By: Robert King, Co-founder of PoultrySouth.com
One of the questions we get the most is “How much is the down payment?” That’s a valid question that we can’t give you a proof-positive answer to most of the time. It’s absolutely something that you need to know early on in the process of buying a farm. It’s also almost impossible to answer with certainty until a person is neck-deep in the financials of the farm and their particular lending scenario. That don’t mean there is no hope in knowing something in general about down payments though. We even try to give buyers some guidance on this particular issue in the descriptions of some farms when the farm is posted for sale.
There is no one-size-fits-all answer, as much as buyers, sellers, lenders, and agents would absolutely love to boil it down to one. There’s entirely too many variables that affect this. There are variables with the farm itself, the chosen lender, the buyer’s finances, the chicken company, and the lending climate. Some of those variables change in different scenarios as well. Most buyers have absolutely no idea about all the different factors that have to be sorted out to answer this one particular question.
This becomes particularly apparent when a buyer has been told that their friend was able to buy a farm with just 10% down payment, and we tell them that another farm in their scenario will likely require 20% down. Some buyers have the tendency to think we are trying to blow them off with answers like this, but nothing could be further from the truth. When asked this question, we answer with the most likely scenario based on what is happening in the market at that time. That’s our craft. That’s one reason sellers hire us to help them.
Traditionally, poultry farm lending has been done by leveraging the equity in another property. This usually manifested itself as the buyer putting up a piece of land they had paid for already, had significant equity in, or land that was given to them for this purpose. Five years ago, this was the primary path to poultry farm ownership. This path to ownership required the poultry farm to cash flow the entire note and make the farmer a living too. It is still fairly prevalent in the market to assume that this is the “right” way to buy and cash flow a poultry farm. However, this is not the most often used path to ownership in today’s market. Most of the deals we are doing today have a buyer bringing in a cash down payment. The equity position of the buyer and the lender is still the same. However, the cashflow is improved greatly in this scenario since there is less debt on the books. For a while, these buyers were in the best position when purchasing. Today, because there are so many buyers in the market like this, pricing on the farms available has began adjusting to this new normal. This type buyer is now the standard-bearer in the market.
So now when we help a seller price a farm for sale, this is one of the foremost variables we consider. How does this farm fit today’s most likely buyer scenario? All this influences down payment as well.
I could list dozens of different things two-levels deep into the variables listed above that push equity requirements (down payment amounts) up and down, and your head would spin. Would you have thought the seller’s timeframe for getting a farm sold can affect the down payment amount needed by a buyer? It can. What about the “effective age” of the farm versus the actual age? That can as well.
I’m trained as an ag economist. You could almost pass all your in-major classes by answering every question with some variation of. “It depends”. That would be the best answer we could give someone when they ask us, “How much is the down payment?”. However, nobody likes to hear that answer. Everyone wants us to provide a guide, and we make every effort to do that with some accuracy. Given that we probably know nothing of your finances, and which lender you will select…we can only answer with the most likely scenario.
I started writing this to help clear up the questions in the buyer’s minds about down payments. As I think through this, I think I probably cleared it up like a 3-year-old clears the water while dancing in a mud puddle. Sorry, no easy answer.
I would advise that you call us and talk with us about the particular farm you are interested in. Tell us how much in dollars of cash, or equity in a property you have available to put down. With these particular questions answered, we can begin answering the question of, “How much is the down payment?”.
Robert is a Co-founder of PoultrySouth.com and has been with Southeastern Land Group since 2003. Robert has helped many poultry farmers buy and sell and can be reached by visiting PoultrySouth.com.
Source: Poultry South Blog