There isn’t much funding currently available for land loans—there are still some lenders out there, but they are few and far between, as potential borrowers very well know. Why? From the lenders’ perspective, it’s the risk associated with start-ups of any kind, and raw land can be considered a “start-up,” and one with no current income. Banks in particular, in the current market, aren’t interested in getting involved with land for that reason.
With no income, there’s a much greater risk for a loan default, and it is incumbent upon borrowers to prove they have the resources, or “a plan,” to avoid that. At the end of the day, lenders don’t want to own land now simply because in the current real estate market, there’s not much one can do with a defaulted property except hold onto it until the market turns around.
A potential borrower has to look at the asset on its own merit and convey that message. Look at whether an asset—land, an apartment building, or a shopping center—truly has value for the short and long term. Understand the repercussions with the various types of properties to prevent possible foreclosure or some other action. Indeed, there is a higher default rate on land because of the fact that there is typically no income from these properties.
The bottom line: As a borrower, be very careful with the decision to invest in land. Make sure you are going to be able to make that payment back, and make sure you can support the debt until you are able to generate income and a stable cash flow. Work with your lender to make it happen.