Buying Land for a Farm
When you’ve at last defined the vision for your homestead and have committed to chasing your dreams, the matter of financing the land purchase becomes your next significant milestone. In this discussion, I’ll delve into the array of options that were available to us, while also touching on alternatives that might be more suitable for others. While this isn’t an exhaustive list, it encompasses the major financing avenues accessible to individuals.
Many of these avenues have been part of our journey as we’ve acquired different homes, and others have been considered as viable paths to explore.
Disclosures for Financing
Let me make it clear from the outset that I’m not a loan officer, processor, or financial expert. Instead, these insights stem from our experiences as a licensed real estate agent that includes working with multiple loan officers, processors, multiple homeowners and small-scale real estate investors. It’s important to note that our journey commenced without a substantial initial capital or an inheritance to rely upon. Our journey was built on the foundation of hard work, a strong work ethic, and a resolute determination to achieve greater financial stability than where we started.
Types of Funds for Buying Land
1. Cash:
Whether you’re utilizing your personal savings, an inheritance, or funds borrowed from various sources including banks, cash transactions are a straightforward way to buying land. “Cash” can include:
- Your own accumulated savings
- Inherited or gifted cash
- Cash financed from family, friends, or private lenders
- Funds obtained through a HELOC (Home Equity Line of Credit) or a secondary mortgage
- These avenues represent different means of securing funds. Regardless of the source, the title company will typically process the transaction as a cash deal during the closing process.
2. Bank Financing:
In contemporary times, the most prevalent method of property acquisition is through bank financing. This encompasses land loans, home loans, commercial loans, and construction loans. The type of bank financing you qualify for will be contingent on the type of land you intend to buy. Whether you plan to acquire developed land, partially developed land, land within a subdivision, or raw land with no utilities, the eligible loan options will differ accordingly. With bank financing, the lender generally holds title and a lien on the property until the loan is repaid, at which point the title is transferred to your name. The lender’s funds are often routed through the title company, and while you won’t physically see the money in your bank account, it plays a vital role in the transaction.
3. Owner Financing/Owner Carry:
This option is feasible when the property seller owns the property outright, without an existing mortgage loan. Proceed with caution, as owning the title doesn’t necessarily mean a lien-free property. When we utilized this approach, we established long-term escrow accounts through the title company. The company managed payments, serving as intermediaries between us and the sellers. This arrangement resembled an automatic payment system similar to dealing with a mortgage company or bank.
4. Lease-to-Own Option:
This alternative offers the chance to lease a property with an eventual opportunity to purchase it. We engaged in one such transaction that eventually led us to refinance through a bank. It acted as an excellent stepping stone to property ownership. I delve deeper into why we chose this option and how it worked out well in another post.
5. USDA Agriculture Government Loans:
These government loans come with specific prerequisites that must be met before applying. For more details, refer to the guide: USDA Guide to FSA Farm Loans, also the USDA website here. As interest rates started to rise, we explored the requirements for these loans. Although we considered USDA loans, we quickly realized we were ruled out due to not having three years of agricultural experience evident on our tax returns. While there are workarounds such as substituting one year with an agricultural degree direct experience in agriculture, first hand agricultural experience is required for at least one of the three years.
Embarking on Your Journey to Buying Land
As you embark on your property purchase journey, remember that each financing method comes with its own considerations and implications. This snapshot of options offers a starting point for your exploration, helping you make informed decisions based on your unique circumstances. What questions do you have in regards to financing and funding a property purchase? Let me know in the comments below, I would love to hear from you!