Anatomy of a Great Development Loan
Updated: Jan 21, 2022
Location: Go west on a main 2 lane paved county road about 3 miles past developed property. Turn southwesterly onto a gravel road going down a hill about 50 yards. Turn south into a new wooded subdivision of 11 lots.
A few years later the subdivision is enlarged, and the road is paved to the subdivision entrance. A few years later the road is paved about 250 yards down the hill to a new subdivision with paved streets in a meadow below the wooded subdivision. The entry road onto the meadow runs due south and utilities are brought to the site.
The asset to be purchased and developed was bounded on the east by the paved road into the meadow subdivision and on the north by the southwesterly gravel road and on the rear by an almost straight line forming a triangular tract on which there was a decaying barn.
This small tract was owned by the developer of the wooded subdivision at the top of the hill and seemed to him to have no significant value. So, he contracted to sell it to my client for $10,000.00 (a sum my client didn’t have).
How it happened:
1. My client traded some labor he performed with a land surveyor who produced a plat, ready for recording, for 9 lots fronting on the 2 existing streets.
2. My client traded a lot to a person who agreed to build a house for himself on that lot and to supervise the building of a house on another lot for my client. Loan commitments were obtained for permanent financing and construction loans were made using the 2 lots as collateral. The end result being that each wound up with a finished house with an 80% loan (and 20% equity).
3. The remaining 7 lots were used as collateral for a loan to pay the $10,000.00 purchase. One of these lots was promptly sold for $5,000.00. The client wound up with 6 lots valued at $5,000.00 each and a $5,000.00 loan balance which was paid off at the next lot sale.
The End Result:
This certainly wasn’t as easy as it sounds. However, the developer went on to successfully develop a larger subdivision (in 2 phases).
One of his clients that purchased one of the first lots went on to purchase and build on several lots in the second larger subdivision. This client went on to be one of the most successful builder/developers in the entire area.
Bernard P. Richter November 2021