#158 You Maxed FSA, Now What?

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15 Minute Balance Sheet Demo 1.3

These have been a lot of fun.

I'm a big nerd on balance sheets, and getting to build random statements while passing along random financial insights is almost meditative for me.

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 third video is available now: 15 Minutes Balance Sheet

SW Financial Literacy

You Maxed FSA, Now What?

Seven ways to keep buying real estate when the easy financing is gone.

The land buying cohort has wrapped up, but that didn’t prevent some conversation spillover from happening this past week. And a follow-up question from the cohort I was asked:

This is a great question and can feel extremely daunting to many young producers. Not only do they have a lot of debt on the books (at least $1.2M), but they haven’t had to pour much cash into those purchases up to this point. They probably realize that future purchases will require a 30% to 35% down payment. The new farm or farms they just bought aren’t cash flowing yet, due to the high percentage of the ground being financed, so building up enough cash to make any future purchase feels impossible.

Don’t worry, there are ways to move forward. Here are a few that I came up with to help you see that you’re not in an impossible situation. You just have to think a little bit outside of the box.

1. Run It Back

If you have multiple smaller properties and loans through the FSA joint financing program, you could 1031 those properties into something different and reuse the FSA funding for your next purchase. If there were a few years' gap between when you made the original purchase and this new purchase, there could be equity available for you to even move into a larger property.

Remember the joint lender can give you a loan bigger than what is available from FSA. You could borrow $500,000 from the partner institution and $300,000 from FSA to continue keeping cash in your pocket.

2. As Completed

You can buy a property that needs cleaned up or requires sweat equity. If you greatly increase the income or value from the purchase, it is possible to get an as-completed appraisal for a larger finance amount.

Here’s how this works:

Buy a property for $500,000. Put $100,000 into the property, fixing it up and making it worth more over the course of three months. The fixed-up property appraises for $800,000. The bank will finance you 65% of the new appraised value. You get a loan for $520,000, which is just $80,000 out of pocket for you.

This doesn’t necessarily need to be done in real estate either. It is more often done with commercial properties, increasing their value and borrowing the funds or flipping the property to get the cash you need for a purchase you want to keep.

3. Partnership

I really like this approach if you have family. Instead of trying to buy ground outright, work with a partner to buy on shares.

What does it look like?

Dad chooses to buy 70% of 80 acres for sale, and you buy 30% shares of that same property. All the collateral would need to be crossed for whoever is taking out a loan (your shares of dirt would be helping to secure dad's loan and vice versa). Maybe dad wants to put more cash into it so you can get more lenient lending terms.

Also, by buying a smaller chunk, you are needing to have less cash upfront to move forward with your land purchases. Therefore, you should be able to buy your next piece of real estate sooner because you’re buying small purchases on shares.

4. Diversify

This is me cheating a little bit, but diversify your operation or start an ag-related business that can generate income for yourself faster. You don’t have to stay with the status quo. There are areas where you have personal strengths or advantages that can provide help for others. Those skills may be able to generate cash faster than the farm staying the same as it always has been.

Find ways to generate more income through a side business. Use those funds to make the cash down payment needed for your next purchase.

5. **You Can’t Do This

Often, individuals simply say, “Well, after a few years, I will have equity in the existing ground and can borrow against it for my next purchase.”

That is inaccurate when FSA is involved with the lien.

While you could do what I explained in my first example, there are two lenders holding a lien on this property. It is my understanding that FSA will not let you attach another property to their collateral if there’s any equity created. Plus, you borrowed at 95% or 100%, so it would take a really long time for there to be any equity available.

This really isn’t a feasible option that I have ever seen come to fruition without fully paying off FSA and their cheap interest rates first.

6. Diversify 2.0

Your next purchase doesn’t have to be ground. Many individuals like having rental properties or commercial buildings in town. You can check for alternative financing programs or buy on a smaller scale to get into these properties under contract.

After fixing them up and generating cash flow for a few years, these rental properties can be flipped or 1031 exchanged into ground. Many can qualify as a like-kind exchange into real estate, helping lessen the cash you need to make a down payment.

7. Keep Asking

Don’t take no for an answer. There are dozens of ways to move forward. Ask questions, poke around, ask advisors, and find land-buying partners if necessary.

You can do this. You just haven’t talked to the right person yet.

Have a great week!

Grant