Land purchase advice needed

Podunkadunk · Dec 16, 2008

Guys I'd like you to help me brainstorm some ideas.

Here's the situation:
There's roughly 20-25 acres of land (no home or structures on it) that borders me that's for sale. Actually the guy has 200 total, but I only want the 20-25 acres that bumps up to mine. I've contacted the owner several times, each time discussing different things, but I think I'm ready to pull the trigger. The price per acre hasn't been hammered out yet, but let's just say 3k per acre to make things easy. Here's where you guys come in, to help me think of something I haven't thought of, or just to offer your input, which I value.

Option 1 - I could take out a second mortgage on my existing home, to use as collateral. I listed this one, but it isn't even an option in my book, as I've been taught it's not wise to borrow against your primary residence. I don't want to get in over my head and lose it all (God forbid). Let's just say that right now, my retirement makes my mortgage. I don't want to go over that amount.

Option 2 - Federal Land Bank. Not sure about these guys, I know they want a hefty amount down, or maybe I'm wrong. ?? All my extra $ is tied up in my now non-existent 401K. Can't touch it anyhow, don't want the penalty or the price per share.

Option 3 - Owner finance. Here's the one I'm leaning toward. To my knowledge, he would be in a win-win situation. He holds the deed until paid, and if I default, he keeps the $ and the land. Also, he farms the field on this place. I told him I'd allow him to continue farming it (keeps the deer coming in).

As you can tell, I'm trying to talk him into going with option 3. He's listening (that's a good thing). How much interest should I look at being charged?

Payment terms? Length of loan? Land Lawyer? Survey? Any thoughts would be appreciated.

Podunk

Erik_in_Hoyt · Dec 16, 2008

why not just do a farm purchase through your local bank? Most banks will go 10 years on something like that. then you can either lease it to him for farming to cover taxes, or for $1, or whatever. He gets a chunk of cash influx now, and you don't have to worry about the terms of an owner finance agreement, especially if he should have sudden health issues.

blueriver · Dec 16, 2008

I think I would consider the local bank. Whatever you do, do not make the mistake I made, the neighbor offered me 40 acres that joined me, I thought man I got everything paid for and sure do not want a mortgage ... today I watch with envy the new owner working that 40 ... I SHOULD HAVE BOUGHT IT!!

SnowRidge · Dec 16, 2008

Survey and attorney drawn or approved contract, no matter what. Agree about not taking a mortgage out on your current property. Talk to the land bank and find out what they really want. Being informed is good.

Why does the owner want to sell? I am always suspicious if someone is willing or offering to sell something, unless there is an obvious reason why he or she wouldn't want to hang on to it.

You might want to do a preliminary title search yourself down at the courthouse. No sense paying a surveyor or title company to find an obvious problem. Naturally, you would still get the survey and buy title insurance if you go ahead with the purchase.

ToadHill · Dec 16, 2008

The last time I bought land from a neighbor, 65 acres I asked him how he wanted to be paid. He said that He'd like yearly payments for the next 15 years as it would be additional retirement income for him. That's how we did it.

It always works best if it's something both sides are comfortable with.

kthompson · Dec 16, 2008

No doubt buying land has changed in the last few months. For pure land you probably will have to have a good bit down. Federal Land Bank (did not realize they still used that name, here is Arbor One) I would talk to and if you do be sure you ask ALL about their loans. Had house with them and was very pleased with their dividend payment or credit.

Financing your house and land are totally different as you will find with the down payment, length of loan and interest rate. A second on your house probably gives you the best interest rate. If this will be income producing property the higher rate may not be as big a deal. You may find doing a loan with a lender and having the owner take a second loan on it for the difference between what you want to pay down and the primary loan is for to be good for all.

I do not understand how the seller's health changing would affect you if you have true mortgage and it recorded. Then I am not a lender nor an attorney. YOU DO NOT WANT A LAND SALES CONTRACT. Miss a payment and you loss all paid and the land. You want a mortgage.

Understand the danger on having your house involved in this. That is also why the rates are lower if the house is part of the package.

As to his farming it and anything else, it all should be in writing and what can and would end it and what happens if ended. Believe me, you will do wise to have a lot of thought into that for both parties. Do put a buy out or termination option for such for either party, it may require a buy out of the party terminating it.

Do not miss any tax rate change with your buying it. Here property will move up in value to current value with deed change. Depending on it's use can really affect the tax bill.

AlanB · Dec 16, 2008

For me it would be a talk with my local Farm Credit services. (I imagine they are in your area) Local banks were a joke when it came to lending on land, and when (seldom) it was done, it was done at commercial rates. (no thanks)

As someone said, get a good attorney familiar with the inns and outs of these deals if you go with owner finance.

JRobyn · Dec 16, 2008

What Alan said!

I used Farm Credit for both of my land purchases.

- Jay

Flatheadyoungin · Dec 16, 2008

farm credit was great for us too.....they are very flexible on financing, new home construction, closing and fees, etc.....

their rates are a bit high, as of about a week ago, but they are coming down....get yourself preapproved and be ready to lock in a rate...i've been watching rates for about a year now, and they are headed below 5%.......at least in my opinion.......and, the good thing about farm credit, is, if you don't get a rate you like, say they go down later, you have the option to buy your rate for a flat fee (% of the loan) and they just rewrite the loan......you don't pay all those closing fees, attorney fees, etc. again.....

shoot, they'll roll your current house in to the loan.....

with rates coming down, you may check about refinanicing your current home (i don't know your rate) and the money you "save" could pay a good portion of your property payment......i'm gonna try to catch these good rates, refinance my current home and seperate garage and hopefully buy down my land rate......between the three, with lower rates, the savings will just about equal my payement on the land.....

did i say i hate to pay interest!

farm credit used to have their rates on their website but they took them down about 2 months ago......

AlanB said:
For me it would be a talk with my local Farm Credit services. (I imagine they are in your area) Local banks were a joke when it came to lending on land, and when (seldom) it was done, it was done at commercial rates. (no thanks)

As someone said, get a good attorney familiar with the inns and outs of these deals if you go with owner finance.