How to Buy Land When Short on Cash
You always wanted to have your very own piece of outdoor heaven and you finally found that ideal tract of land. It is the right size, in the right location and at the right price. Based on your income and credit history you are qualified for financing, except you are short on cash and don’t have the full required down payment. Do you know how to buy land when short on cash?
In general, it is the job of the financial institution you work with to adequately assess the credit risk of each loan. So, whenever a financial institution sees an applicant that may have a good financial history and credit, but has no cash to put down, it may raise the question “Why does someone with good income and credit history not have cash saved up?” Although this shortage of cash will likely be addressed by a lender, all is not lost.
According to Brandon D. Simpson, Assistant Vice-President/Account Executive at First South Farm Credit (FSFC), there are ways to come up with that down payment to make the dream a reality.
Simpson stressed that there are ways to accommodate a “short on cash” situation and stresses that applicants have different financial circumstances and First South Farm Credit doesn’t take a “cookie cutter” approach in qualifying applicants. They can customize and tailor a solution that meets a customer’s needs.
“There are ways to accommodate a cash shortage and everybody who applies for a loan will have their individual situation considered,” Simpson said. “What works and applies to you when you apply for the loan may not work for someone else because everyone’s financial situation is different.”
Simpson said that there are four basic ways that FSFC deals with a “short on cash” situation and they are based on a “least risky” to “most risky” pecking order.
Additional Rural Real Estate Collateral
“Ultimately, cash is king. But if you don’t have cash, the best option from a lender’s risk perspective is additional similar real estate collateral. This option is generally used by existing land owners rather than new land buyers,” Simpson said.
“For example, if you own 10 acres of land (with clear title and no debt) worth $30,000, and you wanted to purchase 40 acres of land worth $120,000, but didn’t have the cash for a down payment, we can look at taking a lien on both tracts in an effort to finance the property being purchased. In this example, the lender would have a total of 50 acres of collateral, valued at $150,000 with a loan amount of $120,000 or 80% loan to value. Note: The maximum loan to value in most cases is 85%.”
Utilizing Gifted Funds
In Simpson’s experience, a gift from a family member is a common way to produce a down payment for land financing, especially for younger buyers who are just getting into the land-owning game and are questioning how to buy land with no money.
“A lot of times mom and dad will give a financial gift to their kids to help them get started,” Simpson said. “A young couple may want to buy 20 or 30 acres for $100,000 and they need $15,000 for a down payment to purchase the land – mom and dad can gift them the money.”
Simpson points out that in the case of a gift, FSFC requires the family to sign gift letters stating that the money is a gift and it isn’t expected to be paid back. A gift of a down payment doesn’t necessarily have to be from just parents. A gift can come for other family members, friends or anyone…but it has to be a gift and be correctly documented.
Liquidate Other Assets or Accounts
Other assets could be personal property as in boats, cars, recreational vehicles, personal possessions whatever can generate cash.
“I had one person liquidate a $70,000 boat. He was tired of offshore fishing and wanted to buy land. Selling the boat generated the cash needed for the down payment.” Simpson said.
Simpson pointed out that while personal property is used to raise capital for a down payment, most liquidation efforts are focused on financial instruments such as retirement accounts, traditional 401Ks to IRAs to money market accounts and others.
“We’ve found that it is common for people to tap into their retirement funds for a down payment on property.” Simpson said. “We don’t encourage anyone to do anything that would negatively affect their retirement, and each person should be mindful of penalties or tax consequences they might incur if they choose to utilize certain retirement dollars.” Simpson noted.
“However, in our experience, we’ve seen that many people want their kids or grandkids to have the same outdoor experiences that they had when they were growing up and they are willing to take money out of their retirement to do it.”
Simpson noted that some people will simply cash it out, while others may choose to take a loan out against the account (if that is an option).
Using Funds From Other Debt
Simpson said that number four on in the list is the use of other debt to finance a down payment for property.
“Typically, this isn’t about getting another credit card or signing over the title of an automobile and getting a loan. It is mostly the situation in which people have some equity in their house and they are going to draw off of their equity line for the down payment or take out a second mortgage,” Simpson said.
“Whether it is an equity loan, second mortgage, or another borrowing arrangement, the additional debt and payment amount will be taken into consideration when we calculate the cash flow projections of the borrower’s total debt.” Simpson added, “To summarize, if you choose to use other debt to come up with a down payment, you need to communicate that to the lender so they can accurately evaluate your income to debt ratio.
In summary, Simpson pointed out that these four options are standards in the real estate finance industry and he had some parting comments on each of them.
“Using additional real estate for collateral typically applies to those people who are landowners and not for people trying to get started. Gifting is often for people trying to get started and the gift normally comes from family. Liquidating assets is a common option for those people who really want a piece of land and don’t have a lot of cash, but have good jobs, other assets, and/or good retirement dollars. And, for those that have equity in their homes, they can draw on their home equity line or take out a second mortgage to purchase land.” And Simpson concluded, “All four are viable options to answer the question, ‘How in the world can I buy land when I’m short on cash?”
First South Farm Credit specializes in providing credit for farming operations, including crops, livestock, land and timber and is also chartered to help with financing lifestyle farms, rural home sites or rural land tracts for enjoyment or investment purposes. First South has over 40 branches with 9,000 members and serves Alabama, Louisiana and Mississippi. Visit their website at www.firstsouthland.com to learn more about how First South can help you finance your land.