Buying, Building, and Living Off The Grid

We all want to be treated fairly, and understanding pricing is part of it. Pricing on a seller financed land deal varies based on many factors, and there are many component parts of the price.

SALES PRICE

The stated sales price on a seller financed land deal has several components and it tends to have an inverse relationship with the interest rate and the down payment proposed on the deal; lower rate and/or down payment = higher sales price. This is because the same cash flows for the next 10 years (or whatever the term of the loan) can be expressed in various ways; a lower rate with higher price, or a higher rate with a lower price, can be exactly the same cash flows for the term of the loan (thus have exactly the same value today – same true price). Additionally, the higher the down payment, the more secure the seller is against default, and thus the seller can offer a lower price (and/or a lower interest rate thus basically lowering the price).

Land sellers usually charge from $500 per acre to $5,000 per acre, and may charge less for customers making larger than required minimum down payments.

DOWN PAYMENT

The down payment is one component of the price. The variation from low to high down payment is part of the overall price of buying the land. The down payment is subtracted from the sales price in computing the amount to be financed, so the higher the down payment, the less of the sales price that is subject to interest. Many sellers will offer additional incentives to buyers making larger down payments (in the form of lower sales price and or lower interest rates).

Land sellers usually charge $50 to 20% of the sales price.

ADMIN/DOC FEE

The administrative fee or documentation fee is another component of the price. Most sellers will charge an administrative fee or doc fee, or both. This fee is for the general setup of the contracts and payment methods.

Land sellers usually charge $50-$500 for administrative or documentation fee.

MONTHLY INTEREST and PRINCIPAL PAYMENTS

The monthly payments, and their interest and principal components, is the largest component of the price. The interest and principal amounts paid on the loan each month will dictate how long it takes to pay the loan back, at that payment. The more principal paid each month, as a percentage of the payment, the faster the loan will payoff.

Land sellers usually charge 7% to 12% on land deals, with 10% being average. The terms can range from as few as 2 years to as long as 30 years.

SUMMARY

Sales price can be expressed in many ways, and understanding the components allows one to understand the price. The Net Present Value of Future Cash Flows is the True Price of any Investment, and the risk of seller default is reduced with greater cash flows up front (larger down payment).

In a seller-financed land deal, a sales price of $11,400 can be the same as a sales price of $15,000, assuming that the loans can not be paid off early. As most loans can be paid off early, the pricing is more complicated and thus this example is to illustrate the core point only. Sellers knowing they will probably not receive all of the interest because of the early payoff, factor this into the price they charge.

Melissa

Melissa is a Marketing Specialist at Online Land Sales, LLC

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