The decision to buy land or a farm shouldn’t be an impulsive one. It takes thorough planning, research, and organization to set yourself up for success and do it properly.
There are a lot of moving parts and factors to consider when buying a farm or land, but don’t get overwhelmed! If you follow the 5 straightforward steps below, you’ll be in a great position to get the property you want and have a better understanding of the process.
Why Do You Want to Buy Land?
Deciding on what type of farm or land you should buy is the first step. To do that, you’ll have to know what your goals are. Are you looking for an investment that will earn income, a place to live, or somewhere to explore your hobbies?
For cash flow you may collect rent by allowing others to hay your land or use it as pasture for their animals. These payments are usually set per acre. It could also come in the form of a payment from a United States Department of Agriculture (USDA) program, such as the Conservation Reserve Program (CRP), which will pay you a fee to improve the plot with plants or other environmentally conscious measures.
On the other hand, if you’re looking for a getaway spot for recreation, you’ll want to identify what improvements you might want to make, such as adding a pond, cabin, water access, or providing deer or wildlife habitats for hunting, etc. Knowing what you plan to use the land for will help you to understand how much acreage you need and what areas you should look into.
Once you’ve decided what you want to do with your land and have a general idea of the size of the property you want and the areas you like, you’ll have to establish your budget. Start by conducting online research through real estate websites like the ones below to determine land values in the area(s) and sizes you’re interested in and note the trends you see:
Organize Your Finances
Now that you have an accurate estimate of how much you’ll need to spend, you can use a loan calculator to run different scenarios and determine the amount of money you’ll need to put aside for a down payment. As a general rule, land loans typically require 15-25% of the total cost for a down payment.
Consider your current spending and financial situation when looking at this down payment to assess whether it’s an achievable figure. Always check to make sure that the figures you’re looking at are accurate and up to date and take into account any and all financial obligations you might have to avoid any unfortunate surprises later. If you find that the down payment just isn’t reasonable no matter how you crunch the numbers, you may want to go back to step 2 and take another look at your budget. In addition, you can also consider different types of loans to see if one may work for your situation.
Determine Loan Type
There are several types of loans you can choose from when buying a farm or plot of land. Ideally, you’ll likely want to take out a traditional land loan with a lender who specializes in land and farm financing, as they’ll understand your needs better than other lenders and have options specifically geared toward purchasing farms and land. At Alabama Ag Credit, for instance, we offer long-term fixed rates as well as flexible payment terms based on the applicant’s income stream and whether the land produces income.
If you intend to plant and harvest crops on the farm you’re buying, the USDA Farm Service Agency (FSA) offers a few programs you may be able to take advantage of to lower your costs. However, the programs usually require that the applicant be unable to obtain financing in a traditional manner. To see if this might be an option for you or what other loan options you might have available, contact your local FSA loan officer.
Once you’ve set your budget, decided on what type of land you want, and considered what loan options are best for you, it’s time to move on to the final step: pre-approval. Obtaining a loan approval.
A lender who specializes in farm and land financing will walk you through all the steps of the application leading up to approval, so don’t worry about the details too much right now. They’ll give you an idea of the payment structure, down payment amount needed, and loan terms prior to making an offer so you can understand what you’re getting into.
Buying A Farm or Land
Are you in the process of buying a farm or plot of land? Talk to a loan officer in your area about financing options and pre-approval. We’re happy to answer any questions or concerns you might have!