What is a Blanket Loan?

Construction companies that specialize in building new homes have plenty of tools made available to them to help them become successful. Many companies that build homes will buy large pieces of property and subdivide them into small pieces of property. Homes are then built on each individual piece of property for the primary reason of earning a return. In other words, companies will make money by subdividing land. This is possible with a blanket loan. A blanket loan is a type of mortgage used by companies that deal with building homes and creating subdivisions. Large pieces of property are financed with a blanket loan while the company subdivides the property into smaller pieces.

Repaying the blanket loan is different than a typical mortgage loan. Instead of repaying each individual piece of property that has been subdivided, the company pays the blanket loan while attempting to sell other pieces of property. Each time a subdivision is sold, the mortgage loan for that piece of land is repaid. A portion of the blanket loan is paid every time a subdivision is sold. This is how companies will make money when using a blanket loan. The amount that a company will pay for large property that can be subdivided will be less than the amount they will earn once they have sold all subdivisions.

Traditional mortgage loans require the entire loan to be repaid once the property has been sold. A blanket loan does not require the entire loan to be repaid once a piece of land has been sold. Instead, only a portion of the blanket loan is repaid, until all pieces of land are sold. Blanket loans are repaid in phases that are determined on how many homes are sold, and how long it takes to sell all homes on the subdivision properties.

Blanket loans have been typically used by contractors for many years. However, during the past few years, home sales have dropped and home values have dropped as well. Many construction companies are finding it extremely difficult to survive in today’s economy. The good news is that property that can be subdivided is also dropping. Investors will take this opportunity and purchase property in bulk. Where construction companies will see a heavy negative impact, other investors will experience a positive impact if they take advantage of the falling prices at the right time. Investors will hold on to property that can be subdivided to be sold at a later date when property value goes back up.

Even though construction companies look at subdivisions as an investment, they may not have the necessary working capital to invest. Investors who invest for long term strategies will turn a profit with a blank loan. Even if the property isn’t being subdivided or sold yet, the investor looks to long term opportunities. Many investors will subdivide property for homes, apartment complexes and condos. Blanket loans are not only used for property that can be subdivided. Blanket loans are also used for investors who are looking to purchase multiple residential properties.

Since the housing crash of 2008, the amount of blanket loans being used has been on the rise, regardless of the slowdown of home construction projects. Investors are buying up residential properties that house 5 or more families. The reason behind this deals with long term investment goals. Property value is down, and the only direction that the value of property can go is up. In fact, some economist state that property value might still drop a little more, but in the end, they will sky rocket back up to their previous value. This gives investors an enormous opportunity to turn a profit a few years down the road.