#156 So You Want to Buy Ground
SW Financial Literacy
15 Minute Balance Sheet Demo 1.1
Everyone should be updating their balance sheet. Every. Single. Year.
I made a new tool for updating my balance sheet and quickly scrapped the old Excel file I previously used, which was slow and prone to errors.
As I'm testing www.farmbalancesheet.com, I thought it would be fun to do some recordings showing how to use the tool and explain what I know about financials along the way. If you like youtube and like balance sheets, I'm uploading a weekly video creating a full farm balance sheet in just 15 minutes. The first video is available now: 15 Minutes Balance Sheet
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So You Want to Buy Ground
Buying ground can be an extremely nerve-racking experience, especially if it’s your first time. There are millions of dollars at stake, and you don’t want to make a mistake that sinks the operation.
How much should you bid? How much should you finance? What is a good interest rate? Where will I get money for the deposit? How do I prepare for the closing?
So you want to buy ground? Don’t worry, I’ve got you covered.
In my lending career, I have closed nearly 100 real estate loans. While there can be minor differences between different purchases, here are the general steps that you need to be aware of from start to finish.
1) Keep Updated Statements
Well before you start buying, you should have a history of annual balance sheets put together.
Your best way to get approved for financing on the purchase is to show a track record of balance sheet growth. A balance sheet created the month of the auction with no prior trend does not tell your story. It would be like watching the last few scenes of Forrest Gump without viewing the first 90 minutes of the movie. There is no context to a single balance sheet showing how you got where you are today.
For a balance sheet that gives you coaching and feedback on your position, go to www.farmbalancesheet.com.
2) Pull Comps
Pull comps on other land sales in the area with similar size and agriculture practices. If the ground sold for $12k/a and has worse soil than the piece you are looking at, expect to pay more. Try to find at least 5 properties like this. It will help you determine what the likely sale price will be for the property you are pursuing.
3) Study the Listing
Closely consider everything in the listing. It will give you details of what is included in the property, if there are any outside leases involved, how taxes will be paid, the amount of payment due at the closing, which title company will be working on the deal, and the date of the closing if one has already been established.
NOTE: I go over details of two and three heavily in the land buying cohort. If you want those details, you can get the recording HERE.
4) Speak With a Lender
Discuss your financing options. They will want to know what your interested bid price is going to be and can give you details on how much you may be able to finance, what other financing options might be available to you, and should be able to provide solutions on making the earnest money deposit if you don’t have the cash available. Get loan applications submitted at least three weeks prior to the auction date.
Disclaimer: These first 4 steps should all be done within the first week of an auction or listing being published.
5) More Research
Continue doing research on the property as you wait for your loan approval. It may be wise to apply for financing with a second lender so you don’t approach auction week or make a bid on a listing without having financing lined up. You should always have financing lined up before placing bids.
Also, take this two-week window to talk with the realtor, previous tenants, your insurance agent, and other knowledgeable professionals to see if they have any advice or details on the property that you may need to look into further as continued due diligence.
6) Financing Approval
Several days before the auction, you should firmly have your max bid in place with a full understanding from your lender of how the earnest money deposit at the sale will be paid. Also have the permanent financing approved if you win the bid.
7) Auction Day
On auction day, preferably don’t place the first low bid (but that can't always be avoided), and be confident when you do start bidding. Resist pulling out a calculator and redoing your math between bids. That work should’ve been done before today.
8) Congratulations!
You won the bid. You will review and sign the purchase agreement and then make a call for your earnest money deposit to be made. Notify your lender that you won the auction so they can prepare for the loan closing.
9) Preparing for Closing
There isn’t a lot for you to do over the next few weeks. Your lender will be conducting an appraisal while simultaneously ordering title insurance to get the deeds successfully transferred over to you through the title company.
It will be nerve-racking as you approach within a week of the closing and may not have any updates yet. You can check with the lender to make sure everything is on track and there aren’t any questions, but closings are rarely scheduled more than two to three days before the actual closing occurs because the title work has not been completed yet. Verify your payment dates and lock in an interest rate if you haven't done so already.
NOTE: In Nebraska, we call it title insurance, but other states may refer to it as the abstract.
10) Ownership
A day or two before closing, you’ll receive a settlement statement. Look this over carefully and try to understand it, but good luck. If you have questions, ask them, as the settlement statements can be confusing as heck.
Make sure you take a checkbook and know what type of fees you’ll need to pay at closing. Attend the closing, sign a lot of papers, and that’s it.
Congratulations! You and the bank now own the new property. Best of luck!
Have a great week!
Grant
