic, access) along with the purchase price, if you plan to sell immediately.

It may take longer to locate this type of property, you'll need to be persistent.

Example:
"Investment properties are frequently miss-marketed", says Erin.  "Last year I found just such a situation-- a residence on a large parcel that had never been marketed as dividable, when in fact it could be divided into four separate 5-acre parcels.  My buyer purchased the property, is planning to sell three of the parcels, and just may wind up owning the fourth parcel free and clear!"

That's not at all uncommon, and it's great if a buyer can end up owning the last parcel-- plus having cash for their time, energy and risk.

Scenario #2: Create a Rental

How it works:
You buy a piece of empty land where you'd eventually like to live.  You purchase a mobile home and install it on the property.  Rent the mobile home-- in most cases you can get enough for rent to cover your land payments.  Maintain your rental arrangement until you've built up enough equity in your own home to allow your to build your dream home on the property-- that's been paying for itself!

What you need:
Money up front for a down payment, improvements (septic, water, access, if they're not already available) and purchase of a small mobile home.  You may need some additional monthly cash, if rental income isn't quite enough to meet  your payments.

The Pros:

Your land is paying for itself through rental income while you "buy yourself time" to improve  your own financial situation.

This strategy is a good hedge against real estate inflation rates.

The improvements you'll make to install a mobile home will all be necessary for your new home anyway.

The Cons:

There will be a time delay before you can expect to be living ion your land, and you may have to spend some time living in the mobile home while building.

You'll have to put some effort into managing your rental property.

Example:
"Assume you find a 5-acre parcel (vacant and unimproved) on the market for $120,000, explains Erin.  "You put 10 %, or $12,000 dollars down, and finance at the current rate of 7 % with a balloon payment due in 10 years.  Your monthly payments would be about $718/month.  You can probably purchase a small, structurally sound mobile home for between $10,000 - $15,000 dollars, and total costs for permits, septic, well and electricity will be approximately $8,000 - 10,000, depending on your location.  If you're short on cash and own your own home, a second mortgage on the equity can help pay for the improvements.  When you're through, you can probably rent the property for as much as $900 - $1,100 a month-- enough to make your land payment and contribute to the cost of improvements."
 

It's worth the effort to consider all your potions before giving up your dream of owning land.

Scenario #3: Buy Trees

How it works:
You purchase a parcel of land with trees that can be harvested for lumber.  Immediately following the purchase, you harvest the trees to generate a large amount of cash that will significantly reduce the payments on your purchase.

If the thought of cutting down a tree makes your choke back tears, this option probably isn't one you want to consider.  It's important to realize, though, that in some areas of the West Coast, land with timber value doesn't mean "old growth" or "protected" forest.  In fact, it's land with trees that were planted for harvesting in the first place.

What you need:
Cash for your initial down payment, and the ability to make initial payments before the trees can be harvested.  Your lender may even allow you to use the timber value as your down payment and closing costs.

The Pros:

Your property will actually help pay for itself, when you cash in on the timber value.

If you're purchasing property specifically for housing horses, pasture typically requires clearing anyhow.  With this option, you'll generate income from the trees, while you clear land for your horses.

The Cons:

You may abhor the idea of cutting down trees in order to finance your property purchase.  If that's how you feel now matter what the circumstances, this option won't be for you.

You may lower the value of your property when you cut down the trees.  If you plan to resell the property, ask your realtor to do an in-depth market analysis to predict resale value, once the timber's gone.

There are a lot of details that need to be considered.  For example, your best bet is to have your "cruise" (timber appraisal) done after you have purchased the property, but finalize this inspection as one of your contingencies with the seller.  You'll also need to make sure the lender will provide the timber company with a timber deed at closing.

Timber prices have dropped recently-- but, just like the stock market, they'll come back up!  If you're still planning for the future, keep this option in mind.

Example:
"I recently sold a six acre parcel with a wonderful home, and over four acres of harvestable timber.  The timber was excellent, export quality, and the check my clients received from the timber company was about 50 % of their initial purchase price!  They have now sold the house and property for more than they paid for it initially.  It sounds far to easy though, Erin warns, "and there's a lot to know."

If you want to try a timber purchase, make sure you work with someone knowledgeable enough to help you with the details.

Scenario #4: Land Sales Contract

How it works:
The seller of the property carries the mortgage, meaning that there's no bank involved.  This option doesn't necessarily saves money initially, but it will in the long haul, and your monthly payments may be less.  There's often a lot more flexibility in the financing arrangement.

A seller can also carry a small second mortgage when you borrow from the bank.  For example, if you only have cash for a 10 % down payment, the seller can "carry back" an additional 10 %.  With the resulting 20 percent down payment, you'll avoid private mortgage insurance (see below).

What you need:
Varies widely with the individual arrangement.  Often requires a large lump sum up front.  This situation would be one to consider if, for example, you've received a large inheritance, but might have trouble qualifying for a bank loan because of a low monthly income.

The Pros:

You'll pay less in fees.  You won't pay loan fees to the bank, and you'll avoid private mortgage insurance, which is an additional monthly cost of $42-$100 per month on every $100,000 you borrow from the bank.  You'll also save on closing costs.

You'll "qualify" more easily if the seller is willing to work with you, and closing will be quicker.

The Cons:

The seller may require a larger down payment.

You're likely to have an earlier payoff date.  Most sellers will be reluctant to carry a 30-year contract.

Example:
"We just bought a piece of property ourselves, and had the seller carry a land sales contract for a period of one year, so we could do improvements on the property.  We saved about $8,000 on loan fees, and it made it really easy for us to make improvements and remarket the property."

This article was written in July of 1998.

REALTOR ERIN BROWN WARREN of Oregon City, Oregon is licensed with the Hasson Company (currently with Premiere Property Group, LLC) and ranks in the top 1% nationally in real estate sales, but where she really finds excitement is in making deals.  "You don't have to make low ball offers to get a good buy in real estate", claims Erin, "and I don't like to do that, especially when sellers are in financial trouble."  Instead she looks for property that's worth the price and has potential as an investment for her buyers.  "There are a lot of things that you can do," say Erin, "and I think it's a blast to get people into property they otherwise couldn't afford." Erin and her husband, Greg, live on 30 acres with their two dogs and three horses.