This is a follow up to my earlier post Eleven Acres of Heartburn...just to give folks some idea of why financing for rural acreage is SO valuable...and a niche I love to serve. You might get the idea below that it's impossible to get loans on a "hobby farm" or "gentleman farm". NOT so. We do it all the time, and with passion! If this matters to you, call me to find out more!
Q: Why do most lenders have a problem with acreage properties?
A: A cookie-cutter suburban home is easy to understand, and in the event of a foreclosure, easy to liquidate. Rural homes with acreage and outbuildings may be imminently more practical than a postage stamp lot and home in the city, but they're harder to understand and sell. As collateral, lenders shy away from anything that's not a very straightforward commodity.
Q: What options exist for the seller of a hard-to-finance rural property?
A: Often, the seller only has two options – 1) "carry paper" for the buyer with a contract sale or a note, or 2) deal with a restricted market of only all-cash buyers. This results in a smaller pool of more aggressive buyers, and usually a net lower sale price than if the property were bought with outside financing.
Q: Are there times when selling on contract or "carrying paper" is a good thing for the seller?
A: Only rarely would a seller prefer to carry paper. It would likely involve complex or unusual tax circumstances. A seller may not need the cash, and might carry paper if it could be negotiated at a high rate of return from the buyer. For most sellers, the ideal result is getting cashed out completely. The perfect buyer has all-cash and can close quickly. This gives the seller maximum flexibility and liquidity for their next step in life.
Q: What are the implications of selling on contract or "carrying paper"?
A: The seller becomes a creditor when they carry a note or contract. This entails risk for both the seller and the listing broker. There are potential lending compliance issues, not to mention the investment risk. The seller who decides to "be the bank" needs to make a good determination about the creditworthiness of that buyer. Setting up the loan or contract, servicing it along the way (receiving and accounting for the payments), properly handling the ultimate payoff and reconveyance, and dealing with delinquency and default are all inherent stumbling blocks for a seller who carries.
Q: What are the implications of selling to only all-cash buyers?
A: The pool of all-cash buyers is a severely restricted subset of all the available buyers in the price range. If there are 10 buyers in the price range but only two capable of paying all-cash, then 80% of potential buyers may never even view the listing. Those eight buyers are often coached by their broker that unique rural properties are hard-to-finance, and as a result, they self-select as not being able to finance. They never even look at the property because they believe they can't finance it. If only two prospective buyers are vying for a property, a lower sale price is likely to result. On the other hand, if all 10 prospective buyers had an option to finance, it would QUINTUPLE the number of prospective buyers, and the sale price would rise because of the increased competition.
Q: What are the implications for a buyer on contract?
A: Buying with a seller carrying a contract or note can be a good solution, but has legal ramifications beyond the scope of this FAQ document. Consult an attorney for a detailed look at your individual situation. One big potential downside is that many seller contracts are not designed to be long-term. Many such contracts are short-term, acquiring payment in full (this is often via a balloon payment) within 3 to 10 years. The buyer may be in a pinch at that time, finding it difficult to refinance out of the contract, or they may be facing higher interest rates at that time. Having such a balloon payment subjects the buyer to rate risk in the future.
Q: What impact do buyers feel when rural property is hard to finance?
A: Most buyers don't have enough cash to buy without financing of some kind. Even with a large down payment, the banks who don't like acreage, simply won't play ball. No matter how big the down payment. That takes many properties out of consideration. The only properties they might have to consider would be seller-financed . They are limited to a smaller pool of available properties, and often miss out on that "perfect" country home, because the seller is unwilling or unable to carry the paper. They have to compromise.
Q: What options exist for buyers when the property is a hard-to-finance rural property?
A: Other than all-cash and seller carry which are outlined above, there are also a limited number of institutions that will finance these larger properties, many with barns, arenas, and other outbuildings, crops, farming leases, or other agricultural elements. This is a simple matter, on the lender's part, of understanding and appetite for lending on these properties. See Hobby Farms for more on this type of financing option.