Buying Your Community Property
Frances Forster and Byron Sandford offer an upbeat primer on criteria for evaluating property, with special emphasis on the how-tos and how-comes of financing, insurance, and legal considerations.
Buying your community property will be a lot like buying a home. If you’ve ever done that you know it can be a roller coaster ride, but eventually it does end! The process itself will provide many good opportunities to practice your group decision-making procedures, and test your abilities to trust that your decision to pursue this venture is right.
So where do you start? By answering three simple questions:
- (1) Where do you want to be (geographically)?(2) What do you need?(3) How much can you afford?
After you’ve addressed these questions, the next steps are a little more mechanical — after all, there are only so many ways of identifying property and paying for it. Just trust that your decision makers will stay focused on the big picture and not get distracted by the zillion and one (sometimes insignificant) details.
Where Do You Want to Be?
Consider what your members are going to be doing for work and recreation. What are your needs for land, water, transportation, proximity to towns? What are your needs for an audience or market, for schools and continuing education? What about climate, rainfall, or soil types?
Make your lists and consult some maps. Chambers of commerce, local governments, newspapers, and libraries can be good sources of information about places you’re considering.
What Do You Need?
A number of things need to fit together, or be developed hand in hand, so you need to have a rough idea of the number and types of people, animals, buildings, cars, and land uses that are going to be a part of the planned picture. For example, your county health department may require a certain type or size of septic system based on the number of people, and the septic fields need to be a certain distance from wells, waterways, and swimming areas.
Operations that require special permits, like the use of chemicals or machinery, merit special consideration, as do services or activities that will bring traffic or require animal management. Check out local ordinances or restrictions related to such spe cial issues now, before you start the property search.
Sketch out a couple of rough site plans showing the desired relationships between buildings or functions. Having these will help in the site-selection process.
How Much Can You Afford?
Unless someone is giving you all the funds (or the land) with no strings attached, you will most likely need a loan from a mortgage company, bank, savings and loan, the actual seller, or other lender. This will apply whether you need funds for land alone, improvements (buildings), or both.
The lender will assess your borrowing power based on the collective income, assets, and debts of the persons who will be responsible for the note. These persons will sign the mortgage and deed documents for your community, based on whatever internal agree ment you have. It may be to your advantage to have as many people as possible for cosigners, because it will boost your assets — the lender will like having lots of responsible parties.
To determine where you are financially, gather all your financial records and add up four sets of figures: (1) gross monthly incomes, interest, dividends, child support received, and other predictable income; (2) bank accounts, IRAs, trusts, whole life va lues, stocks, bonds, and other assets; (3) total of all debts (credit cards, loans, child support owed, etc.), and (4) the monthly obligation for these debts.
Once you have your totals, a lender can give you an estimate of how much you can borrow. While the figures will vary from lender to lender, you can get a ballpark estimate of what the lenders are thinking by doubling your cosigners’ total annual gross inc ome — this approximates the loan amount; one percent of that amount is your monthly payment. For another approximation, if your cosigners already have a debt load, multiply your cosigners’ total monthly gross income by 29 percent — this is your maximum monthly payment (PITI: principal, interest, taxes, and insurance); unless your group already owes monthly debts of more than ten percent of the total monthly income. If your debts are higher, the amount available for the monthly land payments is reduced p roportionately. If you put these calculations on paper you’ll see how easy they are to figure.
Points of caution about your cosigners: (1) get credit reports for each cosigner early on and take a good hard look at them — you don’t want surprises later; and (2) if cosigners are self-employed, make sure the lender considers their income eligible; if you do include future business income in your financial picture, be sure to provide profit and loss statements reflecting past experience.
Visit with Lenders
At this point you have a fairly good idea of where you want to be, what you need, and how much money you have to work with. Now it’s time to make introductory visits to senior officers of some lenders in your area. Ask for information on rates, loan alter natives, what other things you need to look at, and if they would consider loaning money to your group (not all lenders make all types of loans). Provide possible lenders with an overview sheet. Remember, you’re just gathering information, not making a fo rmal loan application.
Visit with Appraisers and Real Estate Brokers
Make brief visits with some appraisers and brokers who specialize in farm and ranch properties, or commercial or multi-family properties if your community will be in an urban location. Again, your goal is to gather information about the vicinity, the mark et, the possibilities. You should be able to learn about good areas to consider, what the average cost per acre or per square foot is in those areas, and which factors are most significant in determining price in your vicinity. Significant factors include size, location, view, water, type of soil, trees, and proximity to major roads.
Broker Commissions, Inspections, and Appraisals
You may not be responsible for the broker commission — in some places it is customary for the seller to pay the commission to the listing broker, who shares it with the buyer’s broker. So payment may not be an issue. Yet, many folks will consider trying to save money by avoiding the use of brokers, or even inspectors and appraisers. On the other hand, professionals can save you money, and a lot of time and energy. Their experience and specialized training can help you to avoid making mistakes. Only if yo u feel you have enough expertise and time should you shepherd a real estate transaction by yourselves.
Another word about brokers. There is some debate in the realty world at this time about whether the buyer’s broker will actually represent the buyer or the seller. There’s no need to get caught up in that concern if you are honest, fair, shop in the price range you can afford, and don’t play games. Then, you’ll do fine.
Inspections are usually performed soon after you enter into a contract. The private inspection is a very thorough inspection of structures and systems (electrical, plumbing, heating, and air conditioning, etc.). The inspector is hired and paid by the buye r, and costs in the vicinity of $200. The purpose of the inspection is to acquaint the buyer with the workings of the property and the condition of the dwelling systems.
Appraisals are also sometimes called inspections, but their role is different. Appraisers provide an independent estimate of the dollar value of a property for the lender, usually, or the buyer or seller. The general rule for pricing a property is to lear n what comparable properties (comps) have sold for in the last six months. If the market is rapidly changing, and there are enough comps, the time limit may be shortened to three months, or appropriate adjustments can be factored in for market price chang es.
Finding Your Property
After visiting with a few real estate brokers, you’ll have to decide whether your group has the time, experience, and contacts to manage the land purchase without professional assistance. If you decide to contract with a broker instead, select one that un derstands your needs, has appropriate expertise, and is willing to put in the time that you’ll need, because you’ll need plenty of time. Everything about an intentional community buying property is unusual, so you’ll need a strong, creative advocate who c an help with the other professionals who are part of the purchase process.
The obvious places to look for properties are the local newspapers and free real estate brochures. Another way of locating property, especially in the country, is to drive around the area you’re considering. There may be properties for sale by owners, or listed by licensed agents who are not members of the local board. A broker will also have other resources, which will vary in format from place to place, but will include new listings and properties that are for sale but may not have signs.
For-sale-by-owner is simply that — the owners themselves are handling the sale without the involvement of a listing agent. Sometimes owners have enough expertise to do the job right, sometimes not; they may not realize what is involved other than saving the cost of a commission. Be sure to find out what the picture really is. And if you decide to pursue a transaction with no agents involved, for sure get an appraisal, survey, inspection, and especially title insurance, even if you must pay for it yoursel f. (Please note: For-sale-by-owner is different from owner financing, which is discussed later.)
Properties on the market should have an owner’s disclosure statement, or a list showing any problems with appliances and systems, structural items, environmental factors, and any legal issues that may affect the property. These statements are now required in some states for the protection of both the sellers and the buyers. If the property you want doesn’t have a disclosure statement, insist on one!
Also check on deed restrictions and zoning regulations for your selected property to make sure you can operate the kind of business you want, or build the kind of buildings you need. Review your rough sketches and needs lists — don’t overlook something i mportant!
You’ve Found the Property, Now What?
Submit an offer. If you’ve done your homework you know everything you need to know to make a realistic offer. Your offer, generally on standard contract forms, will propose your sales price, method of financing, closing date, and other details. Keep it as simple as possible, and don’t ask for insignificant concessions. It’s OK to make your price a little below where you want to end up, but you don’t want to make it so low you insult the seller. You may be buying a family home, not just some corporate tax shelter. The seller may sign (accept) your offer or make a counter, in which case the house is still on the market. Hopefully you will come to terms quickly and move into the closing period — the evaluation period between contract signing and the closing , or actual property title transfer.
You’ve Signed, So You’re Ready to Move In? Whoa!
Give yourself enough time in the closing period to work up a good case of the jitters — if not this whole process is no fun! Actually, from this point a lot depends on the property and the financing method.
In a nutshell, during the next two weeks you’ll do the inspection (if there are any structures), the appraisal, and start the loan process, if you haven’t already. The loan is usually the part that takes time — anywhere between two weeks and two months, depending on how much information on how many people the lender wants. After the loan is approved, the boundary survey is ordered and any other contingencies are resolved — which can take a while, too. Then you can close, and that just takes an hour or s o. Then you can move.
While the lender is doing its thing, the title company is researching the property records to make sure, for one thing, that the person selling the property has the right to do so, and that the title will be clear when it is transferred to you. That means that no back taxes, liens, judgments, or other claims will be transferred to you, and that any easements, encroachments, rights of way, mineral rights, or anything else that will affect your usage and enjoyment of the property will be made known to you p rior to closing. Your insurance on the title is forever, so they like to be sure about these things!
The title insurance is usually paid by the seller, with a second document going to the lender. The cost to the seller is usually around one percent of the sales price, and to the lender about $200. A copy to the buyer costs a little less. A copy for yours elves would be a good idea — and if you order it up front the cost is a lot less than if you do it later.
Let’s Talk Attorneys
Attorneys have a place in the transaction if you want them, and they can be invisible if you prefer. They can prepare and review contracts prior to submittal, during negotiations, and after; they can prepare loan and deed documents; they can order title w ork from a title company; and attorneys can be helpful at closings. If you and the seller prefer to close with the title company, the title company and the lender will simply have their usual attorneys draw up the papers and send them to the title company for closing. Also, in some states, attorneys can still act as brokers. A broker can tell you about local regulations.
Let’s Talk Owner Financing
In owner financing, the owner is willing to forego receiving his full equity all at once, and instead will earn interest on his equity from you. Normally the seller will want 25 to 30 percent down payment, and monthly payments at or above market rates, al though he may be flexible on this point. It is very common for rural properties to be financed this way.
Sometimes the owner agrees to carry the note for only a few years until it’s a good time (for you or him) to refinance, or sell the note. Don’t let the idea that your note might be sold scare you — the note is a commodity, like stocks, that can be bought and sold, but your terms remain the same.
In setting up this note, the seller most likely will want to see your financial documents just as a banker would. The difference is that a private seller may be a little more flexible than regular lenders, which are highly regulated and in most cases must meet required guidelines.
By the same token, you should also ask to see the seller’s documents to ascertain either that the note has been paid off, or that the seller has the right to sell the property without paying the note off. If the note has a „due on sale¾ clause, then the o wner cannot sell the property this way, at least not without written authorization from the lender. And that should be reviewed by an attorney.
Also, with owner financing you need to be clear, in your documentation, about who will be responsible for paying the taxes and insurance, and when the title will transfer. Even if you don’t use a lawyer or a broker, you should still close with a title com pany to make sure everything is done correctly and recorded with the county clerk. A flawed title can be a long-term cause for insecurity and legal expenses, dragging on for years to a very uncertain outcome.
With owner financing you may be tempted to forego the appraisal, boundaries survey, title search, and title insurance to save money. Think again. And if you decide you can do without one of them, think yet again! Honest mistakes are made every day, and yo ur community’s future is at stake.
Aren’t you chomping at the bit to get started on this community adventure? Just think of all the things you’ll learn, and think of all the opportunities you’ll have to practice your group-decision-making skills! It will all be worth it in the end. And you ‘ll know it!
About the Author
Frances Forster and Byron Sandford are part of a new community, Quakerland, west of San Marcos, Texas, to be based on land currently used as a retreat by Quaker meetings in the area. They have traveled to Friends’ Meetings throughout the region, building consensus for intentional community use of the retreat land, and recruiting folks to join the Quakerland community. Frances is a licensed real estate broker and Byron, a former mortgage banker, renovates dwellings and apartment buildings for rent or resale.