FOR RETIRING FARMERS AND THEIR FAMILIES
When does vendor finance work, and when doesn't it?
By Sam Marwood
Vendor finance works when you'd rather be paid from the farm over a term than take a lump sum, and it doesn't when you need the money now.
In vendor finance the seller becomes the bank. The buyer pays you a deposit, you lend them the rest of the price, and they repay you over an agreed term at an agreed rate.
When it works
You want income more than a lump sum. You have no plan for a large sum of money, you don't need it all at once, and you'd rather be paid from the farm over a term.
There's already trust. These deals are built on a relationship first and put on paper second. The paperwork protects both of you, but it isn't what makes it work.
The farm won't sell. A property passed in at auction, or sitting on the market for a year, tells you the market won't clear at that price. A seller who has just learned that is far more open to a structure they'd have dismissed 12 months earlier.
You don't really want to leave. Some people are being pushed out by the people they own the farm with, or by age, or by a bank. You stay connected to the place and to the person farming it, and that ongoing contact is usually where the knowledge transfer happens.
If you need the money now, or your bank says no, it still doesn't work.
When it doesn't
You need the money now. If there's a house in town to buy, or siblings to pay out, or a debt to clear, vendor finance can't do that. Say so early and directly, because it saves everyone months.
Your bank says no. This is the one that catches people. You can genuinely want the right person on the place and still walk away once your bank explains the risk to you. If a bank holds the first mortgage, your security ranks behind it.
Wanting the right successor and being comfortable with the security structure are two different decisions, and the second one isn't made at the kitchen table.
You'd rather do a lease to buy. Some sellers hate the idea of vendor finance and will happily do a lease to buy, so vendor finance may not be the tool even when the rest fits.
Decide which one you're open to before you go further: Lease to buy a farm: what it means when you're the owner.
The relationship is the hard part
You don't need to understand how vendor finance works before you talk about it. Lawyers and accountants can arrange these, but they can't arrange someone willing to do it with you.
The relationship is the hard part, and the structure is the easy part. The questions for your advisers are here: What to ask your solicitor, accountant and bank before vendor finance.
Read more: Vendor finance: selling your farm when the buyer can't get a bank loan and What does vendor finance cost the buyer and the seller?.
This is general information, not legal or tax advice.
The full guide, Ageing on Farm, is free at cultivatefarms.com/resources.
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