Pros and Cons of an Owner-Financed Farm Sale

Pros and Cons List

If you are looking to buy a farm or farmland, you have two options for financing – owner-financed or bank financed. Both options have their pros and cons, but in this article, we will focus on the owner-financed sale to help you decide if it’s right for you.

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What is an Owner-Financed Sale?

First, let’s look at what an owner-financed sale looks like. Rather than obtaining financing from a bank, you obtain the financing from the person that owns the farm/farmland. You receive the title for the land and make your payments (principal and interest) to the owner, just as you would have done with a bank. The main difference is who you pay.

The Benefits of an Owner-Financed Farm Sale for the Buyer

There are several benefits of an owner-financed farm sale, including:

  • Lower credit score requirements – Banks are often tough with their qualifying requirements, including credit scores. They want high credit scores and low debt ratios or you cannot have the financing you need. Individual farm owners, though, can set their own requirements, which are often much more lenient than the bank’s requirements.
  • Lower interest rates – Individual owners usually charge lower interest rates than banks as well. They don’t have the overhead and expenses that banks have. All the landowner wants is to make sure he gets paid on time and with a little bit of interest to make up for the fact that he is not getting the full amount of the cost of the eland upfront as usually occurs in a traditional sale.

The Benefits of an Owner-Financed Sale for the Seller

It may seem like the buyer gets all of the benefits of an owner-financed farm sale, but there are benefits for the seller too. They include:

  • Spread out income – Rather than receiving the money in one lump sum, you receive monthly income, assuming the buyer makes the payments on time. This can serve you well during your retirement years when you don’t have any other income coming into the home.
  • Lower tax liability – If you receive the funds in one lump sum, your capital gains are rather hefty all at once. This can result in a large tax liability during the year that you sell the farm. If you provide owner financing, though, you spread out the profit and lower your capital gains, keeping your taxes to a minimum.

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The Disadvantages of an Owner-Financed Sale for the Buyer

Of course, with the good always comes the bad. There are a few disadvantages buyers realize when using owner-financing, including:

  • Balloon payments – Owner-financing often includes a balloon payment in the terms. This means you make 30-year payments for a specific period, but then owe the remaining principal balance on the specified date, such as 5 years into the term. If the buyer cannot secure bank financing to pay it off, they could end up losing the farm and the money they put into it.
  • Large down payment – Farm owners typically require a sizeable down payment on the farm in order to provide financing. This helps lower the risk of the farmer losing everything if the buyer were to stop making payments on the loan.

The Disadvantages of an Owner-Financed Sale for the Seller

Sellers also experience a few disadvantages when it comes to the owner-financed sale:

  • Large risk – No matter how much as seller requires for qualification, there’s always the risk of default. If the buyer does default, there should be some type of provision in the financing paperwork that allows the seller to take back possession of the farmland after a certain period.
  • Second lien position – If the buyer uses owner financing as a secondary form of financing, obtaining the original funds from a conventional lender, the owner will have second lien position, which can put him at even higher risk of loss if the buyer were to default.

Knowing the pros and cons of owner-financed farms can help you decide if it’s right for you, no matter which side of the equation you are on. As a buyer, it can provide you with a great way to get the financing you need. As a seller, it can help you get more potential buyers and owe less takes on your capital gains. Make sure you weigh the pros and cons to ensure that you make the right decision for yourself.

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