SW Financial Literacy
Case Study – Listing Split
Today I have a new land buying case study for you to consider.
There is a young producer, let’s call him Travis, who runs his own ag business selling seed, chemicals, and completing planter upgrades for local farmers. He is a hard worker with a strong reputation in the area.
Travis does a small bit of farming on the side, but eventually would like his ag businesses to be the side business as he grows full time into a farming operation.
A local realtor put out a land listing for 80a irrigated crop ground for $9,000/a. While this was a strong price, it was not unreasonable for other sales that have taken place in the area. Travis offered the asking prices that was given.
This is where it gets interesting.
As negotiations began, Travis discovered through the realtor that the sale was taking place due to a disagreement between the two siblings who owned the ground (as is often the case with inherited ground). Sibling #1, who had forced the sale, was ready to claim their money now. Sibling #2 hadn’t wanted to sell the ground at all and liked having the steady income stream from the property.
When situations like this arise, it creates unique negotiating opportunities for those like Travis who can see and take advantage of the situation.
Travis doesn’t have the funds necessary for traditional financing. He was planning to go the joint financing route with FSA which takes more time, and this sale didn’t allow for. Travis also doesn’t come from a farm family, so it isn’t an option for him to have a family member buy the ground initially, then Travis buys the ground back from the family member to fit within the FSA joint financing timeline.
It sounds like Travis is backed into a corner and shouldn’t have made an offer, what did he do?
First, Travis negotiated directly with Sibling #2 to buy their 50% share on contract (or seller carry). He would be able to buy 40 of the acres at 2% interest over 10 years with a ballon at that time to acquire traditional financing. This is advantageous because of the low interest rate which helps his cash flow.
The complication that came from this is now Travis needs a survey to split the ground in half, which takes time. Time that he already didn’t have to acquire the FSA joint financing.
A second solution solves his time problem.
Thanks to his profitable and valuable ag business, Travis has a large following of loyal producers who like working with him. He was able to reach out to a local Investor to lend him a hand and make the initial purchase through the realtor. When you can add value and are honest, you would be surprised at how many people are willing to help you.
Here is how it all played out.
The Investor purchased the 80a and paid Sibling #1 up front (Reminder Sibling #2 didn’t want the funds but ongoing payments). Payment at closing $360,000 from investor.
Travis signed a contract to purchase the 80a from the Investor to begin his FSA joint financing application on 40a. Since this financing option often takes 2-3 months, there was plenty of time to complete the land survey, breaking the property into two tracts.
Once the survey was completed, Travis finalizes his seller carry contract with Sibling #2, a $360,000 loan amortized over 30 years. After 10 years of payments of $16,135 at 2% interest, Travis and Sibling #2 can renew the contract or Travis can get financing to pay the remaining $263,132 to complete the buyout. Sibling #2 places a 1st lien on the property until that time.
Travis gets 50/50 joint financing on the other 40a from Sibling #1. The 1st lien with the lender has $180,000 financed over 30 years at 6.50% for payments of $13,913/year. The 2nd lien with FSA has $180,000 financed over 40 years at 3.25% for payments of $8,163/year.
Combined Travis has 3 lenders with payments totaling $38,211/year against 80a ($477.63/acre).
In addition to covering the closing costs from the Investor’s listing purchase and his own purchase from the Investor, Travis pays the Investor $5,000 for the use of his money and thanks for helping him out.
Having the parcels split with different lending timelines and terms gives Travis added flexibility if he were to 1031 into another property or desires to pay one property off early to free up collateral for future investments.
Don’t let the lack of family money prevent you from getting ground bought. If you are adding value to others and forging strong relationships, help may be just one ask away.
Have a great day,
Grant
All views expressed on this site are my own and do not represent the opinions of any entity whatsoever with which I have been, am now, or will be affiliated. Information provided is authentic to the best of my knowledge, and as such, is prone to errors and the absence of key details. The content of this blog is for entertainment and informative purposes and should not be seen as professional advice to finances or any other field.