This post was inspired by malasadas. Sort of like a Portuguese doughnut without a hole, the most Hawaiian version is taro glazed. Purple inside. Good enough to make me cheat on my almost-paleo regimen.
These malasadas flew over from Oahu with the appraiser for Farm Credit Services of Hawaii, who handed them to me with the words “Gotta support our local taro producers.” They were my “mahalo” gift for spending a couple of hours driving him around in my 4WD pickup looking at large raw land parcels for sale in North Kohala. So, let’s talk about options for financing vacant land purchases in Hawai’i.
The ABC’s of Land Loans
The first question I have when working with a buyer who wants to purchase a vacant lot or acreage with financing is how quickly they plan to build.
Land loans typically have a term of three years, interest only, at a fixed rate. The idea is that either the buyer has cash to pay for building and then can apply for a regular mortgage on the completed home to replace the land loan, or will refinance with a construction loan before the end of the term. A land loan would be appropriate also for buyers who intend to hold for longer than three years, but will have cash to pay off the loan sooner.
Typically land loans are available for up to 60-70% of the purchase price. Or to say it another way, land loans require a higher down payment than the 20% you might be thinking from your experience with residential mortgages.
Construction loans are a great option for someone who already owns the lot, or wants to immediately begin construction on the lot they are buying. They are in some ways the toughest property loan to get because in addition to submitting all the qualification paperwork on yourself as borrower, you must already have lined up a contractor, and have plans and specifications sufficient for an appraiser to determine that when the house is complete and the construction loan becomes a permanent home loan, the completed house will meet loan-to-value requirements as if a new buyer happened to be buying the recently built home.
A couple of years ago I had a strong first-time buyer who purchased a vacant lot near Hawi in North Kohala. He had already picked out a home package from HPM Building Supply and had a contractor lined up. We were able to close his purchase with a construction loan within 60 days. This buyer was already a Hawaii resident, which made it easier for him as he could work with the financial institution he’d been banking with for years.
As our local credit union recently explained to a prospective buyer, if they’ve been a resident for one day, they are now eligible to be considered for a mortgage. Otherwise, they would need to source funds from a national lender.
This Summit lot at Kohala Ranch (MLS# 253098) comes with building plans – a head start for a construction loan
More Financing Options for Ag-zoned Ranch or Farm Property
If you are buying agricultural property, which here on Hawai’i Island means for starters it must be zoned “Ag” and you must have or intend some kind of agricultural activity on it, one lender to consider is Farm Credit Services of Hawaii, which is part of the Farm Credit System nationally. The best way to explain it is that it is a credit union owned by the ranchers and farmers that borrow from it.
This is the only lender that I know if that will loan on vacant land for a 30 year term. And here we must put “vacant” in quotation marks, as to be eligible it probably does have cattle or macadamia nut orchards on the property. Luckily, almost all the acreage for sale in my part of North Kohala qualifies.
Grazed by cattle, this 38-acre ocean view lot (MLS# 270143) is eligible for Hawaii Farm Credit financing
Back to the malasadas. I confess, I ate one immediately. The rest I cut in halves and brought as my contribution to the food table at a meeting that night in Hawi of farmers and producers of value added agricultural products. Everything else on the table was beautifully presented locally grown food, but the malasadas were a big hit, especially with the taro farmers in attendance.
A hui hou,
Beth Thoma Robinson, R(B)