How did you finance your farm?

[eastendjumper]

I’ve got family land I am inheriting from my folks. It is owned, free and clear, and is a blank canvas.

So I need funding to build the barn, arenas, everything. I’ve been leaning towards a construction loan, but am hearing from others that the regulations and requirement that come with those loans is extensive and prohibitive. We are fully capable of building most, if not all, of the facility ourselves, so this would be a much bigger financial drain than it needs to be. My husband and I will live in a large apartment over the barn, so the difficulties of building a home, too, are minimized. So basically, we need money for the materials (which is currently estimated at $250,000) and likely some start-up capital.

I have regular meetings with SCORE and they have been great at helping me figure out the business plan/strategy/model, but they haven’t been very helpful in steering me in the right direction here; they just are not very familiar with commercial farm/equine lending. The SBA 7A loan is the direction I am heading now, but I have fears and doubts.

Has anyone been in a similar situation? Is the a lender or loan program out there that may work for this type of situation?

[sid]

Where are you located? There are some farm lending co-ops that may be accessible to you.

But as in any lending scenario, they need to know that you can afford the “morgtage” payments.

BTW, you need to fix the big typo in your headline.

[tangledweb]

If you have significant equity in the land (ie it is large or well located enough to be valuable and is in your name not your parents) then I would have thought borrowing against that equity would be easier and cheaper.

[cutter99]

Construction loans have to be paid off fully when the construction is completed. You usually have 30 days to convert the construction loan to a regular mortgage.

We used a construction loan to renovate our house on our current farm and then went to a very small local bank for our mortgage. Their rates were better than the larger banks in the area, plus we are supporting “local”, plus our mortgage will be held by this bank and not sold.

[kalidascope]

We borrowed against the property - we already had a mortgage on it, and increased the overdraft portion (had paid down enough that we could do this without providing additional equity).

[Guilherme]

The Farm Credit system is national; there are regional ag. lending co-operatives. Talk to your County Extension Agent. They should have a list of ag. lenders.

AVOID COMMERCIAL BANKS!!!

Be VERY wary of government sponsored lending.

Both are “snake pits” if you don’t know what you are about.

G.

[reubenT]

my policy is; no loans at all. Build up as I can afford to pay for it. Land is inherited and I’m not putting it at risk for anything. Plus I don’t like bills, I keep them as small as possible.

[Lmabernathy]

I started small and worked my way up to not as small I have a very similar situation. I inherited an old hobby farm. There was a house already, a metal barn shell, and a couple of delapidated sheds. It’s taken me about 12 years now but now I have 2 pastures, 5 dry lots, 2 long run ins (carport style) that provides shade for 2 dry lots each (fence runs through the middle). My arena is an old dry lot that I put hitching posts in and was already pretty naturally flat and sandy (almost unheard of where I live in the land of red clay) I fenced it off with corral panels I have collected over the years. It’s a good size, maybe 20 ft short of a large dressage arena, but I have that extra length available, but I put a round pen and trail course behind the arena.

I started off as a teacher and did that for 9 years while I was building my lesson business and improving the farm. I was unexpectedly laid off 3 years ago and started working on the farm only. It turned out to be perfect timing. I can support all the bills by myself off teaching and boarding and keep squirreling a little away every chance I get. I do have a mortgage from extensively remodeling the original farm house circa1888, but my truck and trailer are paid for and I have a 73 hand me down tractor, but it has been dependable thus far (touch wood). A new tractor with a front end loader and hopefully a back hoe is what I’m saving for next. I started really young, so I’m still fairly young. That helps with the energy and drive to keep working out in the heat cold and dirt. I don’t travel, go out, party, or have kids. I work and stay at home with my dogs. It’s not a life for everyone, but I wouldn’t trade it for anything in the world.

PS if it helps, when I got the mortgage on the house to pay for the remodel, the banks didn’t want the land. They didn’t want anything to do with the farm. I thought that was crazy because the land is worth more than the house at that time and is probably still worth more. It worked out for me, I had it surveyed and the house redeeded separate. The land belongs to me out right. My mortgage is for the house and 1 acre it sits on.

[DHCarrotfeeder]

Do not skip the local banks as an option. You have equity in the land and perhaps other things, and when standard mortgages would not finance our farm purchase, we turned to local banks. Many didn’t “get” what we were doing, but a couple did and we’re quite happy with the arrangement. With enough equity you might be eligible for a fixed-interest loan. Without enough equity you will be using a variable rate loan of some time - which is not all bad with rates where they are and your long-term plans.

[eastendjumper]

Thanks, all! This is all really helpful. I’m so out of my depth here.

My folks are selling several parcels in the area, but the chunk I’m getting, I’m getting because the zoning is…odd and really only viable for what I want to use it for. It can’t be sold as residential, and doesn’t have enough water rights to be used for crops, and so just isn’t worth much (but we are going to add our own well). We’re out in Idaho so things get interesting. I think my parents were thrilled I am wanting to use it because there just isn’t much they can do with it.

So, stupid question but here goes: who did you go to for advice on how to design your financing? Straight to the lenders? Financial advisors, accountants? Real estate agents, lawyers? This is how much help I need, don’t even know who to ask :(. I’m wondering if it is possible to get a mortgage on the land; having my parents “sell” it to me for roughly the cost of the construction, and ask them to then fund the building, minus taxes, if that makes sense?

[quikchik]

[QUOTE=eastendjumper;8121360]
I’m wondering if it is possible to get a mortgage on the land; having my parents “sell” it to me for roughly the cost of the construction, and ask them to then fund the building, minus taxes, if that makes sense?[/QUOTE]

There may be tax ramifications if they “gift” you that much money. There are limits on the amount of money that can be gifted from one person to another per year tax-free.

[Guilherme]

In the opening post the word “inheriting” is used. Does that mean somebody died and left you the land or that you are “inheriting” it in the colloquial sense (the way a younger child “inherits” hand-me-down clothes from older siblings)?

If the land is coming through an estate it’s likely any taxes will be handled at that time, but check with the attorney going the work. If it’s some sort of a gift then you may well be looking at significant tax liability. Here is more information: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Forms-and-Publications-Estate-and-Gift-Tax

G.

[clanter]

just wondering what this quarter of a million dollars of materials would be? If it is a prefab building, you can negotiate the price/cost and if time lines can be altered to allow the manufacture to use the project as fill in in their production schedule that allows them to smooth out their labor costs… you can get a much better price.

Another alternative is buy an existing structure and have it disassemble and relocated. I knew of one hunter/jumper farm in Kentucky that bought an old move theater from Ft Knox because the laminated beams where 110 ft. They used those beams to build their in-door and sold off the remaining materials

[js]

I believe that any lender would value the land based on it’s appraisal value not what you paid for it. If it has little value then I don’t think your plan of the parents selling it to you would be viable.

[Flash44]

If you need to borrow money to build your farm, you need to talk to lenders to see what kind of programs are out there. That would be banks. You can also see if there are any ag or farm related loan programs offered by the government that you may qualify for. If your farm is going to be a business and not a hobby farm, a business loan may be possible. I would start by walking into my local bank and talking to one of the loan officers. Once you are able to find a few lenders who are willing to work with you, you can compare interest rates and repayment plans to find one that fits your budget and ability to pay.

[moving_to_dc]

[QUOTE=eastendjumper;8121360]
…I’m wondering if it is possible to get a mortgage on the land; having my parents “sell” it to me for roughly the cost of the construction, and ask them to then fund the building, minus taxes, if that makes sense?[/QUOTE]

I know that you cannot do that in Kansas, but it may be different in Idaho. My husband’s family owns land that my husband will inherit. His Mom wants him to have it NOW, though, so that it cannot be “taken” to pay her nursing home bills. We found out that she cannot “sell” it to us unless it is at fair market value - she cannot sell it for less than it is worth.

What we ended up doing was hiring a lawyer who drafted all the legal documents and followed the requirements… We still have to wait to inherit the land, but it will be protected 3 years after we signed the paperwork and cannot be taken for nursing home bills. Thankfully, MIL has enough savings that she can pay more than 3 yrs of nursing home bills, so we should be okay.

But we still cannot build on the land until it is legally inherited.

[Sparky_Boy]

Farm Credit. Regular banks do not like to deal with averages.

[MamaPsalmist]

If it were me, I would call around to some lenders and say something like “My parents are giving me some land and I would like to build a horse barn and arena and pastures on it. Can you help me figure out what programs you might have to fund the construction?”

We recently bought a house and cold calling banks worked out very well for us. Very well. Give them a chance to sell you their products, you never know what they might offer!

[eastendjumper]

Thank you everyone for your time and replies! I really appreciate it.

[wildlifer]

[QUOTE=cutter99;8120335]
Construction loans have to be paid off fully when the construction is completed. You usually have 30 days to convert the construction loan to a regular mortgage. [/QUOTE]

I know what you mean b/c I did the same thing, but the first sentence reads a bit terrifyingly, LOL.

I bought the land & built the house w/ construction loan, no problem. Trick is finding local agent who knows the area & has a lot of experience with it. Luckily, I’d lived in the county for 7 yrs already & work for the state, so I just asked the network & found the right person.

Worked out fine – while under construction, you are only paying interest on the loan, the assumption is you are paying say a mortgage on house you are currently living in (I was). This is where the right person is critical, b/c she took care of everything, so it switched over to a regular mortgage & she even called me when there was a sudden interest rate drop so we could lock that in for conversion.

Real estate & mortgages confuse the heck out of me, I’m a biologist, it’s like talking to aliens, but real people, in a bank branch in a small town, who grew up with my current neighbour I bought the land from…that’s the kind of community I know how to work in!

ETA – locational variables are huge. I did call Farm Credit, their rates were way high & downpayment was insane. My credit union is awesome & held my previous mortgage & my current bank accounts (it’s a non-profit, heart) & I may take my current mortgage there eventually, but the local Go-To person was at our BB&T branch, so there it lies for now. Credit union has spoiled me & now I hate regular banks, but it was all about that one person who made it all happen & was so awesome the hundred times I freaked out, ha.