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Sanj Sukerkar
September 2008
At the dawn of the millennium, a lot of prudent borrowers purchased land parcels
in Las Vegas. Land was reasonably cheap, money was available plentiful and for
banks lending on vacant land was lending at par with any commercial properties.
That was soon about to change. The market took a 4 year roller-coaster ride
up and down. The buyers of homes and land made money only if they offloaded
their properties at the right time. I.e. at the crest of the real estate boom,
the ones that stuck around wishfully thinking of an even bigger profit were
the sore losers. Amongst them the ones with long term notes on their loans didn’t
seem to lose sleep as much as the ones with short term loans. The ones to be
affected the most were the 12-24 month term loans on single family homes and
land. The latter were private money placements assuming the value of the land
would go up whereas the others were just poor judgment.
Land loans today are a different animal than half a decade ago. Land loans
are not plentiful, are not easily placed and have lots of hoops to jump through
before a lender will even bother to look up the location on an online virtual
map.
Here are some of the milestones of evaluating a good land loan prospect –
1. Location: Most lenders in today’s market will prefer locations that
they see immediate potential to revive in value. These are parcels that will
appreciate as soon as the market comes back. I.e. land parcels with immediate
proximity to a freeway, local highway, next to a large casino or on the Las
Vegas Strip.
2. Value: Although accurate valuation of land parcels in an already-softened
market is up for debate, most lenders have a pre-determined measure of land
value. Most lenders will not accept third-party appraisals ordered by borrowers
for their own interest or curiosity. Most lenders will only use their time-tested
and proven, usually MAI certified appraisers. These appraisers are almost on
the bank’s payroll with the amount of leads they derive from such sources.
Knowing so, these appraisers are generally conservative and almost always have
their ear to the ground checking for fair market values. This is one milestone
that I have always argued with the borrowers. The borrower is always the most
aggressive in evaluation. Typical example is on the Las Vegas Strip. In recent
weeks, doing land on the Las Vegas Strip, a land-owner there will bet his life
on the $5 mill per acre on land around South Pointe Casino on the Las Vegas
Strip. But time and again we have pegged our value there at not more than $2
mill per acre.
3. Exit Strategy: Although not in this particular order, but lenders often
like to know what the exit strategy for your loan. If you are borrowing the
money for 24 months, how do you expect to repay that loan? Are you going to
develop the lot, sell it or build on it? No longer can you tell a lender that
you will develop the lot and sit pretty. Lenders will ask you for site plans,
architectural drawings, entitlements, and proof of use-permit applications.
The lenders want to see that you have made a serious investment in that regard.
4. Financial Strength: Finally, the spotlight is on the borrower. If all top
concerns are alleviated, the bank/lender will scrutinize the borrower’s
financials with a fine-tooth comb. Gone are the days, where high net-worth said
it all. Now bankers want to bank on your relationship; they want to see liquid
assets, they want your business deposits, they want you to put all your liquid
assets in CDs with their bank.
If your project doesn’t make sense, you are check-mate. Traditional banks
have long withdrawn from making land loans, heck; they are slowly shying away
from making ‘bankable’ loans. That said, the private money lenders
previously assumed to be loan sharks are the only viable option left.
It’s not so bad. If properly structured, land loans with private money
sources can be a blessing in disguise. They can be your savoir from foreclosure.
As the time ticks by, don’t lose sight of the opportunity.
Let us help you make the most of your situation! Call today.
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