LAND SELLERS’ AND DEVELOPERS TAKE NOTE:
What are the risks and rewards of land subordination, when a land owners’ is willing to be in a second position behind a construction loan.
There are many stalled land development projects, subdivisions or simple home sites for sale. When a land seller wants to get some kind of deal going, here is an option to look at. Find a builder willing to speculate on a home, even if he is not interested in an out right land purchase. The seller will take the risk of waiting for a pay off whose note is in second position to a banks construction loan. The builder will come in with little or no money the bank will lend necessary funds to build and be in a first mortgage position, with the land seller holding a note for the total land selling price. The seller pay off will take place at the time of the homes sale.
How can this be good for the seller if he sees no money out of the deal?
It may be able to establish values for other lots in the subdivision (when the deed conveys the land to the builder) the price will be recorded and will show the seller to be patient in the overall marketing plan.
1) It will lower the sellers exposure to property taxes, association dues, insurance or future special assessments, which will become part of the buyers cost associated with the land conveyance.
2) It will break ground on new activity, as many times a traditional home owner is hesitant to be the first home to be built in a new neighborhood, or subdivision.
3) It establishes the seller as not willing to bail-out on a project or discount the land, making other buyers comfortable they wouldn't become the guys that over paid in the early stages (or could have waited for a better price).
What are the risks for the seller, and are they worth it?
The Seller and the sellers broker must do all they can in determining the reputation of the builder, this plan doesn't work if the builder goes belly up or chooses a poor design for the neighborhood. So have a say in the builder and the design.
If under the best of circumstances the builder still fails, your sellers second to the bank can be in a weak position. You may have to short sale the second, buy out the first, take a deed in lieu of foreclosure, or refinance the property and retain it for rental.
What are some other options for sellers wishing to maintain property value?
I have seen sellers offer cost rebates to buyers after the sale, $ when the building plans are completed, when the homeowner breaks ground on the project, when the home is weather tight (exterior completed), these incentive programs are effective in moving land buyers into new construction phase. This stimulus program can be successful in a new land development project, because there is nothing better in a subdivision than multiple buildings under construction. The other obvious offer is to have seller pay some or all of the buyers closing cost early on in a project and take away those incentives, or raise price once several sites have closed.
These may be ways to kick off a new subdivision or complete the sales on the last remaining lots.
The second Mortgage by law has to have a interest rate (Fair and reasonable rates), But we have structured sales where no payments were required until the home sale was completed, Or the interest was waive if paid of by a certain date. Coming up with the right incentive package can be critical in a slow market.
When a large boulder comes to a complete stop it takes the use of smart leverage to get it to start moving again.