Sold 60 acres on a wrap, took two years to collect the first clean spread year

Closed this in early 2023 and it's finally running the way it was drawn, so here's what actually happened.

The land: 60 acres, mixed timber and pasture, two miles off a state route in a slow rural county. I'd bought it in 2019 with a bank ag loan, 218k at 4.45%, 20 year am. Balance was 181k when I sold.

Buyer wanted it for a cattle operation and could not get bank financing because the operation was two years old and the ag lenders wanted three. Cash offer on the table from someone else was 290k. I sold to the cattle buyer at 322k with 32k down, carrying 290k at 7.25%, 20 year am, seven year balloon.

Spread math: I collect about 2,292 a month, I pay about 1,378 on the underlying, so 914 a month. Call it 11k a year of income on 109k of my own equity plus the spread on the bank's 181k. Better than the 290k cash offer redeployed at anything I could find at the time.

What nearly broke it. My ag loan had a due-on-sale provision and my lender was a small regional bank where the loan officer knew me. I disclosed the sale, asked for consent, and they wanted the loan paid off. Six weeks of going back and forth. What resolved it was that they offered to write a new loan to my buyer directly at 8.9% with 30% down, the buyer couldn't do 30% down, and the bank ended up preferring my paper staying current over losing a performing loan. They gave written consent conditioned on me remaining primarily liable and on quarterly reporting. Whether any other lender does that is not something I'd predict, and the only reason I'm not writing about a called loan is that I asked instead of hoping.

Second thing that nearly broke it: months four through eleven the buyer paid late seven times. Never more than nine days but every time I was covering the underlying out of pocket first and waiting. I put a collection escrow in place at month twelve at 40 a month, which I should have done at closing. Late payments went to two in the following year, mostly because the buyer now gets a notice from a third party instead of from me.

What I'd keep: asking the lender in writing. And the seven year balloon rather than five, because the buyer's operation needs the runway to become bankable and a balloon he can't hit is my problem, not just his.

What I'd change: escrow from day one, and I'd have priced a late fee with teeth. Mine is 4% after ten days and it did nothing.

Answer

1brandonlee36Passive

The lender consent part is the whole post and you're underselling how unusual it sounds. They wanted payoff, you spent six weeks, and they landed on consent because the alternative was worse for them. That only worked because you had a relationship and because they had no better borrower to hand it to. On a securitized loan there's nobody to have that conversation with.

The question I'd ask is what happens if the buyer's cattle operation has a bad two years and he can't hit the balloon in 2030. You've got 290k amortizing at 7.25% over 20, so he'll be somewhere around 230k at year seven, on land you sold for 322k in a slow county. If land values are flat and he can't refinance, are you extending, or are you foreclosing on a property you'd then owe a bank on again? You mentioned the runway. I'd want to know what your plan is if the runway isn't long enough, because the 914 a month reads great right up until that month.

Also 4% after ten days on 2,292 is 92 dollars. Of course it did nothing.

Sold 60 acres on a wrap, took two years to collect the first clean spread year

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