This article is courtesy of FCS Financial. Visit www.myfcsfinancial.com to find more about financing your agribusiness, ranch, farm or rural recreational property purchase.
It is said over and over. There are three things you need to know about buying real estate: 1) location, 2) location, and 3) location! But what does that really mean? In urban areas, this can mean safe neighborhoods, traffic flows, proximity to shopping malls, school quality, nightlife attractions and proximity to jobs or natural features such as the ocean or a mountain range. Rural real estate includes many of the same factors but also includes quality of roads or access to your property, productivity of the soil types located in the area, utility access such as water and electricity as well as satellite internet and television access.
Look around the neighborhood. When you buy rural property, you are buying a part of a rural community, drive around the property you are interested in and see what the neighborhood looks like. Do the neighbors show pride of ownership? Much like a home in the city, good fences make good neighbors. Also, the stronger the rural neighborhood, the better chance you have for real estate appreciation and less chance for devaluation.
2. Plan ahead
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.
It is important to be very realistic when looking for a piece of land. In recent years, the agricultural real estate market reached new highs. While these prices are expected to come down with lower commodity prices, it is not expected very quickly. This price escalation requires 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.
The type of property you purchase will have a large effect on what size of down payment as well as how much you have to subsidize. The more productive land will carry more debt requiring less outside income to make work. You need to understand the more “recreational” in nature, 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.
3. Determine the size of property
If you are a cash buyer, then you can simply look at property with a price tag that compares with the amount of money 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 does he or she know about rural property? A lender that understands rural property, cash flows for this industry, the cycles and current real estate values can be of great value to you not only now but 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 of farm you can afford and what you can expect after the purchase.
4. Working with a realtor
Unless you hire a buyer’s agent, make no mistake about it, the realtor is getting paid by the seller and is working for them. However, they bring a lot of information and will only get paid if the sale occurs. Realtors work in this industry 24/7 and can offer a vast amount of information to help you. They will set up the closing and help both the buyer and the seller meet the demands of the written contract. Real estate closings can be very complex. Realtors 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 everybody, realtor, 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 move
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 the general location.
b. Review properties available by using the internet, local newspaper, or visiting with realtors that cover the area.
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!
7. Title insurance
When you buy a car, the first thing you do is buy insurance before you leave the lot. Why? To protect you case of an accident. Title insurance does the same thing only in terms of ownership. It 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.
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:
- Local Rural Lender: They will know the people 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.
- 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.
- 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.
- Local Farm Input Supplier: This may be the local MFA (Missouri Farmers Association) Elevator or a privately owned company. These “farm stores” will carry about everything you will need from corn seed to fence tighteners. They are a great source of information for questions surrounding agricultural production.
- 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 a mower, 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 was 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. If you are going through a realtor, they should also be able to help you.