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buying land

5 Mistakes to Avoid When Buying Land

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Buying land forces you to make a lot of choices. Unfortunately, people who don’t have much experience buying land rarely know how to avoid common mistakes. And even experienced buyers can make mistakes.

Check out these pitfalls to avoid so you can make informed decisions the next time you are in the market buying land.

1. Choosing the Wrong Type of Funding Source

You have several funding options when buying land. If you have exceptional credit, then you might find that a conventional bank or credit union will lend you money.

Another option is going through the Farm Credit System. “The Farm Credit System (FCS) in the United States is a nationwide network of borrower-owned lending institutions and specialized service organizations. The Farm Credit System provides more than $304 billion in loans, leases, and related services to farmers, ranchers, rural homeowners, aquatic producers, timber harvesters, agribusinesses, and agricultural and rural utility cooperatives.

Congress established the Farm Credit System in 1916 to provide a reliable source of credit for farmers and ranchers. Today, the Farm Credit System provides more than one-third of the credit needed by those who live and work in rural America.”

Don’t assume that you have to rely on a bank and a loan, though. Crowdfunding has become a popular alternative to traditional investing.

Explore as many options as possible to make sure your funding best meets your needs.

buying land

2. Accepting High Interest Rates That Increase the Land’s Price

If you decide to get a loan for buying land, look for a lender that will give you a low interest rate. The more interest you have to pay, the higher the land’s overall price becomes.

Putting in extra effort to find a low-interest loan can help you save a lot of money. Even a couple of percentage points will affect how much you spend.

Land loans usually have short repayment schedules, so you will need to repay the lender within five years. Let’s say you borrow $100,000 at 3% interest. At the end of five years, you will have spent about $7,812 on interest.

At 6%, the total interest comes to nearly $16,000. The extra 3% more than doubles your interest payments.

Fight for a lower interest rate when buying land. Otherwise, you will find it much more difficult to repay the loan or earn a profit from the property.

3. Not Inspecting A Property Before Buying Land

Never purchase land before you have it inspected by a professional. The features that you look for will depend on how you plan to use the land. For example, you need to test the soil before you can turn the property into a farm.

Other essential factors to inspect before buying land include:

  • Access to the property
  • The area’s topography
  • How the neighbors use their land
  • Whether the land is in a flood plain

Additionally, you need to hire a surveyor who can show you the property lines. Don’t rely on an old map that shows where one property ends and a different one begins. An inaccuracy could eventually cost you a lot of money, so don’t take any risks.

4. Failing to Get the Right Insurance Policies

Don’t start buying land without getting insurance policies that will protect your investment. Talk to your land consultant to determine what policies you’ll need. Then, determine whether you need additional policies designed for specific uses of land. Below are a few common types of policies landowners can take out.

Title Insurance

Ideally, your property has an accurate history showing who owns the land. Mistakes happen, though. With title insurance, you get protection from:

  • Delinquent tax bills from former owners
  • Unpaid mortgages from former owners
  • Forged documents
  • Hidden mortgages
  • Clerical errors
  • Easement problems
  • Claims from the children or spouses of previous owners

Buying land without getting title insurance is a big gamble. You could lose ownership without getting anything in return.

General Liability Insurance

Anyone who gets hurt on your property can sue you for damages. It’s a problem that all landowners face. The possibility of injury becomes even more significant when you buy land for hunting or agricultural uses.

General liability will pay for your legal protection. Instead of paying a high-priced lawyer, you give your insurance company a relatively small amount of money to avoid court.

Property Insurance

If you plan to build structures or store equipment on your land, then you should property insurance. Property insurance can help cover structures and equipment like barns, vehicles, and tractors.

Crop Insurance

Investing in agriculture can lead to exceptional long-term profits. Unfortunately, you can’t predict how the weather several years from now will affect your crops. Crop insurance can help protect you from significant financial loss caused by unforeseen conditions.

Talk to crop insurance providers about Revenue Protection and Revenue Protection – Harvest Price Exclusion policies to help you decide which option works best for you.

5. Working With the Wrong Type of Agent When Buying Land

Don’t make the mistake of thinking that all real estate agents have the same level of experience in doing land transactions – in fact, most have never done a land transaction. Land transactions are different from buying a home. When buying land, you need to find a land consultant in your area with experience working in your market doing the type of land transactions that are similar to the type of land you are trying to buy.

You can easily ensure that you get help from a qualified land professional by using an agent with the elite Accredited Land Consultant (ALC) Designation.

What Investors Want

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Often times, investors looking to purchase farmland are looking for large, contiguous tracts with significant scale. Investors are not emotional and don’t have to buy the piece next door. They aren’t driving by the showplace farm their entire lives on the way to the co-op knowing they will do whatever it takes to buy that piece if it comes to the market. Investors typically are focused solely on the financial returns of the investment. Therefore, they are naturally more conservative than the farmer buyer, who may look at a potential transaction as a once-in-a-lifetime opportunity.

It’s important to know the various types of investors. A public REIT (real estate investment trust), family office (family-controlled investment group), intuitional investor, or land fund all bring different things to the table. Depending on where you are located, laws may not allow for corporate ownership of land. Understanding the investor’s structure and long-term goals are important.

Farmers looking to sell their land to an investor buyer are likely looking for a leaseback provision and, sometimes, a buyback provision as part of the sale agreement.  It can be tough for everyone to get what they want in this type of negotiation. Recognizing that the investor has the ability to look at land anywhere in the country is critically important.

You aren’t in the same negotiating position selling to an investor as you are selling to the neighboring farmer. It’s wise to help the investor structure the deal so it works for them, as well. This often means the purchase price and rent need to meet their return thresholds. If a seller wants to include things like a buyback provision, the investor generally will want some upside for including that provision.

In an ideal world, we would only sell farms to other farmers and we wouldn’t need investors. The current environment may make investors a key component to allow farmers to keep farming, and they can make great long-term partners for farmers wanting to expand acres and operation.

While a few investors make uninformed buying decisions, most are shrewd and sophisticated. They want to put together a fair arrangement with the farm operator. Being incredibly transparent is the key. Investors generally want a sustainable cash rent figure and can quickly see through inflated rents.

Negotiating these deals can be tough. Attempt to understand both the farmer and the investor’s point of view. If they can agree on a fair rent number that meets the investor’s return thresholds, you can usually put a deal together. This often translates into a lower sales price than the public auction might bring. Ultimately, the question farmer’s must ask themselves is, “Do I want to maximize the sales price or continue to rent the land back?”

This post is part of the 2018 Future Leaders Committee content generation initiative. The initiative is directed at further establishing RLI as “The Voice of Land” in the land real estate industry for land professionals and landowners. For more posts like this, click here.

About The Author

Steve Bruere, RLI Member, is the president of Peoples Company, an Iowa-based land brokerage with a diversified offering of land management, land appraisal, and land investment services in 20 states. He is also a member of RLI’s Future Leaders Committee

Investing in Land 101

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“Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined. The wise young man or wage earner of today invests his money in real estate.” — Andrew Carnegie, billionaire industrialist

When it comes to investing, land has always been a solid choice. Many finance experts agree that investing in land is an excellent way to diversify your portfolio. There are also plenty of famous billionaires who have made their fortune in land. Today, we’re going to break down the basics of investing in land real estate.

Investing in Land vs Investing in Stocks

Before we look into investing in land, it’s important to know how it is different than investing in stocks. When you buy a stock, you own a tiny piece of that company. When the company profits, you profit. When you buy land, you choose exactly what you want to do with that land. You can transition it to another land type, lease it out, or just hold onto it and wait for the value to increase (we’ll get more into these investing methods later in the article). You have a lot more control when investing in land.

Investing In Land

There are many different ways to invest in land real estate, but today we’re going to look at the top three most popular with land experts.

1: You can hold onto the land until the market is great and you can sell it for a profit (also called the buy and hold method). Since it relies heavily on the market, this is usually the slowest way to make a profit. However, if you buy a quality piece of land during a market dip, you can sell it at a profit when the market is strong. Buy low, sell high!

2: You can invest to transition the land to its highest and best use. Transitional land is a booming market. This method will cost more, but if you find the perfect use for your land, you can make serious money off of your transitional land.

3: You can lease the land out to farmers or hunters. This requires more work but can get you a steadier profit. You’ll definitely want to work with a land expert like an Accredited Land Consultant (ALC) on the contracts to make sure you are getting maximum profits on each lease.

Benefits of Investing in Land

There are many benefits to investing in land real estate. Here are just a few.

  • Diversify Your Portfolio. Land is an excellent way to give your other investments a safety net. If you invested all your money in stocks, and the stock market drops, you run the risk of losing most of your savings. Investing in land gives you safety even when other markets are down. Over the last twenty-five years, farmland has produced 5 percent annual return on average. Cha-ching!
  • Limited resource. Ever wonder why people pay thousands of dollars for tiny apartments in San Francisco and New York? It’s because land is a limited resource, and desirable land will always be in demand. As Mark Twain once famously said, “Buy land, they’re not making it anymore.”
  • Low effort. One thing many people love about investing in land is that it usually requires minimal effort, especially if you are using the buy and hold method. This is a huge benefit for farmers and land real estate agents who have very little free time.

Drawbacks

Even though there are a ton of benefits to investing in land real estate, there are some factors you need to be aware of. Even though we think investing in land is an excellent idea, our goal is for you to make the best educated choice for you and your land.

  • Taxes can be tricky. States and counties have different laws for taxing investment land. Here’s a great guide to understanding exactly how much you should be paying in taxes for different types of land.
  • Previous uses. Previous land uses can impact the land’s value and what you can use the land for. For example, some land uses can result in environmental hazards that will cause the land value to plummet. Sometimes, it can be difficult to track down the previous land uses, especially if the land has had many owners. Luckily, if you are having trouble finding the previous uses, you can always use this Google Earth hack to see the land’s history!
  • Patience. Depending on your method of investing, you won’t see returns for anywhere from six months to many years. You should only invest money into land that you won’t need in the next few years. No one likes the waiting game, but good things take time!

Investing in land is a great way to build wealth and save up for retirement. Be sure to consult with a professional and know the hottest land markets to invest in before making any big decisions with your savings.

About the Author: Laura Barker is the Membership and Communications Specialist for the REALTORS® Land Institute. She graduated from Clark University in May 2017 and has been with RLI since October 2017.