When someone calls or emails me and begins with “I read your doughnut post,” they really mean my malasada post. Actually, they really mean my 2014 post about Financing Vacant Land in Hawaii. It is time to update that information as even with all the uncertainty about the future that 2020 has brought, I am still getting calls about buying and financing vacant land.
Land Loan or Construction Loan?
Most of your options for land financing are available regardless of the size of the lot, or its zoning. However the assumption is that you are either going to build or do agriculture on it, in other words, not that you are land-banking, or planning to keep it vacant for long.
The reason I started with this caveat is that post-2008 crash we saw foreclosures on vacant land that the owner had bought intending to flip, or to refinance after three years, and then found themselves with a mortgage in excess of the value of the land. While I believe that in many areas, vacant land prices remained stable or depressed through this latest up-cycle due to supply/demand imbalance, both you and your lender will want to limit your downside risk at this moment in time.
Now for the basics.
Construction Loans. If you are buying a lot with the intention of building on it immediately, a construction loan might be an option for you. In this type of loan, the lender will loan you a percentage of the total cost of vacant land plus construction on it, converting to a conventional mortgage once your home is ready for occupancy. Because the loan wonʻt close until you have selected plans and hired a contractor, obtained building permits, and received an appraisal based upon the finished home, these loans can take 90-120 days to close.
Because you have to have approved plans and permits during the loan process, purchasing with a construction loan is not going to work in a gated community with a lengthy design review process. However, if you can buy your lot with cash and get through the design and approval process, you might be able to use a construction loan to finance the actual build.
Land Loans. Most Hawaii land loan products are offered through local credit unions. That makes them great for Hawaiʻi residents, but unavailable if you are buying to build before moving here because you must be a resident to be a credit union member. Most are for a maximum of three years, during which time you will either (1) pay off the loan, or (2) convert to a construction loan, or (3) build with cash from your savings or other sources, and then convert to a conventional mortgage. Down payments are typical 30-40% on this type of loan.
Financing Options for Agricultural (Farm or Ranch) Land in Hawaiʻi
In my 2014 article I wrote about Farm Credit Services of Hawaiʻi — the source of the aforementioned malasadas. The best news is that last year they merged with American AgCredit, a larger institution that is also part of the national farm credit system. They now have more flexibility and better rates and terms for borrowers who are buying an existing farm or ranch, or planning to start agricultural activity on vacant land.
American AgCredit can offer 30-year mortgages on vacant land, perfect if you arenʻt sure when you want to build, or if you want to live elsewhere and simply farm or ranch on the land. They also now offer a couple of programs to loan on properties that already have structures on them rather than being completely raw unimproved land.
- If you buy a property where the residence is worth less than 50% of the total appraised value, you can get a loan with 30% down.
- If you buy a property where the residence is over worth over 50% of the total appraised value, they can partner with another institution on a 20% down mortgage. They are not competing in the regular residential mortgage market, however, as the property still has to have genuine agricultural activity.
If you have a particular land listing in mind, feel free to call me to discuss next steps or get introduced to a lender.