crash course on land buying (long post)

Rich Iowa

Member
I have no knowledge in buying land so hopefully some on here can give some insight. I've been thinking lately of finding a place, a few acres up to 40 acres in size, to set up a home base of operations if you will and then work towards renting/buying more land as things progress. Friends showed me an ad for a farm of 187 acres for sale close to where they live. Pretty sure the bank won't give this 28 year old $1 million but this got me thinking. My questions:

What kind of loan options are available? I know there are regular loans from the bank. Are there options from farm service agencies? I believe I've seen some where there are loans for beginning farmers. Or a possibility of working with the owners/sellers on a deal?

How long can it take to purchase property? I assume it will take awhile to get every thing worked out, which would give me time to get a degree finished. I expect to be done with school in August, 8 months from now.

I could or would probably rent the land out to a current tenant or someone else for a year or two til I was ready, and may or may not live on the property depending on the distance from where I live and work currently. That would provide a little money at least.

I will talk to a cousin who is a realtor and the guy my sister has worked with at the bank to get their opinions and ideas on this. I know speaking with an attorney about this would be a good idea too.

I know there are lots of helpful guys/gals on here so that's why I'm throwing my thoughts out on the table.
 
Dream big. Talk to FSA and Farm credit. FSA has loans for beginning farmers that are low down payments and financing for the equipment to do the job. Look around. If you have decent credit and are a good manager, and are willing to work, they may be able to help you. Remember, nothing beats a try but a failure....
 
When I bought my farm 10 years ago, I learned the hard way that financing can be tricky.

I talked to many different banks to get pre-approved for financing and to find the best rate and term. At the time, conventional mortgages were in the 5.5 to 6 percent range, and I naturally assumed I could get a mortgage with a similar low rate. How wrong I was! Most of the small local banks I spoke with said they would only write loans in their county or adjacent county, which limited my chances for shopping around for a good loan. Because I was trying to purchase more than 20 acres, they said I couldn’t have a conventional mortgage--I would have to get an agricultural loan.

The banks required at least 30 percent down payment on a five or “maybe” seven year balloon loan with a 7 to 7.5 percent interest rate. It didn"t matter which bank I spoke with, the story was the same. When I pointed out that conventional mortgages were a full 2 points lower with a longer term than what these banks were quoting me for an agricultural loan, the banks said that agricultural loans weren"t open to the other funding sources that are available to the convention mortgage market, thus the shorter term and higher interest rates.

In addition, all of the banks expected the farm to earn enough money through farming to pay the mortgage! The banks really didn"t want to consider my off-farm income for servicing the debt. The banks set the limit at what I could borrow based primarily on the farm"s ability to generate income. In the end, only Farm Credit Services of America made it possible for me to buy a farm. Only they were able to offer rates and long terms comparable to a conventional mortgage.
 
Rich Iowa: You had better be what your handle is to buy land right out of college with little or no money. Any bank or even FHA or Farm Credit is going to want to see a track record of some type of farming/income history. It sounds like you have little to zero record.

Regular lending institutions are going to want cash or collateral of at least 20% of the appraised value. The purchase price means nothing much it is what it appraises that counts.

So house and 40 acres will start at $400,000 and up around here. So you are talking about $80-100K for down payment or collateral.

If you are just finishing college at age 28 what degree will you have??? Or did you go to the service first??? These are questions that make a difference. Are you going to have large school loans??? That could sink any thoughts of land purchase. Those will be counted on any balance sheet you have.

There are first time farm buyer loans but they have down payment requirements that are at least 10-15% down.

You will find very few if any owners willing to carry a land contract in todays land market. Most land around me is sold with in DAYS if it has any kind of reasonable price.

Also there are hardly any owners wanting to help some stranger to start farming. It is too dangerous for both parties. The kid may get zero when the owner dies or the owner gets beat out of a reasonable value on his farm.
There is 28 acres that is half tillable sandy soil. 1960ish house that needs some repair with one pole barn that is out dated. They are asking $250,000. It has been for sale for three years. It appraises at $175,000.




You are going to have to start out, like most of us did, by renting and building experience/financial stability. I have helped my children buy land and homes. They all had good jobs that they had been at for several years and money for down payments. Even then they had to start small and work up.
 
Rich, (sorry - long, but you asked)

MOST IMPORTANT in my opinion: Get a "fixed rate" loan when you do buy. Those ARMS (adjustable rate mortgages) can kill you and make you lose everything if interest rates take an upward hike. Yes, you will pay a little higher interest to lock in on a fixed rate...but you will always know what your payment will be. No surprises down the road.

Also, when we bought our farm - we made darn sure that we could afford the payments even if we both lost our jobs and one of us could only get work at McDonalds.

BEST ADVICE:
1. Work hard now...save EVERY PENNY that you can. Buy AFTER the big bust when prices are much cheaper.

We bought our farm in the mid 80's when the economy was really bad. (Just 2 years before us, a young couple had bought our farm and paid twice as much as we did. They could never afford the payments - not even the interest payments and lost it after only two years).

2. Stretch your mortgage out as MANY years as possible (so if times get hard you are not obligated to a huge payment)... BUT PAY IT OFF EARLY by having the discipline to make extra payments EVERY MONTH (as much as you possibly can-even if it means you don't eat out, or you don't get satellite TV).

3. Look up, read AND LIVE BY Dave Ramsey's financial advice..."Live like no other now - so tomorrow you can live like no other". In other words, forego much of what your peers do now for enjoyment - so that when you are a little older you can live debt free. Then when your peers have to keep working until age 70 because they cannot afford to quit working - you will be living debt free, can maybe retire much younger than they can... and do things that you enjoy because YOU can afford it.

EDIT: P.S. This does not mean that you can never take a vacation or do anything fun... but it just means you cannot do it until you have saved up a big cushion of cash and gotten rid of as much of your debt as possible.
 
Great advice that was the same advice given to me. Our place is paid for and we are completely debt free we also bought in the mid 80s. We took a fixed rate mortgage stretched it over 30 years and was able to pay it off in 12.
Tony
 
Tony,

Same with us. We would've had it paid several years ago... but about 5 years we tiled the farm in order to rent it out - because renters need to be able to show up with equipment and get their work done in day. But we will get to debt free in a few short years anyway.
 
You talked about taking a while to get thing land bought.

Once you have the money lined up It doesn"t take long for the rest. making sure you have the loan takes a while.

The rest can go fast.

Last January I heard a farm was for sale on a Thursday. I signed a purchase agreement on Saturday. Closed on it 2 weeks later. Less than 3 weeks from start to finish.

Called my attorney to draw up the papers to sell and transfer a buildable lot to one of my daughters this past Monday.We go in the 27th of this month to close. Again less than 3 weeks.

Gary
 
I'd work and save some cash. At today's land prices, it will be very tough to get started. I know folks who inherited a couple hundred acres that gave up, they could never get any more land. I am surrounded by a farm that has been in the same family for over 150 years. It has been rented by the same farmer for over 20 years. Turnover in this business is very low!!
 
Since you're planning on working an off farm job anyway then get out of school,find a job,see where you're located and how much $$$ you're making before you even think about buying a farm.
Right now you're assuming you'll actually find a job that'll pay you enough to live on plus farm payments thats a real BIG assumption.
 
Honestly? I dont think I would buy any land right now. I know its hard, seeing people around you doing what you love and what you want do for a living. But the truth is, this is one of the most difficult times to get into the business we have ever seen. As for fools who want to give 17k an acre for farm ground and run the little man out, we will just see what happens to that. . .
 
Over the years, I've made more buying and reselling small farms than if I'd held them and farmed them. By doing so, I've had the opportunity to work with a number of "beginners" with minimal resources and big dreams. The one thing that separated the winners from the losers (in terms of who the banks were willing to work with) was the winners had a detailed business plan to show bankers they had some clue of how they would pay back the money they were trying to borrow. Just walking in and telling them you have a dream and a passion ordinarily won't cut it.

Talk with bankers. Talk with an attorney. Talk with real estate agents. And consider taking a few ag management courses (on up to a full blown degree. NOTHING trumps a good education) A GOOD real estate agent and/or a good banker will not want to waste their time working a deal that is hopeless from the get-go. They'll recognize the POTENTIAL for a sale if you have it, but they're gonna want to see you have a fighting chance before they spend hours and hours just to be turned down.

About 15 years ago, I bought a 90 acre tract just down the road from me. I had no intentions of keeping it. In 2009, a young man approached me about buying it. He had little more than you speak of, but he had a solid plan to make the property pay for itself. (along with some good credit history) He got accepted, bought the place, and is now farming quite a bit more ground. He's after me to sell him another tract I'm wanting to sell. (we just need to agree on a price) Point is, you CAN do what you want, you just have to prove to a sometimes skeptical banking world you know enough to make a dream become a reality.
 
I bought 46 acres this time last year. did not take long at all to get loan and paperwork done. me and seller agreed on price the monday before thanksgiving and signed all papers on dec 28th. two things took the longest waiting on title search and getting appointment with lawyer for closing. 2nd thing was working around the bankers 2 week long vacation he took at thanksgiving and middle of dec. getting approved for loan took about a week of getting info to banker. financed with the land bank (agcredit) and their policy is you must have 15% of purchase price of put up collateral of 15% of purchase price.
 
I should explain a few things that I didn't make too clear earlier. I returned to school four years ago and have been taking classes parttime while working fulltime. I have been working fulltime since I graduated from high school, and had parttime jobs before that. So I do have work history. I also have had loans such as vehicles and 4-wheelers, ALWAYS paid off early.

I have no problem starting off small and renting while gaining experience and financial assets.
 
I don't think any bank will give you a loan until you have a job. If you have school loans or car payments as that will be taking into consideration. A friend of mine just sold his 43 acre farm. He never farmed it and had a big log home built on in 1990. He sold it for $475400.00 that's about $11000.00 an acre. Hal
 
Thank you for the help. I am still working on a business plan. Have a very good idea on what I plan to do, just haven't gotten it all down on paper yet.
 
Rich,
I think I saw that piece of ground, was it right on the Raccoon river?

What we did in 2007 when we moved back to Iowa was go to the USDA/FSA office. The FSA office loaned us 106K and US Bank-through the Beginning Farmer program loaned us 106K. The FSA loan guaranteed the loan from US Bank, they were both 20 year ARMs.

My wife has a good job and we didn't need the income from the farm to make it cash flow, but the farm couldn't operate at a loss or we would be sunk.

The FSA wants you to show that you know what you're doing, you need records on past, profitable, production no matter how small of acreage you've been running.

I am not going to buy anymore tillable ground until this bubble pops, which it will no matter what the BTO's say. I think you and I are only going to be able to afford marginal land even after the bubble, for the foreseeable future.


Nate
 
SweetFeet
Thank you for the advice. I am saving as much as I can where I can, while also get rid of what debt I do have. I have had numerous vehicle and 4-wheeler loans when I was younger, ALWAYS had the loans paid off early. Thank you for the quote as well, I will save that to serve as a friendly reminder to myself.
 
Starting in the early seventies I bought, divided and sold several farms (made money when they sold NOT so much when farming them lol) and over the years was a farmer, truck n tractor dealer, engineer and real estate broker, now semi retired attorney, so heres my best advice based on my experience over the years:

Get a good job
Save money and a hefty down payment
Build up a good credit score
Develop a business plan and do your homework
ONLY THEN do I imagine you could get a loan

Buy land that has a lotttttttttttt of road frontage and has subdivision potential

Buy land that has some marketable timber

Explore owner financed land sales

TALK TO LOCAL EXPERIENCED REAL ESTATE BROKERS, LAND SURVEYORS, AND ATTORNEYS FOR ADVICE and put more weight on those "local" experienced professionals then someone miles away.

Its a great goal you have in mind (it served me well) GO FOR IT IS MY OTHER ADVICE

John T
 
What kinda FICO score do you have......lower 800s? Upper 700s? How much down payment do you have? Got a detailed business plan? Won't hurt to ask at your local bank..........where you've (hopefully) been doing business, but based on the info you've provided, you'll have to look elsewhere. (been sleeping with a banker for 46-plus years)
 
Rich What Sweetfeet is talking about would be ZERO four wheeler and auto loans!!!! Save up and pay with cash and even then by used. Truthfully a young person showing up at the bank with a good payment history on auto loans was a double edged sword. It does show how you have paid loans off but it also shows that you bought things that could have be bought with saving for a short period.

You are talking about working and being in college. You do not talk about what, if any farming experience, you have. This will be an important consideration when you go for any type of Ag loan. IF you by a smaller tract that gets considered a home loan then the farming history is less important.

Most bankers are not going to be impressed with your education and car loan history when you are talking about buying farm land.

Also like several have posted: Farm land is at generational high prices right now. It is not the time to be buying if you can avoid it. Yes my two sons just bought land but it was right next to them. It may not come up for sale in their working life time again. You do not have that issue. You have said that you do not even know where you are going to be working so you have no idea of where you need to be looking at land.

It could very well not even be in Iowa. You will find out that there is a real wage drag in this state. That is why many of your class mates are going out of state for jobs. That drag can be as high as 50%.

Another thing. DO not buy into the trap of thinking you can buy a piece of land today and divide/sell it in a few years and make a big profit. There is very little of that kind of land here in Iowa. The current market has ten people thinking that buying ground right now.

Maybe you can find some with a ran down home that you could fix up and sell but even that market is touch right now.

I would still recommend working and saving now for a future purchase. You have too many unknown factors to make a major purchase in the next year. You need to get a job and get settled in an then start looking for a place.

A piece of land or a house that you buy before you are financially ready will turn into a nightmare real fast and could sink you.
 
Lot of good advise, I'm mostly repeating I guess....

Talk to banks, find out that wont work, they have the govt house loan setups, can't work with farmland interest rates and equity is way way too high....

Talk to credit unions, find out they are friendlier, but won't cash flow for you. Better than a bank, but same basic problem...

Talk to Farm Credit Services find out they are the best deal as they are the ones tailored to ag land, but you will need 50% cash to make it approved. Everyone is scared of the current ag land bubble....

Talk to FSA, get into the beginning farmer program, that will lower interest quite a bit, but you have a world of paperwork to get done, on and on. You will not be allowed to cash rent the land you buy, you might be able to crop share it so you are making farm decisions, but they want to deal with farmers, not landlords, you will find many issues to comply with. Might as well get this checked out so you know where you stand....

Find some land to buy, have 50% cash to put down, and sign up the paperwork you did above.

This will be your process. Don't skip the banks and credit unions, but you'll end up with the last 2 most of the time.

It's hard to own farmland when you don't own any to begin with, no equity, the big farmers can easily get bigger with a 40 or 160 here and there and cost average all their land costs; you need to make that first purchase cash flow sometime soon so you just can't pay what they can..... It's very hard to break into the farmland game...... Did you notice you need 50% cash these days, that is a big hunk of cash on even a 40.....

Paul
 
The cold hard reality is that nobody is going to loan you a million dollars without:

A.) A proven track record, not just a high credit score, but some kind of history of making the kind of money necessary to pay off such a loan.

B.) a solid business plan which reasonably proves you'll be able to repay the money

C.) A sizeable investment (downpayment) of your own to prove you have "skin in the game".

There's no shortage of people wanting to borrow money from banks. They can have people lined out the door if they want to lower their standards.

They HAVE to be selective, (aside from when the government thought everybody should get a loan and stuck their hands into the mix, creating the mess we've seen over the past 10 years.... but that was an anomaly.

Lenders can't afford to be nice. They can't afford to have "vision".

Vision is risk.

If they want to put their money at risk, they'd be much better off putting it in more secure corporate investment vehicles than investing in strangers off the street who want to try something new.

Banks don't want to hear "I'm going to rent half of my land to help pay you back"

They want to hear "I'm going to rent half of it, but when I can't find tennants I still have X income to continue making payments".

So - with all that said - you have to turn yourself into somebody the banks seek out.

You want to be a good investment.

Establish a solid track record of good income. Establish flawless credit.
Increase your experience so you can write a real business plan and prove how you're going to generate money.
Save save and save some more for an impressive downpayment.

Look at it this way - if you were to get the money, and then ran into trouble repaying it - you'd essentially )#($* yourself in a way that's going to make it veeerrrry difficult to get a second shot ever again. So don't be over anxious to move on it.
 
A lot of good suggestions here. My feeling is do not get your hopes up with FSA other than guaranteeing a commercial loan which is in some ways better. I can not speak to other parts of the US but I hear of very few people getting FSA starter loans where I am at. The other thing is that if the Feds reduce their role in commercial agriculture it may be better to have the commercial loan now instead of getting a letter in the mail at some point in the future stating the government is getting out of ag lending and then have to look for a new loan possibly in a very bad economy.
As far as education or career goes you may have to set aside dreams (not related to the land) to insure you wind up in a high income field. Anybody getting loans that is not established in farming are getting them because they have exceptional income. This may mean working at something that may not personally suit you and may limit the time to enjoy your acquisition as you will need to be elsewhere quite a bit. I might have been well advised (if I took it) to do this while I was young versus struggling mightily now with mediocre income. Of course who could say back thirty years ago things would have nosed down to the extreme they have locally.
Just one person's opinion. Try to stay optimistic.
 
Start small that's how I'm doing it. I'm 29 and medically retired from the army. First I bought a modest home on 5 acres then bought the neighbors adjoining 5 the rented 2 here 3 there then 7 then 8 then 5 now 27 and 18 are in the works and evey year I save a portion of my income to make that big down payment. But you have to live frugal. Slow and steady wins the race!!!
 
Hi Nate,
The land I was refering to was in Marion County. Thanks for telling me how you guys got going. How many acres you working up there? I do think there will be a point when the bubble pops like you said, hopefully I'll be in a good position when it does.
 
I would like to thank everyone who chimed in on this. A few things I knew already (a reminder never hurts) but there were some other things I hadn't thought of so I'm glad some with lots more experience shared what they have learned. Has given me more to consider as I prepare. Thank you all again.
 
JD Seller- Some of your advice comes off a little harsh which I'm sure is not your intention, and I'm not taking it that way either. I do appreciate your helpful advice.

Those vehicle loans were when I was younger and they were used vehicles, haven't had any loan for a few years now and plan to keep it that way.

I admit I don't have lots when it comes to farming experience. Mostly providing extra labor on the farms of friend's parents, cousin's farms, and for a few years I was baling a few acres of hay by myself with less than quality equipment. Not enough experience to amount to much I know.

My degree is in criminal justice and I'm also working on getting my FF1 and EMT certifications through the vol. fire department I'm on. Public safety can be a very good paying stable career ONCE you get in it.

I agree land is extremely high priced right now and at some point these prices will not be able to sustain themselves. I don't see myself moving out of state, I like Iowa. When I do buy land I plan to live the rest of my days there. I have no intention of dividing/selling small lots, I don't want lots of folks living close by.

Like lots of others who posted on this you say I should hold off until more of the variables are figured out. I agree and that's what I'll do. Thanks again.
 
Ive been buying/selling/trading in land and most every other legal commodity since 1987. Things HAVE changed. The traditional wisdom was build equity and if hard times hit you can always draw on equity until it rebounds. Not so much any more.

In 1987 I was a 20 something year old college sophomore, had cows, had a good hay business, had a little cash. I found a nice 230 acre farm, well kept, good buildings, for 230,000. That was half price from 5 years before. Talked to the president of the local bank and he asked me a few questions, looked at my 20 percent down payment and wrote up a demand note at 12 percent. I couldnt prove cash flow on anything.

Now, or three months ago, just for curiosity sake I asked the bank president what he would loan me on demand on my signature. 20 to 25 thousand was his response. Wow! There were credit card companies giving that out not long ago on nothing. Of course thats why it is so tight now. Several big farmers, close to me, are cut off on their credit lines. The appetite for risk just isnt there. I'd plan on at least 30 percent down and a proven ability to cash flow payments.
 

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