FOR ASPIRING FARMERS

Lease to buy a farm, or vendor finance: two ways to own one

Not every way onto a farm starts with a bank loan.

You Can Own a Farm covers two transition options that work very differently. Lease to buy gives you the option to buy later, if you take it up. Vendor finance means you buy the farm now, and repay the seller over time. Both come with trade offs, for you and for the farmer selling.

Lease to buy a farm

With lease to buy, you lease the farm for a set period, with the option to buy it when the period ends. The price is set at the start. It gives the landowner a clear path to selling their asset, while you build equity through farming profits.

The agreed price usually reflects the current value plus an agreed yearly rise in value. That helps avoid arguments about who pays for upgrades. You know the value your improvements add beyond the agreed price comes to you when you buy.

An example of lease to buy

Take a farm company in regional Victoria. It negotiates a rolling five year lease with an option to buy at an agreed price.

At the end of the first period, it renegotiates a new lease pegged to the appraised land value, with a purchase option reflecting an agreed rise in value. After good seasons, and with less debt, it buys the property. Its total outlay, including improvements, is less than the appraised market value at the time of purchase.

The company is a hypothetical, to show how the option can work.

Benefits

• An orderly handover of ownership
• A reason to spend on improvements
• The landowner can manage succession well

Drawbacks

• Landowners may be reluctant to commit to a fixed future price
• You risk spending on improvements, then not being able to afford the purchase at the end

Vendor finance

With vendor finance, you pay a deposit and the farmer who's selling lends you the rest, repaid on terms you both agree. You get the land straight away. They get capital and a consistent return. The interest rate is usually higher than a bank loan.

An example of vendor finance

Here's a hypothetical, not a real family. Picture an aspiring farmer and an older couple who've got to know each other over a few years. They'd like him to buy their farm.

He buys with a modest deposit and pays an agreed interest rate on the balance. The agreement requires him to find bank finance at the end of ten years, or sell and pay off his debt.

For the couple, it means a steady income from someone they trust. For him, it means owning a farm without a bank loan he'd never qualify for.

Benefits

• You can buy when a bank says no
• A consistent income for the farmer who's selling
• The buyer can spend confidently on improvements

Drawbacks

• A higher interest rate than a bank
• The selling farmer's capital is tied up for a long time

Before you agree a price

Whichever way you go, your plan should show how you got to the price, whether from a valuation or from recent sales nearby. And if you're leasing first, say up front that you'd like the first chance to buy at the end.

The full guide, You Can Own a Farm, is free at cultivatefarms.com/resources.

You can build your own plan at cultivatefarms.com/plan.