When buying a house, most people finance the purchase their home purchase with a bank mortgage. However, when it comes to purchasing vacant land, where do land buyers find the money?
Their choices are:
- Cash
- Loan
- Seller financing
Which source of funds is more prevalent? How does the source of funds vary by price range? I’ve always wondered. So I did some research. Now I can share my research with you.
First, let me explain what I mean by each source of funds.
Cash
I thought that “cash” was self-explanatory until the time I told a buyer that the seller required “all cash” and he replied “so, you want me to come to your office with dollar bills in a duffle bag and put it on your desk”? From the perplexed look on his face I understood in that instant that “cash” means different things to different people!
Paying for land with “cash” means that you pay with money you already have in the bank or some other account. The money is sitting there, ready to go toward your land purchase. It is “liquid”. You can write a check or wire the funds to escrow tomorrow.
Loans
Loans to purchase houses and condos are plentiful. But remember, you’re buying land, dirt, not a home with four walls. Loans to purchase land are scarce.
When available, a loan to purchase land might be available from a bank, credit union or other conventional lender. Loans are sometimes financed by so called “hard money” lenders. Occasionally sellers receive loans from family, friends, or acquaintances.
Seller Financing
Seller financing is also a type of loan. The only difference is that instead of the bank serving as the lender, the seller becomes the lender.
It works like this: The buyer makes a down payment. The seller transfers title to the buyer at closing and the seller becomes the lender. The seller has a lien on the property, just like a bank. The buyer makes payments to the seller (now the previous owner) over time. When the buyer finishes paying off the loan the seller removes the lien. If the buyer does not pay, the seller contacts the Trustee and forecloses, just like a bank would.
How Common is Each Source of Funding?
To figure out where buyers were getting their money to buy land, I searched one large Multiple Listing Service (MLS), the California Regional Multiple Listing Service (CRMLS). I identified all vacant land parcels sold in the last year in various price ranges.
In the one-year period that I reviewed, a total of 4786 parcels of vacant land sold. Of those, 3398, or 71% were purchased with cash. Further, 910, or 19%, were purchased with a bank loan or other loan of some kind. The remaining 478, or 10%, were purchased with seller financing.
Variation in Funding Source by Price Range
The source of funding varies by price range. For land selling in the $50,000-$199,000 price range, seller financing is more common than outside loans. Seller financing is used in approximately 17% of transactions. This is clear in the figure below:
For land selling in the $200,000-$1M price range, outside loans are more common than seller financing and are used in 23% of sales:
Cash is the most common way buyers purchase land in all price ranges except the $1M+ range. In that high price range, buyers are slightly more likely (51%) to purchase land with a loan than pay cash (46%). Seller financing in the $1M price range is rare (2%).
Here is the complete data for all price ranges:
| Price Range | N | Cash | Seller Financing | Loan |
| $0-49,999 | 2127 | 76% | 7% | 17% |
| $50,000-99,999 | 724 | 76% | 16% | 8% |
| $100,000-199,999 | 638 | 68% | 18% | 14% |
| $200,000-499,999 | 635 | 69% | 10% | 21% |
| $500,000-999,999 | 305 | 64% | 9% | 27% |
| $1M+ | 357 | 47% | 2% | 51% |
| All | 4786 | 71% | 10% | 19% |
Conclusion
In California in 2016, mortgages are plentiful for homes, but not for land. Land is generally purchased with cash. Seller financing is common, especially in some price ranges.