Truly the easiest way to finance this potential purchase is to ask the seller to “carry back” the financing. This can either be accomplished with the seller carrying a First Trust Deed or a Second Trust Deed.  In the event that there already is a First i.e. assume the First and have the seller carry back a Second. In the event that the seller wants “all cash,” make sure that the seller truly understands the tax benefits of an “installment sale.” Some sellers are moving out of state and won't carry paper because they wouldn’t know what to do if the payments are not forthcoming. That’s easy, just set up a collection account with a third party. The payments can be sent to the seller, wherever. Another reason that the seller should seriously consider financing the property is that they will receive interest in the range of 7 – 10%.* That is far better than any rate that they can get from a bank these days. *

The next easiest way to finance this type of property is to find a bank or mortgage broker that is TRULY familiar with this type of loan: a lender that makes this type of loan on a REGULAR basis. In many rural areas, the local small bank is familiar with this type of loan. Therefore my First suggestion, when financing rural/ranch property, is to search out a knowledgeable lender. You may think that I will eventually steer you to our company as “That Lender.” No, we are private party; equity lenders and we do not do typical bank thirty-year loans.

In the event that the above solutions are not applicable, we can get more CREATIVE.  Lets assume that a ranch property is in escrow for $800,000.00. The buyer has 20% down and has been trying to get a new First Trust Deed for $640,000.00, i.e. 80% of the purchase price. While this will be easy for a single-family residence or condo, properties with substantial value in acreage, barns, stables and out buildings require thought.

Although the above property is worth $800,000.00, an appraisal quickly determines that the house on a 1-acre parcel has a value of $350,000.00 while the adjoining acreage, barn, 18-stall stable and separate mare motel has a value of $450,000.00. Conventional lenders will only lend 80-90% of the $350,000.00 portion. What now?

Assuming that there are several parcels making up this acreage, there are many financing techniques that can get around this problem. One of my favorite creative financing expressions is “DIVIDE AND CONQUER.” Let’s consider a couple of techniques to solve this problem.

1) Break the sale into two parts, i.e. $350,000.00 and $450,000.00. Obtain conventional financing for the house and ask the seller to carry a First Trust Deed on the land/horse property portion of the sale.

2) If the seller will consider carrying only a small portion of the purchase price,
shop around and have the seller carry a small Second. Many equity lenders
will make a 50% (purchase price) First Trust Deed with “no problem.”

2a) Ok, the seller refuses to carry anything. Use the same scenario as above
except come up with the $100,000.00 missing increment in some other way. I
know we hate to prostrate ourselves before friends and relatives but offering
8-10% interest with a recorded Second Trust Deed. Sounds like a fair business
proposition.

2b) Let’s assume that the buyer had 20% down on the original $800,000.00, i.e.
$160,000.00. The buyer puts $35,000.00 down on the house portion and
$125,000.00 down on the land portion. In this example the seller would be
asked to carry a Second Trust Deed for $100,000.00. SOUNDS FAIR TO
ME.

2c) Ok: Same scenario with no friends or relatives. Do you have any reasonable
equity in any other real estate in California? If so, try to get a Second Trust
Deed from an equity lender and offer a Second piece of property to use as
collateral. This is called a “Blanket” Deed of Trust. It is one loan and one
promissory note secured by two pieces of property. The other property might
already have a First and Second Trust Deed on it. That should be ok if there is
still decent equity remaining. I hope this has been helpful.

This was not intended to be a whole financing course but just a warning to prepare yourself for fewer financing alternatives when dealing with ranch and rural property.



*This page was dictated in May, 2005.