This section is from the book "Practical Real Estate Methods For Broker, Operator & Owner", by Thirty Experts. Also available from Amazon: Practical Real Estate Methods for Broker, Operator, Owner.
Sometimes the operator buys and sells the vacant land and secures a profit. He may sell and only get back a part of his cash invested, and a second mortgage for the balance; or he may sell to someone desiring to improve and agree to advance a share of the money necessary for the cost of the building; or he may not advance any of the construction money, but agree to go (with a second mortgage) behind such a sum borrowed elsewhere. The first two cases are very simple. In the third, the operator makes what is called a building loan; that is, he agrees to take back a first mortgage (only in very rare cases is a building loan made as a second mortgage) for a sum representing the mortgage on the land, plus an amount which he agrees to lend toward the construction of the building. As the building progresses the money is paid in instalments, called payments, which are stipulated and set forth in the building loan mortgage, placed on record.
In making such a mortgage, the operator has many things to watch for: first, that his builder-purchaser is competent and has a good reputation in the trade; second, that the building he purposes erecting is properly planned and suitable to the needs for which it is intended and the neighborhood in which it is to be erected; third, that the builder is financially able to complete the structure; and fourth, that his payments are equitably distributed, so that the builder will at all times have sufficient money to meet his bills and yet will not get more money than the value of the work done at the time of payment safely warrants. All of this takes a thorough knowledge of the real estate and building business and a keen head for financing.
The operator has various methods of financing a building loan: first, having sufficient money of his own to make all payments; second, selling the building loan in its entirety to someone who will take it over and make the payments either directly to the builder or through the operator (in both cases the operator frequently guarantees the completion of the building); third, by hypothecating the building loan and borrowing a portion of it, financing the balance himself
Owing to the recent stringency in the money market, it has become customary for the builder to try to procure a building loan which shall become a permanent mortgage when the building is completed. The building loan otherwise is a temporary mortgage only and comes due at a specified time after the completion of the building.
The operator often reaps large profits by purchasing a number of lots in an undeveloped section, selling off a portion for improvement and realizing a bigger price for the balance. He also creates value by taking land supposedly suitable for five or six-story buildings and improving it with six or eight or ten stories, thereby greatly increasing the income.
One other form of handling vacant lots in a fast growing section is to erect one-story stores. These bring in an income, stop the increased cost of land due to taxes and interest, and can be readily torn down when the neighborhood has developed. Such an improvement is commonly called a "taxpayer."