What are potential risks to lending the equity from my land to another investor?

An investor has come to me asking to use the equity from land I own. I own this land free and clear and the investor is going to get a 12-24 month construction loan. At the end of this time frame the lien is removed from my land and I will be paid a fee for lending the equity.

What are the potential risks of losing this land if something falls through with his construction loan?
I am new to development, Is this a common practice in larger developments?

This isn’t enough information.


 So is this investor buying your property and asking you to subordinate your land value to a new 1st trust deed construction finance loan? Which means the value of your land is then placed as a 2nd trust deed behind the construction finance 1st trust deed?

If this guy is not buying and building on your property, Don’t Do It!

If this guy is building on your land then the new construction money 1st and your 2nd (land) should be in total less than 75% to 80% of the retail loan to value. IE: $70K construction 1st + $10k land value (Maximum of the two together) for property retail selling at minimum $100k.

The risks are very high if this guy is wanting to use your property for collateral on a construction loan to be used on someone else’s land! “Don’t Do It”!!!

If this is on your land then make sure you get some kind of down payment and make sure his construction loan as a new first and your land balance of value is less than 80% of FMV sale price. Actually your better off if you can get this percentage ratio to below 75% but somewhere in between you at least will not lose money even if you had to take the project over for non performance and sell it yourself.

This basically means you will adjust your down payment requirement amount to bring the ratio to less than 80%. You will have to work with the buyer to understand his construction cost and what he proposes to borrow so you can project the numbers and come up with a down payment requirement that suits your needs!

The construction money 1st trust deed will be available to this guy as construction draws in the rears so the house will always be being built ahead of subcontractor payment and the lender should be receiving material and labor lien releases (Partials) as the project moves along. Plus most lenders will want the builder to hold “Retainer” (10%) of draw request amounts in reserve to guarantee full performance all the way through the punch list period.

You can ask the lender to update you that they received partial lien releases for each draw payment to insure you that all bills are being paid and that you are protected during the process.

Anything else feel free to PM me.

Good luck,


Using you land as collateral for a loan may not be possible. Unless the borrower’s name is on the title, I do not see how a lender will put a lien against it legally speaking.

Perhaps, the investor is asking you to take out a loan on the property and then give him the money. In this case, there is a heavy amount of risk. If they default and do not pay you back, then you will have to pay off the loan on your own property. If you default as well, then kiss your “free and clear” property good bye.

If you decide to do this, make sure that there is some sort of upfront fee plus a high rate of interest on this “loan.” Basically you will be making a hard money loan to the investor. Do not let him encumber the property. Give him the cash and get a promissory note or some other legal agreement written by an attorney.