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CHECKLIST:
What You Should Know
. . . Before Making Your Decision!
In the last issue of LAND RUSH, we covered topic
5 of 11 suggested questions you should ask before making your land
purchase decision. In this issue, we'll cover the sixth one - about
seller financing- in depth.
6. Will sellers finance the
property or do they expect cash?
Buy a tract of mountain land and there are three ways you might
choose to pay for the property – cash, bank loan, or owner
financing. Let’s take a look.
First, cash is an alternative – obviously. Although buyers
have historically borrowed from some source to pay for land, more
recent transactions reflect a great increase in cash purchases.
It appears that many buyers now feel their cash resources are more
profitably invested in land than in the stock market. Tired of being
pummeled by stock losses or squeezing out 1-2% returns on their
CDs, land buyers want their money placed into a solid investment
they can see, feel, touch, and enjoy.
Buyers may also choose to borrow from a traditional lender –
a bank. Because unimproved land carries some amount of risk to the
bank, these lenders usually require about 30% down with the balance
payable over no more than 10-15 years. Current rates seem to be
in the 6-8% range depending on the lender.
Bank loans also carry with them certain expenses. The lender may
charge for an appraisal, credit report, a loan origination fee (about
1% of the loan amount), plus closing costs such as title search,
title insurance, and recording fees. The lender may also require
a survey – always a good idea anyway.
Banks usually require a financial statement, employment verification,
and debt information to determine the buyer’s ability to repay
the loan. In other words, when borrowing from a bank, you must “qualify”
under their terms.
Finally, you may choose to ask the seller to be the bank. Instead
of borrowing money from the bank, thereby providing the seller with
cash payment for the property, you simply ask the seller to do the
financing. Here’s how that might work:
Let’s say you want to purchase a $200,000 property. You have
about $50,000 in cash to invest as a downpayment, leaving $150,000
unpaid. You can make your purchase offer based on the seller financing
the $150,000 over some reasonable length of time, secured by a note
and deed of trust (just like the bank would do).
Keep in mind that sellers who are willing to finance do not want
to wait 20 years to receive their money. They agree to finance in
order to make your purchase decision easier. They don’t require
all the background checks like a bank, nor do they charge all the
fees you will encounter with a bank. In fact, seller financing is
very simple. You simply say, “Will you do thus and such?”
and they reply, “Yes.” (or occasionally “No.”).
The most likely format for such financing might go like this: You
offer to pay $50,000 down with the balance of $150,000 payable based
on a 10, 15, or even 20 year amortization schedule at some acceptable
rate of interest. You also include the stipulation that a “balloon”
payment will be made at the end of 5-7 years. This means that although
the payments are structured as though it were a 10,15, or 20-year
loan, in fact the entire remaining balance is due and payable at
the end of the 5-7 year period.
Now, before you panic, consider the benefits. You are able to buy
land now, with payments spread out over a long period of time. You
have no extraneous costs, no qualifying, no unreasonable paperwork.
At some time within the 5-7 year period, you’re going to decide
exactly what you will do with the property, i.e. build a home or
cabin. When you do, chances are you will get bank financing at that
time and pay off the seller’s note anyway. In effect, this
type of financing allows you to purchase the property you want,
have reasonably economical payments, and have 5-7 years to make
other plans.
To the seller, this type of arrangement accomplishes three benefits.
First, the property is sold. Second, receiving payments over time
may spread the seller’s tax liability. Finally, the sellers
know they will receive all their money from the sale in a reasonably
short period of time.
Although not all sellers are willing or able to finance their property,
many will. Our company encourages seller financing, and many of
our property owners agree to do so. If financing is important to
your land purchase, tell us. We’ll do everything possible to
structure a purchase to meet your requirements.
PAST TOPICS INCLUDE:
(click on a topic to read about it)
INTRODUCTION
1.
Has the property been surveyed recently?
2.
What is the topography of the property?
3.
Is the property accessed by public road or right-of-way?
4.
How much are the property taxes each year?
5.
Are there any restrictive covenants or zoning on the property?
UPCOMING TOPICS WILL INCLUDE:
7. How much earnest money is
required with a purchase offer?
8. What, if any, utilities are
provided?
9. How much are the closing
costs to complete the transaction?
10. Are there any hunting leases
in effect on the property?
11. Are there easements or rights-of-way
for the benefit of others?
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