New farmer knowledge: Property purchase agreements
If you’ve ever considered owning farmland, there’s a lot you need to do before signing on the dotted line. Often that involves working with an attorney to make sure you’re getting the best deal, but attorneys don’t come cheap.
Enter the Agriculture Law Education Initiative (ALEI).
Margaret Todd is legal research associate with ALEI, a collaboration between three attorneys to create free resources and educational events to serve Maryland’s ag community – including a webinar where Todd spoke about property purchase agreements.
Like any big decision, the best place to begin is by asking yourself what your non-negotiables are and what should take top priority. Todd suggested making a list of the pros and cons around owning property.
Pros would include more security in the land and your operation, building equity and creating a source of collateral. One of the biggest cons, however, is “tying up a lot of your assets, potentially creating a large source of debt for you and although it’s security, it’s also a very permanent asset that may have little flexibility.”
Considering how the land will be utilized, both in the present and down the road, is necessary. Questions to ask might include “What if I want to use my farm to host educational events or start a food production value-added business component? What are the types of facilities I would need? Would the zoning of my property allow for that?”
If you’re unsure about a property, you can give the seller a letter of intent to let them know you’re interested. However, Todd warned, the letter isn’t binding, so in the time it takes you to become a buyer, the seller is still free to accept any legally binding offer they may receive.
You’ll need to decide if you or your business will be the owner. If it’s you, will your business rent it from it you? A money-saving idea would be to have business partners or be a part of a co-op or an LLC. It’s a great way to reduce individual expenses and share responsibilities. However, this brings up another set of questions to be answered before purchasing: Who gets what percentage of the ownership and who takes care of what part of the business?
To help guide you, Todd mentioned Land for Good and the Young Farmers Coalition, which has a lot of great (mostly free) resources to help find answers to these and many other questions.
Getting a loan for a farm often means working with multiple lenders. According to Todd, “You may be able to get pre-approved through a private lender farm credit, but with the USDA Farm Service Agency, you won’t. They’ll cover up to around $600,000 of a purchase expense but you must work with a commercial lender.” The FSA has loan officers who can guide you through the process.
After decided owning farmland is what’s right for you, how do you protect yourself financially throughout and long after you have closed the deal?
A contingency regarding loan approval is a term you want included in your purchase agreement, said Todd. “It will protect you if your financing doesn’t come through and during the actual purchase process,” she said.
Since the pandemic, deep-pocketed investors or individuals have been snatching up properties in every market, sending costs skyrocketing. Cash offers with no contingencies are not unusual, which makes it difficult to protect yourself from losing money should something go wrong after the purchase.
Despite this, Todd warned to not succumb to market pressure. “If the seller is asking you to waive contingencies or inspections, often the answer is going to be ‘no’ because you would be exposing yourself to more risk,” she said.
When you begin your search for property, consider working with local ag service providers. “If there is a county economic development office, they may be able to help you, as would a realtor who has experience with farmland transactions,” Todd said. “It would be wiser for both sides to get their own agent to avoid any conflict of interest.” It’s important for the agent to provide you with a copy of a contract outlining specifically what services they are obligated to provide.
Make sure to learn what fees the buyer and seller are responsible for paying. Todd also advised the buyer to add a 90-day period to conduct due diligence in the offer. At the conclusion of the transaction, each party will receive a closing statement listing all the outstanding fees in addition to the cost of the property.
Once both parties agree on the terms, the agreement is signed, making it a legally binding contract which is then converted into the purchase agreement. Then a down payment is put into a third-party holding account (escrow), after which you will receive the financing documents from the lender.
“The lender will require you purchase property insurance,” Todd said. “It’s important for your agent to note any hazards or insurance risks … as this could cause your insurance rate to be very high.”
You’ll then sign the deed, which normally includes the names of the parties, the legal description of the property and any types of restrictions that go along with it. It’s then recorded with the Office of Land Records.
Buyers will also want to get title insurance to make sure the land being purchased is free and clear of any liens, encumbrances or easements. Hiring a title insurance company to do so saves a lot of time. However, said Todd, “be sure and read the policy terms to see in what instances you would be entitled to any sort of compensation, including if something comes up in the title after you’ve closed the transaction.”
There is also an agricultural declaration of intent. If the property is being used for agriculture, it’s normally taxed at a lower rate than a commercial property. Failing to do this could have you paying significant back taxes on the property.
What happens if the seller breaches the contract? “The buyer would be able to request specific performance, which just means that you want them to satisfy the contract as they’ve agreed to,” said Todd.
On the topic of due diligence, it’s important that when the buyer signs the agreement, they are “assuming the risk that restrictive covenants, zoning laws and other recorded documents may restrict or prohibit the use of the property for the purposes intended by the buyer.”
For example, “If the seller knows what you want to do with the property, they don’t have to guarantee that the property is suitable for your purposes. A lot of times you’ll hear about property rights as ownership rights, that you can do whatever you want with your property … but there could also be an easement agreement in place,” Todd said.
If the property is being used as a farm at the time of the sale, don’t assume that’s something that you can carry on because it’s possible the seller had been given a special exception.
Todd also cautioned to be mindful that even if something is allowed by zoning, there is no guarantee your neighbors will be okay with it. Some counties require the approval of the neighboring properties.
Finally, in your purchase agreement you will want to include what’s being transferred with the property, such as fences, gates or sheds. If there are any structures already built, such as barns, you’ll want to know if any of the equipment inside will be included in the sale price.
“It’s good to have all that information included in the addendum to the purchase agreement,” Todd said.
Note: This article is for educational purposes and should not be taken as legal advice.
by Jessica Bern
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