Yes you can. Buying agricultural land may seem tedious or even intimidating, but with careful thought and planning we can assist by developing a plan to fit your goals and your needs.
POINTS TO CONSIDER
1. Plan Ahead
It is important to be very realistic when looking for a piece of land. The agricultural industry has not been included in the recent economic downturn. In fact, it is one of the few industries that is thriving. This has caused the agricultural real estate market to reach new highs. Along with this price escalation, it is requiring one of two events to occur, 1) additional capital, or down payment be made to allow the property to be self sufficient from its own cash flow, or 2) additional subsidizing from outside income.
A lender that understands rural property, cash flows for this industry, the cycles & current real estate values can be a great value to you now & many years down the road.
The type of property you purchase will have a large effect on the size of down payment as well as how much you have to subsidize. More productive land offers more income potential so it requires less off-farm income. The more “recreational” the property, the more you will have to invest or subsidize. Unless you have been pre-approved by a lender, always, always have language included in the contract that indicates the purchase is subject to financing.
Call your local USDA Farm Service Agency (FSA) office to find out what programs the farm is currently enrolled in. This will provide an idea of how productive the farm has been. You can find your local FSA office at www.fsa.usda.gov/ca.
2. Determine Your Financing Needs
If you are a cash buyer, you can simply look at property with a price tag that compares with the amount you want to invest. If you need to finance a portion of the purchase price, it is vital that you meet with a professional in the rural lending world. Your current banker may be a great source for loaning money on your home in town, business, car or boat. But what do they know about rural property? A lender that understands rural property, cash flows for this industry, the cycles and current real estate values can be a great value to you now and for many years down the road.
They can also be a source of financing for items needed after the land investment. Before you sign a contract, a good rural lender will ask you some very tough questions that will help you decide what size farm you can afford and what you can expect after the purchase.
One thing to consider when evaluating the farm with your lender is how much revenue the farm is making. You can get an idea of this from the local FSA office. Is there any marketable timber on the property? The timber could be sold to reduce your investment costs and increase your return on investment.
3. Soil Type & Drainage
Ask questions about the soil type. Ask for any recent soil tests, or request a soil test. A soil test will provide a report of the nutrients present or missing from the soil. If you have to add additional nutrients to the soil to bring it back up to a tillable state that will cost you more money. If you determine you will need to add nutrients, get information on the costs needed to do so.
Evaluate the percentage of tillable acres versus the total acres on the farm. Also evaluate if there is any acreage on the farm that could be “reclaimed”. “Reclaimed” land may presently be sitting idle that could be tillable with some additional work. This will increase your tillable acres and potential for profit. Try to determine the costs of the additional work to make the acres tillable.
Research the farm’s drainage. If the farm is terraced, make sure the terraces are in good shape and working. If it’s not terraced, you will need to evaluate how much erosion damage has occurred on the farm. For farms located in bottomland, determine if all the ditches are clean and if idle surface water is removed. The soil type and drainage on a farm will have dramatic impacts on the amount of revenue the farm can generate.
4. Working with a Nationwide Commercial Executive
Your Executive Associate will provide a lot of information that will be helpful during the transaction. They will set up the closing and help both the buyer and seller meet the demands of the written contract. Real estate closings can be very complex. They will be able to explain a lot of the procedures and work out who will be responsible for certain expenses of the transaction. This will include closing fees, document preparation, accruing real estate tax liabilities and recording fees.
5. Items Included with the Sale
It is extremely important that the buyer, seller and anyone else involved in the sale, understands in writing what is included in the transaction. A detailed list of anything you feel you are buying needs to be a part of the contract. The list may include:
- Livestock panels’
- Portable sheds
- Fence posts
- Treatment or removal of any existing farm or hunting leases
- Any miscellaneous equipment
- Anything that can be moved
6. Steps to Purchase Property
Each situation is different. However, as a starting point, you can expect a closing to occur about 30 days after you and the seller sign the contract. Overall, the process goes something like this:
a. Determine the type of property you are looking for and general location.
b. Review properties available on the internet, local newspaper, or visiting with area realtors.
c. Make an offer on the property and negotiate with the seller until an agreed-to price is reached. You may wish to speak with your attorney before signing a real estate purchase contract. After signing the contract, you will place earnest money on the farm to hold it until you can close.
d. Take your contract along with financial information to a local rural lender. This may include past tax returns, current pay stubs and a list of all assets and liabilities. They will work with you to make sure the property is within your financial capabilities. Meeting with a credible lender prior to even looking for a property can save you a lot of time and effort by narrowing down the price range you can pursue.
e. Upon loan approval, the lender will work with you to get the property appraised and alert you of any title issues prior to loan closing. Have an attorney review any information you do not understand or if you just want additional peace of mind.
f. Prior to the closing, you will receive a copy of the closing statement that will let you know the amount of money you will need the day of closing. Normally these funds have to be certified which means a cashier’s check.
g. If you are borrowing part of the purchase price, you will close your loan with the lender prior to the real estate closing. Then you will meet at the title company office to close the transfer. They will file the necessary deeds at the courthouse and forward them to you after the recording is complete. You will need to take a copy of the deed to the local USDA Farm Service Agency (FSA) office so they can transfer any program payments to your name such as CRP or base acre payments. Your lender can explain these to you. You will also want to make sure the county collector gets a copy so the next year’s real estate tax bill will be sent to you for payment.
h. After the closing, you will need to drive straight to the property and determine which project to tackle starting tomorrow morning!
When you buy a car, the first thing you do is buy insurance before you leave the lot. Why? To protect you in case of an accident. Title and flood insurance do the same thing only in terms of ownership.
Title insurance ensures your ownership of the farm in the amount that you paid for it as long as all of the items listed as exceptions are corrected. This may include transferring ownership by legal deed, or the seller having a deed of trust removed. The closing agent will review any items that need to be discussed at closing. Normally, you will receive a copy of the title insurance commitment days before the closing. If you have any questions, ask an attorney to review the policy. Purchasing a title policy is the most secure way to buy property today. Title insurance will also warn you if the property has been the site of an identified hazardous waste dump site.
If your prospective farm includes buildings determine if they lie in a flood zone. If you finance a farm purchase, the lender will have to make this determination through an outside agency. If the buildings do lie inside a flood zone, the lender will require the purchase of “flood insurance” as a condition of making the loan. This is required by federal law and cannot be waived for any reason. The cost of the insurance can be very expensive depending on the type of buildings. Determine whether any of the buildings have suffered damage in prior floods and how the repairs were made.
8. Local Resources to Know
The farther away your property is located from your home, the more important it will be to develop your own personal network of contacts for that area. A simple list, and one that you will probably add to as you spend more time enjoying your new property, should include:
a. Local Rural Lender – They know in the area as well as programs that may benefit you and your property. They will have names of people that provide services such as a dozer operator, custom farming service and farm managers, if needed. They are also very in tune with the local market and can give you some indication of what land is bringing in a specific area. This could save you thousands of dollars.
b. County USDA Farm Service Agency (FSA) Office – The FSA office administers all government programs that could have a very positive affect on your farm’s cash flow. They also administer programs to help you with conservation issues including pond construction, erosion control and wildlife enhancement.
c. Neighbors – One of the first things you need to do is stop by and meet each of your adjoining land owners and the nearest homesteads. They may end up being the person that pulls your stuck vehicle out of the ditch on a rainy day or loaning you that trusty wrench.
d. Local Farm Input Supplier – This may be the local MFA Elevator or a privately owned company. These “farm stores” will carry about everything you need from corn seed to fence tighteners. They are a great source of information for questions surrounding agricultural production.
e. Mechanic – At some point, something is going to breakdown. This may be a tractor or your own vehicle. Having a relationship with someone local before that happens can give you a sense of security when it does.
9. Costs of Ownership
There are very few instances that allow you to buy property and then stop right there. You may have to run electricity and rural water to your property. Then there are the normal operating costs such as insurance, gravel for your entryway, and monthly utility bills. After normal operating costs, the investments needed after the purchase will depend largely on the type of property you purchase and what your reasons were for buying. The more involved you are with your property, the more additional investments you may need to make. These items may include a mower, ATV or UTV and a storage shed. Or, it may include livestock purchases for pasture. Even recreational property usually ends up with a small tractor and mower, or a four-wheeler and trailer. And these are just the larger ticket items.
Then you will get into smaller items that can still add up. These may include a chainsaw, air pumps and an additional set of tools to leave on-site. Of course once you buy all of this equipment, you will need to build a shed to store everything. And after that you may decide to build a water structure or pond to fish in or just to have a quiet picnic when you go “out to the country”. Before long you will start thinking about a small cabin or maybe even a second home. Someone once said the cheapest part of owning rural property is the initial purchase!
10. Property Boundaries
Nothing is worse than finding out you didn’t get what you paid for. Unless you want to have a survey completed, no one will ensure the number of acres you are buying; they will ensure a legal description. Normally the description will be written in either a rectangular survey or meets and bounds method. It is usually a good idea to go to the county assessor’s office and have them pull the “card” for the property you are looking to buy and see how many acres are being taxed. This doesn’t mean their figure is right, but it should compare fairly close to what you have been told by the owner or realtor. If there is a big discrepancy, you will want to complete some additional investigation. Also, if you are obtaining a loan on the property you are buying, the lender will normally complete an appraisal as well as examine the title policy to ensure they have the right amount of security for their loan and to ensure they have a legal claim based upon the deed of trust filing.
BONUS – 11. Zoning
Zoning is something fairly new to the rural area and should be investigated before you buy rural property. You will need to go to, or call, the county courthouse where the property is located. They will be able to tell you if the county has been zoned and, if so, what the zoning requirements include.
Contact your Nationwide Executive Associate today for further information.
Published by FCS Financial