In today’s Farm Talk show, Paul discusses seller financing and tells us why it is doable. People ask Paul all the time about seller financing and more often than not, it’s not considered an option. Paul shares a great story with us about a current listing he has where farm financing is not an option due to the orchard being reliant to county water, which is very expensive. If the orchard didn’t exist, it would not be planted today. For this particular property, the water costs eat into any profits.
Paul explains the challenges for the different loans that are possibilities with this kind of property. In the case of this property, a nextdoor neighbor has made an offer, but has requested some seller financing for 5 years, which Paul explains could benefit both the seller, and the buyer.
Tune in and learn what situations make seller financing desirable.
This is show is full of great information that is vital to know when purchasing, or selling, a ranch property. Don’t miss it!
The title of today’s podcast/blog is Seller Financing is Doable and I do truly believe that seller financing is an option in many cases. People ask me all the time about seller financing and more often than not it’s not considered an option, but I believe that it is very easy and very doable. First, I want to tell you a story and then I will explain how it may work for you as a buyer or a seller.
Currently I am selling a beautiful ranch property here in Ventura County, California. It’s a trust sale, so the beneficiaries are the children of the owner, who passed away. The main house is an amazing home with spectacular views of the entire property and surrounding hills. There are several acres of orchards attached to the property and this particular property relies on county water, which is incredibly expensive. If the orchard did not exist, it would certainly not be planted today. It takes several years for an orchard to mature and in the meantime, there are of course water bills to pay. So, for this particular property, the water costs eat into any profits and farm financing is not an option for the property because of the current water situation. A buyer may be able to get a conventional home loan or certainly a hard money loan for the property, but those loans have their own challenges. In this situation, hard money is very expensive, and a traditional home loan typically doesn’t work for properties above 10 acres that have a history of income generation. In this particular case, the neighbor has an affordable well and he wants to expand his operation. If the next-door neighbor does buy the property, it could be a win-win for everyone.
The neighbor is offering a significant amount for this property, not the asking price, but he’s offering a significant amount for the property with 10% down. He’s asking the seller to carry the first mortgage at a 5.5% interest rate for five years and this would be amortized on a 30-year schedule with monthly payments. Monthly payments would be made and there’d be no prepayment penalty. So, if he paid off the loan before five years, there’d be no prepayment penalty. In the five years that he’s borrowing money from the seller, he would extend his well water from his ranch to the new property next door. With the new, more reliable water, he can bring the orchard into maximum production and then secure farm financing.
For the beneficiaries of the trust, the drawback is they’re only going to see 10% of their big payout. They will need to wait five years for the balloon payment, but they will be getting a monthly check that includes 5.5% interest. This of course is a much better interest rate than simply sticking their money in the bank. There may also be some tax benefits for the beneficiaries to seeing smaller payouts for five years before the balloon payment. I don’t know the outcome of this story yet, but I still want to share it with you to show how seller financing may work in this particular situation. Then of course, how it may also work for you.
If you are a buyer, it doesn’t hurt to ask about seller financing. Invariably, the answer is going to be no, but sometimes it might be yes. Here are some situations when seller financing may be more likely than not:
If a property has some quirks or if lenders don’t like it for whatever reason and those reasons can be fixed.
If the property has been on the market a long time and for whatever reason, the owner has not been able to sell it, but he or she is willing to carry paper.
If a seller doesn’t owe much and has significant equity in the property, the seller may be willing to carry the note.
If the property is already in escrow and the appraisal comes up a little short and the buyer and the seller need to compromise on the price, a seller may be willing to carry a small second mortgage to make up the shortfall. Now, of course, in that particular situation, it usually leads to a renegotiation of the purchase price, but more often than not there’s a compromise and the seller might be willing to carry some paper in that situation.
Also, vacant land is incredibly challenging to get financing. If you want to build your dream home, a seller financing on vacant land may be an option and then you can seek conventional financing once the home is constructed and you have your occupancy papers.
There are many different situations and options where seller financing can work for both parties. I’m just sharing with you a real-life current situation where seller financing may come into play. I don’t know the outcome of this particular story yet, but I just wanted to share it with you and I’ll certainly share the outcome with you on a future podcast/blog.