Many people dream of buying a plot of land on which to build a retirement getaway. But with the booming real estate market, the only thing tougher than finding a little piece of heaven on the beach may be coming up with the money to pay for it.
Borrowing to buy undeveloped land is nowhere near as easy or or competitive as getting a mortgage or refinancing a home. Land is more difficult to appraise than a house because it doesn't turn over as often and may have soil or drainage flaws. And there's no Fannie Mae to buy land loans from lenders who don't want to keep them. If you put down 10 percent or 20 percent, some banks are willing to lend money on recreational land — but only in their immediate area. Others require 50 percent down or simply refuse to finance land deals. And forget land-finance companies that charge as much as 12 percent interest.
The best way to buy recreational property is to dip into your financial assets and pay cash. If that's not feasible, the next-best option is to use your home equity or do a cash-out refinancing.
Sometimes a seller will arrange for "dealer" financing. For example, McKeough Land Co. refers buyers to local banks near its developments, such as Independent Bank, in Traverse City, Mich. That bank has a 30-year adjustable-rate loan at 5.125 percent — the rate comes up for review in three years. It's a fair deal, but it's available only for land sold by McKeough, which operates in Kentucky, Michigan, Tennessee and Wisconsin.
If you're not buying from a developer with a financing program and you can't borrow against your primary residence, or don't want to, go directly to a local bank — especially if property values are rising. Because of the land boom on the Texas coast, "loans are easier to get," says Tom Corry, a land investor and developer in Rockport, Texas. "Two years ago you needed 20 percent down. Now you really have to have bad credit not to be able to get a 15-year loan with 10 percent down."
Keep in mind that, unlike interest on a mortgage or home-equity loan, interest on a land loan may not be fully deductible. Even if you plan to build a house later, borrowing money to buy undeveloped land will be considered an investment, and the loan will be treated more like a margin loan on stocks than a mortgage.