The Big Picture by JT Korkow: Personal Financing: Part II
February 3, 2015
See Part I in last week's paper, or online at http://www.tsln.com.
Based on 2007 NASS statistics, there are more than 313 million people living in the United States, of which approximately 2.2 million people actually live on farms and ranches. Of that 2.2 million who live on farms, less than 1 percent claim farming and ranching as their principal occupation and source of income. As a point of reference, in 1935 there were 6.8 million farms out of a reported population of 127 million people living in the United States. As the number of farmers and ranchers decline, demand for agricultural products have increased. And as the U. S. farm population dwindled, the average age of our agricultural community continued to rise. It was reported in 2007, that about 60 percent of the farmers in this country are 55 years old or older, with about a 10 percent increase of operators 65 years old or older since 1969.
It does not leave much to the imagination that there is a going concern here from the "big picture". Although our present day farmers and ranchers have kept up with producing food and fiber for the current American population and still provide another 30 percent of their products for export, concern over the statistical data presents cause for some plan of counter action. Production agriculture is a business that requires a lot of capital investment. It is an occupation that knows no specific hours or schedule, and requires a variety of talents, but also is a rewarding lifestyle that many young people desire to experience and raise their families. It is just hard to break into the business without proper backing. Without the proper tools to provide opportunity for future generations, the United States will soon find themselves subject to foreign countries for their food supply. So what could be the answer?
What I propose to our readers is that if you are thinking of retirement from farming and ranching, and the kids aren't interested in taking over the operation, consider helping someone out that is really interested in the business by financing the transaction. When we are listing ranches for our retiring clients to sell, we ask them what they plan to do with their money. The common answer is that they will have to pay taxes and then put the balance into some investments and hope there is enough income to provide for a retirement. My proposal is that you consider financing the sale of your own property under a contract for deed or note and mortgage. You will earn interest income and spread your capital gains over the life of the contract by receiving principal over the amortized period. And land contracts can be tailored to fit your particular needs. Terms, payment schedules, prepayment penalties, etc, can be negotiated to cover your future financial needs. Worst case scenario is that in the event of a default, you take back ownership of the property and have the ability to resell it again or lease it out. To me, this is less risky than trusting a third party to manage my money in purchasing stocks or other assets in which I know nothing about and will yield much better than current jumbo CD's. At least you, and only you, would have intimate knowledge of the collateral that secures your mortgage backed security! Generally, Contract for Deed interest rates charged are a bit less than what banks will loan money for, as you do not have the cost of money in overhead that a bank has. Financing cattle and other assets may be a bit more risky, but I recently become aware of a rancher who has done just that, and will receive a handsome 7 percent return on his investment, and because of his vested interest, you can be assured he will offer whatever help and advice to his borrower is necessary to ensure potential success.
From the buyer's side, it eliminates time and cost of an appraisal, which can range between $2,500 – $10,000 and take 75-90 days to obtain, bank loan fees which can add up to more than 2 percent of the loan, ($20,000 on a $1MM loan), and darn sure takes much less time in putting the transaction together. What I call a win-win! With an astute real estate broker, title company, and attorney – contract for deeds, notes and mortgages, and lien instruments can be prepared and filed to adequately protect both parties in the transaction Now, if we can get the government to guarantee those loans, we may have something!
If any of you reading this are thinking of buying or selling in the near future and have any questions regarding the sale of ag property on contract, feel free to contact me via email: firstname.lastname@example.org I am always glad to assist our ag community when it comes to understanding financial matters.
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Proverbs 22:7 The rich rule over the poor, and the borrower is servant to the lender.