Subordination to build on vacant lots? - Posted by Burt Buchanan

Posted by Michael on November 04, 2000 at 11:08:19:

I am a builder, and just sold a spec home within 45 days of completion, I also sold one earlier this year, before it was complete. I didn’t owner finance either. As a matter of fact there are two spec homes next to the one I just sold, offering owner financing, that were completely built when I started construction on mine, and they are still on the market. My house sold for $132,000 the ones offering owner financing, started asking $129,900 reduced to $119,900. Hey, if they keep dropping in price, I may buy them, change the paint and carpet, add ceramic tile instead of vinyl flooring, rework a couple of the flaws in the layout, possibly add covered parking, and since they are slightly larger homes resale them for about $140,000.

The secret is presentation, most people don’t have vision. Keep the colors mostly neutral, don’t go to cheap on the appliances, plumbing and light fixtures, make sure you have a formal dining area, superb kitchen, and an exquisite master bathroom this should help you sell your homes faster. Covered parking is also a BIG plus.

Subordination to build on vacant lots? - Posted by Burt Buchanan

Posted by Burt Buchanan on November 01, 2000 at 15:35:30:

How do I nogotiate with residential vacant lots owners to build a new house when I have no cash to first buy the lot? I heard banks won’t give out construction loans unless you first own the lot. Is there a way around this dilemma? How is the use of subordination used in this situation? How does builder make a landowner’s mortgage note subordinate to the construction loan and when permanent financing is put into place, the landowner gets paid off. Can someone please explain in detail how this works?

Also, how do I locate the owners of a lot when there is no physical address?

Forgive me… I’m new to this… Thanks

Re: Subordination to build on vacant lots? - Posted by Ed Garcia

Posted by Ed Garcia on November 03, 2000 at 10:47:19:


You’re on to something. You defiantly have the right idea. The first step is to find a good lot that’s in a marketable area and that you think could be an ideal location. Next you have to convince the seller to subordinate to a construction loan. My suggestion is to explain to the seller how you intend to build on the property and INCREASE the value of the asset about 50 to 100%. Remember, the lot will be cheaper than the house that you build on it. If done right, you should be between 70 and 75% LTV.

In most cases the bank will want to see at least 10% liquidity in your financial statement. What that means is that you have at least 10% of the project available in cash. The reason for that are overrides and in the event something should go wrong, you have the ability to cover it.

While I’m at it, let me ad what I just posted on the Main Newsgroup in regards to construction loans.


You will need the following.

(1) LAND: Either free and clear, or 50% paid down for a land draw.
(Note) If you wanted, you could buy a lot with NO money down, have the seller subordinate their loan to a construction loan.

(2) PLANS: These plans have to be approved by the city your building in.

(3) PERMITS: As you know, sometimes the City can require you to build either conforming structures or off sites, that the City wants. The will also have building standard for your area.

(4) COST: The Bank will require a COST BREAKDOWN of all of your expenses. They will want to see a cash flow chart to pay you on a VOUCHER system. As each phase is down and signed off by city inspectors, the contractor will be paid for that phase. (Note) interesting enough, the bank will take your cost break down and analyze it with their computers. If the cost is more, that will concern them, and they will cut it back. If it’s less, that will also concern them because they will think you short changed yourself in building this project. So In essence, the bank can be instrumental in verifying your cost. However, don’t ever count on anyone but yourself. Do your own, do diligence. (Note) the bank will require at least 10% liquidity on you the borrower.

(5) CONTRACTOR: If you are a Contractor, the bank will want to see your resume and you contractors license. If you are not a Contractor, then the bank will want to have a resume on your contractor as well as a copy of his license, and financial statement.

There are other considerations, but this is enough to get you thinking in the right direction. If everything is done right, you should be in the deal about 70% to 75% LTV on a NEW property. In fact I have seen better depending on area, and size of the deal.

Ed Garcia

Re: Subordination to build on vacant lots? - Posted by Paul Macdonald

Posted by Paul Macdonald on November 07, 2000 at 21:35:58:


Don’t forget cross-collateralization of equity in lieu of cash or down payments (although you’ve got to have pretty good credit for this one).

Paul Macdonald

Re: Subordination to build on vacant lots? - Posted by Burt Buchanan

Posted by Burt Buchanan on November 03, 2000 at 12:45:49:

Thank you for your post Mr. Garcia. :slight_smile: I now have a better understanding in how to set this up. The lots I’m interested in are in very good areas. Ed, to my understanding, you are a mortgage broker…correct?
Do you do any of these type loans? If so I would be extremely interested in working with you. If you, any one you know, anyone reading this post, would like to partner with me, then by all means contact me via e-mail and we’ll go from there! I will get the land under contract. Get the contractor lined up
(have two who are ready to go). You provide the cash for the holding costs of the loan or finance the deal altogether. I will sell these homes using owner financing and then simultaneous close the note to cash out. If a second is required for the note purchase, I’ll carry and you’ll receive all cash. Owner financing, I’ve heard is the way to sell a home quickly. After all said and done, we’ll split the profit 50/50. The comps for the areas I want to build will support the $240,000 to mi