Can You Subdivide Property That Has a Mortgage?

Investing in land is one of the safest ways to grow your net worth. Sometimes, though, investors will get in over their heads and buy up too much property. Or they’ll buy large pieces of land solely with the idea of selling it off for a profit. But what about the bank? Will they just let you subdivide land that you’re still making payments on? Can you subdivide property that has a mortgage, or will you get into trouble? 

Yes, you can subdivide a property that a bank mortgages. You’ll need to get their approval and receive a partial release of mortgage before the deal can be closed. Having the partial release is critical, as going around the bank can activate a demand feature clause that requires the remainder of your mortgage to be paid in full.

There are more things to consider than just your bank, though. I’m going to dive into all the things that come along with selling land, mortgaged or not. That way, you’ll have a well-rounded view of just what it might cost you in the long run and if it’s worth that cost. Let’s dive in.

Why Would You Subdivide a Property?

Whether you bought your property as an investment or just wanted a little space away from the neighbors, owning large pieces of land can be a fantastic way to increase your net worth.

But often, the upkeep for so much land can get overwhelming quickly, and many landowners will start to look for options to unload some of it. Not only does it help to unload some of the burden, but it can also create a nice chunk of profit if the value has increased since your first purchase.

Properties of any size can be subdivided as long as there’s a ready buyer. But if you want to get into land investing to flip for profits, take a look at this chart. It can give you an idea of how much acreage land developers typically purchase for different types of subdivisions:

Type of SubdivisionMedian Number of Acres
Metro29
Non-Metro20
Single-Family Detached26
Single-Family Attached5
Mixed-Use69

Source

The Things that Can Prevent Your From Subdividing Property

Some real estate investors get into a bad deal when they purchase a property without understanding certain restrictions. Just because you own land doesn’t mean you can do whatever you want with it. There are two main roadblocks you’ll come up against:

Zoning Issues

Say you’ve got a few dozen acres you’re looking to offload to a land developer. The developer is interested in building an industrial park on the land they buy from you. The problem is, based on the jurisdiction in which the land resides, that could be a big no-no. Communities often want to control the amount of development around their neighborhoods, and having a dirty, loud industrial park a few blocks away simply won’t do. You could be blocked from selling the land altogether. Check zoning laws ahead of time before accepting offers so that you don’t end up in a tough situation.

Getting the OK From Your Bank

Do you have a mortgage on the property? If so, you’ll need to get approval from your bank ahead of time. Skipping this part can not only cause problems for the sale but can get you into a world of trouble that gets expensive quickly. I’ll talk more about that in a second, though. 

Considerations Before Subdividing Your Property

Selling off swaths of land can generate a good profit, but at what cost? I’m not trying to stop you from dividing up your land. If there’s a good deal to be made, then go for it! However, there are a few things you should consider ahead of time before deciding how much you’re willing to give up.

What access to natural resources are you losing?

If you’re selling off an area full of trees, then your buyer may own the timber rights instead of you. That, or mineral rights for a yet untapped vein of crude resources, could net the owner of those rights a nice profit, possibly even launch them into the 1%. If that chance has slipped through your fingers, you may feel like you got the short end of the deal. Don’t be naive about the resources you’re giving up. Make sure you understand just what potential income that property holds. 

What’s going to happen to the property?

If zoning laws aren’t an issue, you may still want to consider how the property will be used. If you live on land next to it, your quiet life can be quickly turned into a zoo. I mean “zoo” figuratively, but it could be literal! Or it could be a shopping center, power plant, amusement park, whatever. Are you okay with how the land will be used? Make sure you ask questions ahead of time and get it in writing. 

Will you lose privacy?

What’s the value of your privacy, and is it shown in your asking price? Those wide, open spaces could become cluttered by a savvy developer who wants to maximize the use of the area by cramming apartment buildings or other things that bring lots of people near your property. Consider the worst-case scenario for you and decide if it’s worth the offer a buyer has made or not.

Do you understand the actual value of the property?

Land is one of the few investments that’s almost guaranteed to increase in value over time. If you need cash quickly and want to sell off assets, that’s one thing. But don’t let a fast nickel prevent you from getting a slow quarter. To put it another way: consider if selling your land now is more valuable than holding onto it and selling for a higher price later. There are no takebacks in real estate deals like this, so think about the long-term benefits you could be losing. 

How to Negotiate With Your Bank to Get a Partial Release of Mortgage

If you have a mortgage, your bank will need to sign off on any land deal first. Lenders require this because they’re losing pieces of collateral that are attached to your loan. The subdivision is a gamble for them since the value of your land will decrease.

Don’t try to get around this step. I’ve seen investors try to sneak around their lender and sell pieces of land off without the bank’s consent. Their thinking is usually that they’ll take the profits to pay off the mortgage, and the bank will be none the wiser. The bank gets paid; what’s the harm?

Here’s the thing. Could you get away with it? Maybe. Is it worth the risk? Absolutely not. If your bank finds out you’ve gone behind their back, they can activate a demand feature which would put the full amount of your mortgage due ASAP. 

That said, most lenders will sign off on your deal so long as you come prepared. Your bank will be looking to see if the land deal will cover their debt position. Luckily, this most often is the case because subdividing land increases the value. Once approved, you’ll get what’s called a partial release of mortgage. Unfortunately, it’s not what it sounds like: all the release means is that the land sold is no longer attributed to the mortgage. You’re still on the hook for the entire balance. 

Each lender has its own set of rules for subdividing mortgaged properties, so have a lawyer look over your contract to see what specific hurdles you’ll need to overcome. 

The best advice I can give you is to come prepared. Bring any documents that show how the land will be used, approvals from the zoning boards, title searches that prove there are no liens, utility bills to show owner-occupation of the land before the sale (a requirement depending on the state), and an appraisal. However, the bank may still do its own anyhow.

The easier you make it for them to feel safe, the more likely they’ll consent to the sale. 

Final Thoughts

Subdividing a property can be highly profitable in the right situation. The key is to find a balance in value between what you’re giving up and what you’re receiving. Give some thought to whether the deal still has you coming out ahead by considering a few things mentioned above. That way, you’ll ensure that not only will your land be used well, but that it will help to raise the value of all properties around it (including yours).

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