Last week I discussed the financing of the acquisition of a residential lot for development with a woman who wanted her husband to build their own home. As always when it comes to financing, the conversation turned to the interest and loan structures. When I described the price of a fully indexed loan on a home-country crowd, they are almost condemned to impotence!

She stammered, “Wha … What would the rate be so high My home loan is 6% and you’re telling me that the lender wants 10% more land for a loan, that is ridiculous

Well, not really.

I understood his confusion, but it was comparing apples and oranges. From the perspective of the investor, the Earth is a great investment for a number of reasons: “They” are not more of it (except perhaps in Dubai), you can lay your hand on it (it’s “real”) can, no one pick up and take it without mounting an enormous effort, and it will end up with more value than you paid for it (in most cases). However, if the earth from the perspective of a creditor, it leaves much to be desired.

If you make a loan, the lender main goal of all interest and principal payments is free. The lender is based, the borrower’s obligations under the Note, however, requires some “insurance”. This insurance is in the form of a lien on a property called “secure” the loan and ultimately by the lender if the borrower can not repay the loan. The loan to the borrower, not ownership. It is secured by the property if the borrower has to repay the loan. This is what a lender for the best security they can find to make sure that it will be refunded.

Commercial real estate makes great security for the lender because of income that can make loan payments until the property sold if the borrower produces. The houses are also very safe because it usually sell in an active market and when a borrower is likely all he can to do to keep his primary residence. The business property occupied by the owner is a good bet for a combination of these reasons.

No, the earth.

Country for all potential value, it’s there. No one lives on it, it does not work on it, Tumbleweeds roll through it, and if not used as a parking lot or an exchange, it produces no income. Add to these challenges is the fact that the process is the conversion of land to income-producing property or stay with a lot of effort, expertise and time. Most lenders do not really like these features in their security, and therefore can not be on the floor.

Therefore, when confronted with the use of land as collateral for a note, lenders, the loans on earth do some things to do to reduce their risk. The first is that they typically reduce the loan to value significantly. The more equity you have in the country, the higher the discount they offer to a buyer, or when it is windy and they feel safer in the loan. Note that this was not the case in my example of openness. This particular lender had a specialized program that allows up to 90% of the value of an amount borrowed would have done, but it was for the estate of owner-occupied.

The second thing, the lender increased its rate of return based on the perceived risk for the disposal of property to default. If the lender gets 12% to 14% on his money for a country that loan, he gets his money invested quickly, even if we call them “interest.” This reduces the burden on the lender offers a faster, risk-adjusted returns, if the loan is disbursed.

So the next time you think a property financing, remember that your lender will look for a different situation than you. Done this way, you are likely not to cough loudly when he quotes the sentence you!


Commercial Loans