So he would henceforth include a substitution of collateral clause in the contract.  

This is definitely not the norm in this space, unless you are cross collateralizing with another multifamily you own 

You can hypothecate collateral from one person/entity for use by another person/entity, but you might want to borrow the money as a home equity loan (fixed payments and term...one time funding) or a home equity line of credit (HELOC).

Is it true that the bank would use the lot as collateral for a new construction loan @Troy Sheets 

@Cynthia GomezWe work with a few that will lend on new construction without a new build experienceDepends on down payment as well as potentially cross collateralizing it

(Credit check, putting up collateral as protection for my IRA loaning to, etc)

Otherwise you could finance by credit card, bridge loan (use this property as a collateral) or HELOC.

If you want to leverage, you could use the property as collateral, take a hard money (bridge) loan, rehab, then refinance, which also makes sense.

For docs, at a minimum, you'll want a promissory note, PG, loan agreement, and a security agreement to attach to whatever collateral you can reach.

3) Find a capital partner to work with.4) Can you use other properties as collateral?