There are many reasons why you could have your loan declined by our risk analysts…
At Gap Equity Loans, our lenders generally do not lend on raw land without significant construction on site. There are some exceptions to this rule but they are few and far between. Why is this?
Land Generates Expenses, Not Income
Land is a “money sink” — it does not earn any money, in fact, it needs money to stay afloat, in terms of taxes and maintenance. Compare to a house for instance, that can earn money as a rental before you sell it.
Also, land generally requires a substantial initial investment (in the form of construction) to turn it into an income generator. Lenders who take back a piece of land due to a foreclosure are left with few options: either sell the land quickly, or invest a substantial sum to develop it.
Land is Speculative
Here is the issue with land: It’s a 100% speculative investment. Land investors are 100% hoping the value will go up to provide them a fair rate of return. Lenders are not generally speculative with loan collateral.
There’s Plenty of Land in Costa Rica
While theoretically there is only so much land in the world, and by extension Costa Rica, it is also very abundant. When trying to sell land, you’re up against a vast inventory of parcels also for sale, in a buyer’s market.
This is why lenders do not value land as highly as a house, for instance. In the event of a foreclosure, raw land can be much more difficult to sell at market prices. A lender is looking to recoup their investment as quickly as possible if the borrower cannot pay back the loan.
Who Might Consider Costa Rica Land as an Investment?
Land may be a good investment for home building companies and long-term corporate land investors with extensive development experience and significantly diversified portfolios of land to reduce their overall risk. Also, if you find an amazing deal on a residential lot to build your dream home, and you’re willing to take the risk, then it can be a worthwhile venture.
But for the regular investor, buying land implies more risk than reward. This is why lenders prefer to lend on properties with residences or construction of commercial value.