Using Land Equity

Land equity comes in three forms;

  

*First, gifted land- A family member has offed to gift you land, or sell it to you at a greatly reduced price, and you have accepted their generous generous offer. Congratulations, you now have equity in your project! How much equity will depend on the appraised value of your land and the value of your project. Take a look at what other similar parcels have sold for in the last year. Only count the usable lane. A ten acre parcel that has 9 acres of swamp is really a 1 acre parcel, just as an example.

 

*Second, you put money down on land less than six months ago. Perhaps you purchased the land with 100% cash, made a down payment and have a land loan, or made a down payment on a land contract. In any of these scenarios the funds you invested in the property count as if you brought them to closing. This assumes that the project appraises for the dollars you have in it and the land appraises for the purchase price.

   

*Lastly, you put money down on the land more than six months ago. The same rules as above apply but now you can get credit for any appreciation the land may have experienced. Again, take a close look at what similar lots have sold for in the last year.  

 

In all of these situations your land equity can count towards your required down payment and closing costs. This may allow you to close on the loan without bringing any funds to closing. The VA is a little different. For some odd reason the VA does not recognize land equity when it comes to rolling in closing costs. The work around is to have your builder agree to pay these costs and simply increase the contract to build price to cover the costs. 

As I have mentioned, the value of your land will be set by the appraiser. They will take a close look at what similar properties sold for, in your area, in the last year. Keep in mind that the value of your property is not based solely on the size of the lot. Road frontage, usable area, soil conditions and the ability to hook up to city water and sewer systems all play a role in land value.

 

There is a limit to the value you get for land equity! The appraiser will not give you credit for any "excess" land. Every home comes with some land. The amount of land that is standard and customary depends on where you are building. In metropolitan areas lots over an acre or so would be considered to have excess land. As you move out of a metro area and into "bedroom" communities it is not uncommon for homes to be on one to five acres of land. Finally, if you move completely out of a metro area into what would be consider a rural area it would not be out of the norm to see homes on ten acres of land or more. 

 

 

Ultimately when your appraisal on the proposed project is done the appraiser will review the sale comps they used and the lot sizes they are on. As an example, if the sale comps are on 1-3 acre parcels, and you have a 10 acre parcel, the appraiser will only give you credit for 3 acres or so. The theory here is that most buyers in this area are only looking for, and will to pay for, 1-3 acre parcels.

 

Here's a great article you can review from the Appraisal Institute on this subject, https://www.appraisalinstitute.org/valuing-excess-land-creates-challenges-for-appraisers-the-appraisal-journal/.

 

FYI, most construction programs written to Fannie/Freddie guidelines will not approve projects on ten acres or more. To finance those projects you may have to seek out a special type of lender. Call me and I'll be happy to point you in the right direction.  

 

For more info visit my website at www.bestfhaconstructionloan.com or call me at 586-917-5534.