Using what we call "OPM" or Others People's Money the best and really the only way to finance any of your developments, and in saying that, any of your real estate investments!
This may not be new to you, but many people are amazed and the response that is heard often goes something like this "ahh, so that is how they do it".
Depending on where you live in the world, there are several methods that can be used to obtain financing. In the USA there are generally 3 ways.
1. Direct working relationship with the seller
2. Use options to control the property
3. 1031 exchange
The 3 method here needs revised explanations and requires the services of an accountant and legal advice, therefore it will not be discussed in this article.
Working directly with the seller allows you to provide him / her with what it is that they require, you satisfy their needs! This is critical to your success when using this approach. If you satisfy their needs first in this transaction, you will get your needs satisfied. You also need to work on your personal skills and become a very good listener if you are not already. Remember, it is THEIR land you want! You must communicate very well.
So they become your partner in this deal, in the land development transaction. So if you have finance qualification issues, (which some do at the present moment I might add) the seller helps you by taking on the debt themselves and in return you the unqualified buyer is able to get the deal you were not able to get initially . In return for this "help", the seller claims a better slice and therefore a more attractive sale price.
Concomitantly, the seller also benefits by receiving a greater after-tax profits. This occurs due to the fact that the seller is 'carrying' the paper, the sale amount will not be taxed instead it will be based on the installment payments made over the years. So instead of having a hefty capital gain tax bill due to being pushed into a higher tax bracket, they may be able to stay within a lower bracket due to installment payment being made over a period of years therefore enabling them to stay in a lower tax bracket then if they obtained the complete sale amount in one lump sum.
Controlling the Property By Using Options For Financing Land Development.
What is an Option? It is a specified agreement detailing future performance in exchange for a benefit.
In laymans terms, it means that you cough up some funds, and you get to control the property!
So what you are effectively doing is obtaining control of the land by buying this control. In other word, you agree upon a price for the option to buy the land that you are to pay at an agreed upon date in the future.
This is all done legally and is very simple to have in a contract. At any period of time in the future before the expiration date of the option, you can exercise your right to close the sale and take control of the land. Legally the seller must sell when you have the funds and commit to the purchase. If you know your markets, you can also do very well from this transaction itself. By buying land a fair market value at the time of the contract, and as the market increases you are still able to obtain the agreed upon price for the land that you made at the earlier date. The seller still must sell at this agreed price even if the land value has tripled in the time period you agreed upon! This is why it is so important to be up to date with your 'patch' and what is happening in the market where ever you are.
A more detailed and sophisticated approach to options is the rolling option. This is generally used for large parcel land development transactions. This is quite a detailed and complex agreement, and there should require more knowledge and experience. Utilization of the rolling option occurs when a large amount of property is purchased to develop master planned communities. Such as when developers are creating 'phases' in the development project with an absorption of dwellings usually excluding 5 years.
What the buyer typically does in utilizing the rolling option, is that they control the entire tract by being able to 'put up' one option at a time, and after each execution of the options the buyer is able to take control of more land until they control the entire parcel of properties that was contained in the original contract.
Execution of the options must take place when they are due or the entire contract in null and void and therefore canceled. The seller then has the right to put the property on the market again at the same time keeping the initial premium.
The buyer benefits by having a contract that if adhered to, allows them to be able plan their development for the entire property package with the knowledge of what they are to pay for the land, and this there allows them to create the most important pre development work, the development ROI (return on investment) calculations.
The primary benefit to the seller is that they obtain their desired and agreed upon price, and if the transaction does not come to fruition, they receive the sizable option premium and the land can be sold again. If all goes well, they receive the entire agreed upon price.