How (and Why!) You Should Finance Your Next Land Purchase

You might call Caleb Kjergaard, Director of Client Services – Rec Land at Outdoor Bank, atypical in today’s modern banking world. Born and raised in Eastern Kansas, Caleb understands land. He’s spent many mornings watching the world from a duck blind or tree stand. After working as a CPA for four years, he swapped that life for this one – one in which he gets to walk property with his clients, and work with agents across the country to find the best possible rates and options. Caleb’s style of lending evokes the friendly, lockstep approach of generations past. He believes in working with clients to find the best financing option, “Whether that’s with our bank or another finance organization.” With an understanding of finance that rivals his love of the land, Caleb offers up his tips on how – and just as importantly, why – you should finance your next land purchase. 

The Benefits of Financing Your Land Purchase

Caleb highlights three main benefits of financing your land purchase:

1. Liquidity – “This is the main reason I recommend financing land purchases. A lot of people think they’ll be saving money by paying cash and avoiding interest, but putting all of their cash into land might mean they might miss out on another opportunity that requires cash, like improvements to the land later. Keeping some dry powder in your bag for other opportunities that pop up is always a good idea.” 
2. Tax Benefits – For this point, Caleb puts his CPA hat on. “With financing, your interest payments are tax deductible. Property tax is deductible. If you put improvements on the property, those will be depreciable. And if you’re a farmer, there are loads of deductions you can take advantage of.” 
3. Leverage – When it comes to weighing the odds (and historical data), Caleb points out that using leverage has the potential to amplify the returns, especially in a bull market, when the rate of appreciation on the land exceeds the cost of borrowing. Smaller monthly payments can also be much more manageable than a huge cash windfall at the get-go, both of which can afford you more financial flexibility and leverage down the line. Also, financing can allow greater buying power. “You can finance a larger, more expensive property than one you would be buying if you just bought it with straight-up cash.” 

When getting ready to buy land, Caleb always recommends buyers talk to their tax professional first. 

Exploring Financing Options

There are typically three types of financing when it comes to buying land: traditional mortgage loans, land loans, and seller financing. According to Caleb, mortgages and land loans are pretty similar, but not every bank understands land. “Many lenders look at land and think of development, when in reality, many of our buyers are buying land for the sake of owning land, not to develop it.” 

There are a few key factors to consider when thinking about your financing options.

Down Payment 

This is where traditional mortgages and straight land loans can vary slightly. Sometimes a land loan will require a bigger down payment. Traditional mortgages usually require a minimum 20% down payment whereas raw land loans can require up to 35%. Talk with your lender about your options.

Interest Rate

Interest rates can be intimidating, but again, Caleb encourages an open line of communication between buyer and lender to find the best rate for you. “Don’t let today’s prices or interest rates push you out of the market if you’re thinking about financing. Interest rates aren’t forever, but that property you’re looking at can be.” 

Length of the Loan

This can also vary depending on the type of loan you secure, fixed-rate or adjustable-rate (ARM). Talk with your lender about the difference and which is a better option for you. 

Credit Score

Credit score is an important factor in a land purchase, even more so than when securing a traditional home loan. It’s important to make sure yours is at an acceptable threshold for your borrower. 

Seller financing, also known as a land contract, is a third option, although a less structured one. There are a variety of reasons buyers and sellers might choose this route, including the buyer having a lower credit score, wanting to avoid using a bank or lender, or a lower interest rate. However, it’s important to fully understand the terms of seller financing, including whether or not the seller owns the land and all outbuildings outright. 

Factors to Consider Before Financing

When you’re getting ready to finance a land purchase, there are some important considerations. In short, Caleb notes this step is similar to making any large purchase. “Get prequalified, look over your current financial situation to see what you can afford, find the right sized property, and make sure you feel comfortable making the payments.” In short, make sure you’ve checked these three boxes before you buy:

• Assess your financial readiness

1. 1. 1. Credit score
      2. Current personal balance sheet
      3. Debt-to-income ratio

• Understand the market dynamics and property valuation

1. 1. 1. Current interest rates
      2. Market trends
      3. End use for the land relative to the region
      4. Mineral and water rights

• Evaluate the potential risks and rewards

Navigating the Application Process

If you’re serious about buying land, or a piece of ground has become available that you can’t live without, it’s important to be ready to go. This is where the type of relationship-first banking and lending Caleb talks about comes in very handy. He’s a big believer in open communication with your lender, and working hand-in-hand with buyers to secure the best possible outcome. “Relationship banking leads to relationship pricing. We don’t have a set rate for everyone; a lot of it is based on relationships. This can start as a checking account or car loan, just so the bank knows you when it comes to getting a larger land loan.”

Having that established relationship with your lender can greatly expedite a land sale. In addition, it’s important to gather all of the necessary documentation and information. Most lenders can provide a checklist of required items to secure a land loan. These can include, but are not limited to:

• Driver’s license
• Legal name and contact information
• Federal income tax returns from previous years, typically up to three years back
• Total assets and liabilities, both personal and business
• Current employment status
• Legal proof of any assets you’ll be using as collateral

Mind Your Credit Score

As mentioned, credit scores and financial history play an important role in securing a land loan, because land loans are sometimes viewed as riskier for the lender or bank. Strong credit and a transparent, traceable financial history can help you get a lower interest rate and better loan terms. 

Getting pre-approved for a loan is a great way to stay one step ahead, even in non-competitive markets. As Caleb points out, land can be different from buying a car or a home in that the right piece of property might not be readily available. “A lot of times, these farms only pop up every 20, 30, even 100 years.” It’s important to be pre-approved and have your financial ducks in a row when it does. 

Selecting the Right Financing Partner

Back to Caleb and Outdoor Bank being the type of lenders that want the best for everyone involved. “At Outdoor Bank, we’ve built relationships with banks throughout the country so we can find the right fit for the loan, whether it’s with us or someone else.” It’s a refreshing and important perspective. “The relationship is a lot more important to us than what the client is actually buying.” 

Even if you can’t meet with Caleb and his team about your land purchase, it’s worth keeping his philosophy in mind when you’re looking for the right financing partner. Make sure to research and compare lenders. Talking with friends, industry professionals, and other landowners in the area is a great place to start. Look at recommendations and reviews from trusted sources. 

And definitely don’t forget to read the fine print. Some lenders will bury hidden fees, interest rates, and terms. Talk with lenders and finance partners at the beginning of the process about the exact fees you can expect throughout the process and at closing. 

Tips for Negotiating Favorable Terms

It’s important not to forget your power as a borrower, and highlight it when you talk with your lender. Again, this is where your financial history, credit score, and current assets come into play. 

You can also leverage market conditions and competition. In a hot market, talk with your finance partner – and even the seller – about why you’re the best person for the land. As Caleb puts it, “If you want the land at that price, there’s a good chance someone else wants it at that price, too.” But don’t let market competition scare you either. Advocating for your strengths as a buyer can include what you intend to do with the land, conservation efforts, improvements you want to make, and more. 

Talk with your lender about flexibility and repayment options. “A lot of our lending practices are based on the strength of the borrower. Other lenders are focussed on the collateral and cash flow of that property, and a lot of those programs are tailored toward profitable farmers and profitable ground. Our niche is people who are looking for the right piece of land and dreaming of what they want to do with it now and for generations to come.” 

Avoiding Common Pitfalls

Buying a big swath of land is something fun to dream about, but the reality can be trickier and more involved. Make sure you’re prepared and that you avoid the following pitfalls when buying land:

• DON’T fall for predatory lending practices
• DON’T overextend your financial capabilities
• DON’T fail to conduct due diligence on the property and financing terms

Make sure you do your homework, talking with your recreational real estate agent, finance partner, and any relevant farming, ranching, or resource oversight organizations in your area. 

Securing Your Investment for the Future

There are some straightforward and obvious steps you can take to protect your land investment. Then there are less obvious ones. Let’s start with the simple. 

1. Title Insurance – This is an important step for landowners because it protects both you and your financing partner in the event the previous owner didn’t own the property free and clear. Title insurance protects against the losses that might occur when the property is not free and clear of defects. 
2. Property Insurance – If you intend to use your property for events, large gatherings, or something else that might require risk management, talk with your finance partner or insurance agent about securing adequate property insurance.
3. Financial Planning – Creating a long-term financial plan for your property, including farming- and ranching-related costs, out buildings, improvements, maintenance, employees, and conservation is important in ensuring it retains and grows its value. 

Look for Unusual Opportunities

Caleb chimes in on some of the less obvious ways you should consider securing your land investment for the future. “My thoughts are, if someone has purchased some ground, specifically raw land, and wanted to ensure they do not hurt the valuation of the property over time, one of the best things they can do is leave the land undisturbed.  Adding some improvements such as fencing and outbuildings can help boost the value to the owner, however if they intend on selling the ground in the future, the upcoming buyer might not see the same value in those improvements.”

In the case of recreational properties, Caleb adds, “A good land investment strategy can (and often should) involve some improvements, but one of the best things, other than leaving the property as raw as possible, is to create healthy animal habitat. Whether that’s clearing out timber and other invasive plants, creating good cover for upland birds, adding food plots, and clearing game-trails, there are a lot of ways to improve the value of your property without adding too many invasive man-made structures. Enhancing wildlife habitat on your property not only increases your opportunities to see and interact with local wildlife, it can also bolster your future sales price if you were to sell it, and it very seldom, if ever, hurts the value.” 

Conclusion

Buying your dream piece of ground, be it row crop farmland or expansive equine property, can be fun and exciting, laying way to a lifetime of recreational, farming, and ranching opportunities. But back to Caleb’s point, not every bank understands land. If you’re in the market, it’s important to find both a recreational real estate agent and trusted lender to work with as you navigate your purchase, someone who gets the ins, outs, nooks, and crannies of large land deals; organizations that focus more on who they’re lending money to than what they’re lending money for; someone who believes in the kind of relationships that make a farm successful, or a piece of land thrive year after year.