Buying a farm on contract?

[sodbuster]

Has anyone here bought a farm on contract? I would like to do this but, I have never been around this before. What is the normal process of handling this procedure? Do lawyers need to be involved or can this just be done bewtween the seller and the buyer? Also how are the property taxes handled and who needs to carry the insurance for liability?

 

[turkeyriver]

Buying land on contract isn't a lot different than borrowing the money from a bank. The only difference is the former landowner is also your lender. You make interest and principle payments to the seller and if you default the seller gets the land back instead of the bank. In the old days most land was sold on contract because the terms were more favorable than from the bank and the landowner was satisfied in waiting for his money. Doesn't happen much now except between family. Lawyers are definitely involved. Taxes and liability are still the buyers responibility just like if you financed from the bank.

 

[Monsterbuck1]

Don't forget that if you make payments on a land contract that the interest is considered "investment interest" for tax purposes and can only be deducted to the extent of investment income. The undeducted portion gets carried forward. If you take out a home equity loan, you may be able to deduct the entire amount of interest as mortgage interest, so the tax deduction advantages may be a factor in your decision. The other thing to consider is the difference in interest rates between the bank and the land owner and also if you borrow the money from the bank, it will use up some of your borrowing power in the future. I would consult with your tax advisor to see if it makes a difference for you.

MB1 (CPA)

 

[JOSHBRNDT]

Buying on contract has some advantages and also some disadvantages.

Advantages: the contract won't be on your credit so you do have more buying power. You don't have to wait for a bank to say yes or no.

Disadvantages: Interest rates tend to be a couple points lower going through a bank. Also most contracts have a balloon payment after 3 to 5 years so you would end up having to redo the contract or pay off the seller and do the financing through a bank or a Mortgage Broker like me. I would say save some time and just try to finance it through a bank. You will more than likely have to do it some time in the future.