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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   October 2017

Direct Lenders Are Land-Deal Friendly

They are less risk averse than banks and offer the advantages of speed and flexibility

Traditional lenders, such as banks, typically consider land loans too risky to fund. Most look only at the tax returns, financial statements and creditworthiness of the borrower as well as the current cash flow of the property.

Traditional lenders do not take the value of the land or its future potential into consideration. Also, they don’t want to end up with land that they were forced to foreclose on, so they generally won’t even entertain land-loan applications when they come across their desks.

When it comes to land loans, borrowers and the commercial mortgage brokers assisting them simply have no other option except to explore alternative funding sources. Private, alternative lenders can confidently step in and are more than willing to fund a land loan. They look at the present value of the land and its future potential. The loan is not based on a borrower’s financial statement or tax return, which is good news for developers who faced severe financial crises in the last real estate bubble and have bad credit as a result.

Even if it’s for higher fees, shorter terms and at a more conservative loan-to-value (LTV) ratio, borrowers and their brokers often prefer the hard-money/private-lender approach because the loan is based on the value of the land and its future potential, rather than other factors irrelevant to the deal at hand. Alternative lenders aren’t all the same, however. While private lenders and direct lenders are each known for their less-strict criteria, a direct lender has distinct advantages in speed, flexibility and even geographic range.

Direct approach

Speed is the name of the game when it comes to securing a loan. Borrowers can miss out on unique opportunities if a land loan is delayed. To accommodate these fast-moving opportunities as they come up, lenders must be equipped to act quickly, and the best way to guarantee quick action is to have direct access to funds.

For direct lenders, having immediate access to adequate sums of money is key to funding land loans in days, instead of weeks or months. Unlike private lenders that may obtain funding from third-party sources, direct lenders have the money available when needed, on hand and ready to go for immediate use.

Some lenders and commercial mortgage brokers use what is known as “table funding,” an option which allows brokers to originate, process and close loans. At the time of settlement, the loan is then transferred to the lender, and the lender simultaneously advances funds for the loan.

These loans are subject to the funding source’s rules and policies. Direct lenders are more flexible than traditional lenders, or even private lenders working with third-party funds, because direct lenders are only accountable to themselves. That eliminates the need to get approval from a third party to fund the loan, bypassing weeks of searching and clearing hurdles presented by an outside group.

In-house touch

It’s not just the money that’s controlled by direct lenders, which conduct all their business in-house, from application review to servicing the loan long after it’s approved.

Borrowers interact with the same experienced individuals from beginning to end. The same individual or team that took the borrower through the application process and through closing will continue to service the loan. The loan won’t be sold off to an outside company for continued management.

Direct lenders are properly set up to take on the land loans and other atypical, risky deals that other lenders normally won’t touch.

That in-house touch adds an extra layer of security for the borrower, especially when dealing with something as risky as a land loan. The benefits don’t stop at speed. Direct control of their money defines every aspect of the loan-application process, particularly in the types of projects a direct lender can fund.

Fast and agile

Traditional lenders often have rigid qualifications that can’t be adjusted or avoided. Direct lenders have the distinct advantage of being able to work outside of those parameters.

Direct lenders can consider each loan application on a case-by-case basis, instead of automatically rejecting less-than-perfect fits based on predetermined criteria. Each mortgage application is reviewed on its own merits, instead of being categorically rejected because the applicant’s credentials aren’t perfect.

While they still need to review tax returns and other financials, direct lenders don’t assign them the same weight as a bank or other traditional lender. Mandatory items required to fund a loan by a direct lender include a title search to identify any judgments or liens, a Phase I environmental report, a land survey and an up-to-date and accurate independent appraisal from a trusted third-party provider. Minimizing requirements to what matters for the deal itself reduces time spent shuffling paper, conducting background checks and waiting.

Direct lenders also are generally more willing to take on risk. Without needing to answer to the requirements laid out by a third party, or submit the land loan to a board or bank committee for approval, direct lenders can essentially do what they feel is best based on their own review. This means that the value of the land itself, as well as the borrower’s intentions for the property, can be reviewed as part of the application. Circumventing strict criteria allows direct lenders to examine the opportunity itself, giving land loans a chance when banks won’t even dare approach them.

This unique flexibility allows direct lenders to bring a level of creativity to securing a land loan. Direct lenders can look outside these parameters to find solutions to complicated borrower issues.

International land loans

Direct lenders are properly set up to take on the land loans and other atypical, risky deals that other lenders normally won’t touch. Even when a traditional lender does decide to take on such a loan, however, the line is typically drawn at doing deals outside the United States. Although the direct lenders engaging in international deals are few and far between, those that do operate in foreign markets are well-equipped to handle the challenge.

Many traditional lenders, both in the U.S. and abroad, are wary of granting land loans across international borders. Most banks and other traditional lenders won’t even entertain the opportunity, and for good reason: their lack of knowledge about local lending laws and overseas government regulations. Each country has its own policies and rules regarding lending practices. If a loan goes awry, the foreclosure process could be challenging.

Some direct lenders are very comfortable working in this space because they are better equipped to fund loans in the Caribbean, Canada and other countries outside the United States. For these lenders, it’s not enough to simply be prepared to handle potential land-loan risk like any other property in the U.S. The direct lenders who work in this space must be thoroughly versed in the regulations, restrictions and risk associated with land loans in the territory in question.

Many lenders might be surprised to learn that funding a loan in the Bahamas, for example, requires special registration that adds several months to the timeline. A borrower with a tight timeline could lose out on an opportunity just because the lender didn’t know about this registration.

• • •

Land loans may have a reputation for being difficult or even outright impossible to obtain, but direct lenders were designed for the challenge. Structured to fund higher-risk deals through conservative LTV ratios and higher interest rates, direct lenders can circumvent the unanswered questions about a tract of undeveloped land while protecting themselves from the risk that accompanies land loans. 


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