Six First Time Land Buyer Mistakes to Avoid
Owning land is the original American dream. Unfortunately, for many first-time land buyers there are some common mistakes that I see over and over again. When buying land, most first-time land buyers will begin the process by deciding whether to use land financing, first-time land buyer loans and grants, and understanding what may or may not exist in first-time land buyer programs. In this article, we’re going to dig into the first-time land buyer loan and grant mistakes you’ll want to avoid and give you some helpful tips on how to begin your purchase.
First Time Land Buyer Loan Mistake #1 – Not Getting Approved before Looking for Land
When it comes to first-time land buyer loans and grants, it is crucial that you use a lender who understands and specializes in all rural land types. John Matulia is a lender and relationship manager for Alabama Ag Credit in the Montgomery Alabama office. Alabama Ag Credit is a borrower owned cooperative that services central and southern Alabama.
I recently sat down with him on the Huntin’ Land Podcast and we did a deep dive on every mistake we’ve seen in first time land buyer purchases. Matulia brings a unique perspective to land financing because he’s also a former land sales professional. After earning his Agricultural Economics degree at Auburn University and before moving into financing, he specialized in the sale of large acreage rural land. Matulia believes that one of the most common mistakes he encounters is not getting funding in place before beginning a land search.
“We’re one of the first phone calls you should make once you start thinking about buying land and are a first time buyer,” Matulia said. “Of all the mistakes folks make, one of the biggest they’ll make is to not be ready. Then all of a sudden, they find that tract they wanted, and now they’re trying to gather everything needed for their financing application, and they miss out on the opportunity. Even worse is as they get down the road they’re not able to qualify for the financing.”
From a land sales professional’s perspective, I have to second this. In 2019, I was working with a buyer who was looking for a parcel to hunt on and grow timber. I found the perfect tract based on the price range and acreage he wanted to be in, not even on the market yet, and it was a great price. I showed the tract to the buyer on Wednesday and I made him aware that it was a great deal and he needed to move quickly or he would lose it. Unfortunately, he didn’t have his financing in order, wasn’t sure exactly what he could afford and was uneasy about making an offer. That afternoon as I left the property, the neighbor saw my truck as I was closing the gate. That night, the neighbor contacted the landowner and made an offer that she accepted. Not having his financing in order cost this first-time land buyer a beautiful hunting property full of nice timber.
First Time Land Buyer Loan Mistake #2 – Misunderstanding Interest Rates
When you start your land purchase process, that first phone call needs to be to a lender so they can grasp your financial picture and approve you for a loan. One of the variables in what you’ll be able to afford is the interest rate. These rates change frequently so it’s important to stay in touch with your lender to stay on top of the most up-to-date accurate interest rate options.
At the time of my interview with Matulia (February 2020), interest rates for land loans were very attractive.
“Our bread and butter product is typically a 20-year term with rates currently ranging in the mid to low fours. With a 15-year term an interest rate will be somewhat lower,” Matulia said.
Matulia pointed out that one of the major differences between AAC and local or commercial banks is the potential for a patronage dividend which reduces a borrower’s actual effective interest rate.
“Every borrower purchases stock, that stock allows them to receive a patronage dividend as declared by our board,” Maulia said. Over the past five years, the Board has declared close to a 1% payout, specifically for the past two years, it’s been 95 basis points each year. We’re really proud of our patronage program.”
So, for us folks who don’t speak in finance, what this means is that if you borrow at a 5% interest rate, you effectively borrow at a +/- 4% rate after the patronage is paid to you. It’s not a guarantee, but I’ve never heard of any other banks that send their borrowers a check in the mail each year. Understanding interest rates is critical in determining how much land you can afford and goes hand in hand with mistake #1. Before beginning your land search, contact a lender who understands first-time land buyer programs and let them help get you ready to find your ideal piece of ground.
First Time Land Buyer Loan Mistake #3 – Making Assumptions
I see it all too often when I’m working buying land with a first time buyer. They come into their first purchase under many assumptions that, in most cases, are wrong or misguided. For example, many first-time land buyers think they can go cut trees on the property to fund the down payment, and in most cases, this is not possible. That doesn’t mean that there aren’t other creative ways to finance a piece of land.
“The best thing to do is pick up the phone and call us and talk to us. Even from the standpoint of interest rates and loan terms, we can customize options for you based on your goals and objectives for the property,” Matulia explained. “There are a lot of other options than just regular down payments and loan terms that you typically hear. Where we add value is, we really want to listen, and we want to know what your goals are. We may be able to show you something that makes a whole lot more sense than off the shelf financing.”
First Time Land Buyer Loan Mistake #4 – Too Many Improvements
I can’t tell you how many times I’ve walked onto a property and seen camps, barns, and buildings where the owner spent way too much money on the structure. Most first-time land buyers think that if they spent a dollar in construction, they’ll get a dollar back in the eventual sale. Done correctly, this can be true, but it is definitely not always the case. This is a mistake for many reasons, but from a lender’s perspective, it makes it challenging to lend on such a property. Matulia weighed in on spending too much money on improvements.
“We have to consider risk and, in the event of default if we have to take this property back, what obstacles could there be in marketing the property? If there are too many costly amenities it could be difficult. A reasonably priced barn or cabin, folks want those things, it’s just ‘over improved’ where it could become an issue,” Matulia said.
First Time Land Buyer Loan Mistake #5 – Thinking You Have to Have a Survey
I find that most first-time land buyers think they have to have a survey. I asked Matulia if he thought a property could be financed with doing a new survey.
“We do not always require a new survey. As long as there is a valid legal description and the closing attorney can insure that property and provide a lender’s/owner’s policy on that piece of property, we don’t require one,” Matulia said. I always have that conversation and say, we don’t know until we start doing title work, and our appraiser starts looking at what the description says. But that is probably one of the bigger misconceptions for my first-time land buyers that they think 100% of the time, we need a new survey. I would say probably only 25% of the transactions I have worked required new surveys.”
With today’s technology and readily available GIS systems, if somebody is concerned about acreage, it can be estimated with a relatively small margin of error. Let’s say you’re paying $2,000 an acre on a large tract of land. Let’s assume your margin of error equals $5,000 in terms of “lost” acreage. If it’s on the negative side to you, but the survey to confirm that it’s going to cost substantially more than that, then you’re probably not going to pay for a survey unless it is necessary to provide a complete and accurate legal description.
First Time Land Buyer Mistake #6 – Not Working with a Land Professional
Residential agents and residential mortgage companies are experts when it comes to buying and selling homes and I believe that in both cases you need to call a residential real estate professional. When you buy a home, your first call should usually be to a lender who offers residential products. For serious buyers, professional agents and lenders are not a cost but a significant value.
That being said, I do not sell houses, unless they are on large tracts of rural land.
If a homeowner comes to me and asks me to sell their residential property, I refer them to the expert residential agents that I know.
The reasons for this are many, but from a lender’s perspective, here is Matulia’s read.
“If you’re buying land, as a first time buyer, you typically see the property listed with a land professional. Often, based on the types of questions first-time land buyers ask me, I can tell if they have been working with a land professional. Land professionals have already addressed specific questions and issues before they’ve gotten to me,” Matulia concluded.
First-time land buyers should be excited about making their first purchase. There is a lot to learn, but the good news is that there are professionals who can help you along every step in your journey. If you’re thinking about buying land and are a first-time buyer, be sure to avoid the mistakes we’ve covered above, and your first-time land purchase will be one you’ll never regret.