Sukanya Kumar - RetailLending.com
The best investment on earth is earth."
- Louis Glickman.
“The land is the only thing in the world worth working for, worth fighting for, worth dying for, because it's the only thing that lasts".....Gerald O'Hara, Gone With The Wind.
"Our land is more valuable than your money. It will last forever. It will not even perish by the flames of fire. As long as the sun shines and the waters flow, this land will be here to give life to men and animals."- Chief of the Blackfeet.
Buy Land. They are not making it anymore.".......Mark Twain.
We have not inherited the land from our ancestors, we have borrowed it from our children.".....Old American proverb
"It's tangible, it's solid, it's beautiful. It's artistic, from my standpoint, and I just love real estate."
- Donald Trump
Everyone always write about ready or under-construction home purchase and one of the most important purchase rurally as well as in urban India is purchase of a plot of land is generally not talked about.
PSU and private lenders do substantial volume of loans for funding land; wherein most MNC lenders do not indulge. Though the personal credit documents for applying for a land loan is same as any other home loan, there are major number of differences which one needs to be aware of before applying. Here are the differentiators:
1. Type of land to be funded:
Land parcel only with residential or commercial conversion can be funded. Agricultural land in green or orange belt can not be commercially funded by regular lenders.
2. Type of Plot:
The plot of land can be an independent one or in a gated community. Lenders prefer plot in gated community as it will be more secure from encroachment and will also have basic required development work done like electrical cables laid, roads developed, proper earmarking and numbering of individual plots, sewerage and water pipes laid underground, proper filling and leveling of land.
2. Geographic limitation:
Lenders are specific about the actual location of the land. From the risk-perspective for the collection team, it is important since there is hardly any land available in the middle of any city and most of the lending in this category are on outskirts.
3. LTV
A very important note in this is the lower loan to value ratio(LTV) for funding on land purchase. For an independent land it is a max of 70% of the agreement value and can be maxed at 75% for the ones in gated community where the lender approved the land developer as well as the entire property.
4. Tenure
Loan tenure is mostly restricted to 15/20 years in land purchase loans. Some lenders who have more branch network and can absorb more of land loan product give flexibility till 20 years too, with some deviation, based on the profile of the borrower.
5. Rate of interest:
Rates are same as in home loans during some scheme floated by the lenders for specific period of time, but may be a tad higher otherwise.
6. Construction timeline:
Be sure that the loan you are opting for is a pure plot loan & not linked with a 'condition' that you need to start construction within agreed timeline. Unless you have plans to construct a house on it soon, and if you opt of a composite loan which means loan for land as well as construction, the lender might choose to increase your rate of interest in the event of not starting the construction.
7. Investment or self-use:
Lenders might want to know your purpose of purchase during the credit appraisal and discussion. If the property is for investment, they might want to know your plans for sell-off to understand your seriousness on this investment.
8. Lenders' view on Risk aspects:
Land loan is construed as a riskier investment. Not only it has the risk of encroachment, it can have more chances of litigation and at the end of day, a piece of land is not the priority investment for the borrower if he is not planning a construction and if the value of the land does not increase as expected by the owner, it might even default of the EMI payment and never mind losing it too! This has happened historically and many lenders have burnt their fingers and had to write off the portfolio. Many lenders have stopped lending on lands.
9. Bright side:
However, some experienced lenders have shown us the bright side of lending against a land too. Yes, that means you can mortgage your land and get funded for usage of the money elsewhere. LAP(loan against property) for land is a fairly new concept with mere one or two lenders only and with very low LTV of 40%, but at least the silver-line shines.
Hope the above points help you invest in the most sought-after investment in the world.
"Real Estate can not be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world."
----Franklin D. Roosevelt
