How easy is it to finance vacant land? And, is it easier to finance vacant land if you’re going to build a hour or a commercial-use property on the land within the first six months of owning it? Unfortunately, it’s tough to finance vacant land and if you plan to live and work on the property, financing could be even tougher.

Q: I watched Ilyce’s very informative video on how to finance a vacant land purchase.

I had a question about your last statement in the video relating to financing vacant land purchases. Are residential lenders more willing to finance vacant land if you plan to throw up a small home in the first six months?

Also if I went the commercial financing route and started operating a business off of the land would financing be easier?

A little background on me. I own a transportation company looking to purchase between 8 to 10 acres which over time I could ideally manage operations from in addition to it being my primary residence. Operations would include warehousing, loading/unloading, logistics, and storing. I imagine it would be like an Amazon or Costco warehouse, but on a smaller scale.

A: Congratulations on building what sounds like a successful business. There are some issues with how residential lenders would treat what obviously sounds like a commercial enterprise.

Finding a vacant property that would accommodate both residential and commercial construction of the sort you are proposing is the first step. The property will need to be zoned for both types of construction (very unusual unless it is an extremely large parcel) and you should make sure you can get this sort of zoning by stopping by the local building department of the municipality into which it falls.

If the property you’re looking at is in an unincorporated part of a county, you may need to talk with the county’s building department to discuss any zoning issues you might have.

Don’t get tripped up by purchasing a property expecting to be able to use it any way you want. And, don’t rely on the seller or seller’s agent telling you what you can use the property for. Always double-check it for yourself. (And, we’ve heard plenty of stories about investors who check with the local building department ahead of the purchase only to be denied zoning changes once they own the property and are getting ready to build.)

Next, if you buy vacant land and decide to build a home on it, you’ll have to qualify for very different financing than if you buy an existing home. The type of financing is called “construction-to-own” and typically you have to buy the lot separately (with cash) although sometimes you can get construction-to-own financing that includes the lot.

But commercial properties don’t typically get financed this way. More often, when you’re building “Costco-type” warehouses, your company is already big enough to have a regular commercial banker and other sources of funding. The purchase of the property might then be in cash and your regular commercial bank or other financing vehicles could arrange for the building of the warehouse.

Banks and other commercial lenders don’t often do this for first-time ventures because it is so risky, although that will of course depend on what assets you can pledge. Another obstacle you might find in trying to get financing on the residential side is that the location and type of home you may want to build may not have comparables around it making it hard for an appraiser to value what you want to do. When an appraiser has trouble, the amount a bank is willing to lend you could be quite a bit less than what you need.

What you should do is find a local real estate attorney who works extensively with commercial property developers and lenders. Talk about what you hope to do and ask for help in finding the right kinds of developers and lenders who are experienced and can guide you appropriately.

Hope this helps.