Refinancing raw land to ease the burden of down payment.

[Adam Wuertz]

Hi everyone. I'm looking into building my first 4 plex as an owner/occupier. Land in Anchorage Alaska is a little on the expensive side and I'm finding that the land's cost is pushing me away from my approved FHA financing. I was also approved for more money than the FHA through a Fanny conventional loan with the higher down payment. The Fanny loan is pretty much off the table at the moment, except for the fact that my lender is saying that this following scenario is possible.

“if you were to purchase the land with the minimum cash output needed, then with the use of a quit claim, quit clam the deed to the builder so that they may build the building. Once the building is built then the loan for the existing land is refinanced to include the cost of the new building. When that loan is refinanced, they take into account the value of the raw land as principal or money down therefor greatly reducing the amount of cash needed at closing to complete a conventional loan with 20% down.”

That’s at least how I heard what was told to me. So other than the fact I may not have all the details or the correct order of things. Does this refinancing idea seem like a real thing? I realize there probably has to be a lot of trust between myself and the builder but that aside, has anyone used a deal like this to get around those large conventional down payments?

This is approximately how I see my deal, using this refinance method 

Land value at purchase 200k. Purchased with a Conventional loan, 20 years at 4.8% interest rate with 20% down. Cash out of pocket for the purchase approximately 25k. Resulting in relatively hearty monthly payments until the refinancing of the loan happens.

The 4 plex is built using the quitclaim to the builder for a final value of 800k. Then the existing land loan is refinanced to include the building’s cost at a total value of 1,000,000$. At this point it seems that the original land value is looked upon by the bank as existing money brought to the table, in this instance 200k or approximately 20% of the total refinance amount. If this is truly the case then money out of pocket at this point is ancillary costs to close the loan etc plus the original amount that was put down on the raw land.

Am I completely of base? Does any of this make sense?

Thank you for any input.

Adam

[Allen S.]

@Adam Wuertz The total value of your land isn’t your down payment, just the equity in your land ($25k in your example).  Also, it’s very unlikely that you’ll be able to quit claim the deed to a property that you have a note on.  That kinda defeats the purpose of the bank holding the land as collateral.  I know the quit-claim to your builder is a thing, but I don’t prefer it and neither does my builder.  We are currently building a house in the Valley and will hold the title to our land in our name the whole time.  The likely path to building what you want will involve a construction loan, but that’ll require 20%-25% of the total project.

More importantly, I’m wondering where in Anchorage you’re planning to build a $1,000,000 4-plex and get your numbers to pencil out?  Will these be high end condos in bootlegger’s cove?  Everyone has a different tolerance for how they run their projections, but I suspect you might be underestimating some expenses or overestimating the rents you’ll realistically get.  I’m not anti construction at all, and it definitely makes sense sometimes, but in this town I think it’ll be hard to get a reasonable return out of a $1,000,000 4-plex.