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Why Do Lenders Consider Vacant Land Loans Extremely Risky?

The number of pieces of land for sale here in Lakeside, Nobelius and other areas surrounding Melbourne is growing, suggesting that there is a great demand for them. It should not be a surprise, considering that a vacant real estate makes a good investment.

It requires practically no maintenance and is not susceptible to theft or vandalism. Plus, land is scarce, so owning a piece of the Victoria when you can give you a valuable asset that could build your wealth passively.

However, you might be disappointed to know that applying for a vacant land loan can be difficult. You may take out a regular home loan, but most lenders might turn you down when there is no property built on the block of land you intend to purchase.

Unless you are prepared to part ways with a significant amount of cash from your savings to reduce the money you need to borrow to complete your purchase, you are likely to struggle to secure some funding.

Why are traditional lenders, especially banks, so conservative when vacant land is in question?

Below are the reasons why.

Land Can Be Hard to Sell

First of all, a vacant parcel of land is not a desirable type of collateral because it is not exactly marketable. Upon seizure, a lender may be hard-pressed to find a buyer who is willing to pay a handsome sum and struggle to turn this liability into an asset.

Make no mistake about it, certain blocks of land attract numerous interested parties. Those located in or near major cities or regional centres tend to sell more quickly. In less populated areas, access to all-weather roads as well as services such as electricity, water and sewerage is an attractive feature.

The problem is that zoning limits land use and, therefore, affects how lenders perceive it. If a piece of real estate is subject to Goods and Services Tax, a bank might classify it as a commercial property and disqualify ordinary vacant land loan applicants.

Land May Remain Vacant Forever

vacant land

Learning their lesson in the past, vacant land loan lenders look for a borrower’s intention to build to lessen the risk of extending credit. If someone plans to construct a property on a parcel of land within a year, a lender will be more motivated to approve the loan application.

However, plans can change, and sometimes they do. If an approved borrower has a change of heart along the way and defaults on the loan for whatever reason, a lender might get stuck with a commodity that does not sell fast.

Land is Prone to Sharp Value Depreciation

In real estate, land is considered the asset, while the structure constructed on it is a liability. While there is a logic behind such notions, understand that land values could drop considerably when the economy turns sour.

Compared to house and lot packages, pieces of vacant land usually depreciate faster since they tend to have lower demand, to begin with.

Financing vacant land can be challenging, so do everything you can to improve your credentials. Be ready to put down a large deposit to reduce the risk your prospective lender has to take and secure adequate funding more quickly.

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