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Buying out family member partner-farm property
Old 08-17-2015, 09:50 AM   #1
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Buying out family member partner-farm property

What would you do with this scenario?

Background: My father and his 3 sisters inherited a 20 acre orchard in 1988. My dad did all the financial stuff with the orchard, and did an ok job with it. One sister gifted her portion to one of the other sisters.

All remaining sisters have passed on. My dad first. I've been doing the money stuff for it since 2007. (it's leased to a farm family with generations of experience, and they take great care of it.) It's no work at all. Our net, after expenses, has been $16K-$30K/year.

The cousin who now owns a 50% share and lives in the area wants to keep it and is happy to have me take care of the money aspects--paying bills, doing the taxes, and sending him money. He checks on the property regularly. Another cousin owns a 25% share. He and his dad are business schemers. I'm not very happy having him as a partner. They've been pushing to sell the property since it was originally inherited in 1988. Always cash poor, but live in fancy houses.

This cousin approached me about buying out his portion. I'm offering $100K. It seems to be in the middle of the prices per acre I've seen the past 5 years.

BTW, the orchard is on low-lying land with it's own well and a high water table. Despite the California horror stories, water is a relatively small problem. The land has been planted with almonds since the 1930s.

Pros: 1. I'm more comfortable not dealing with this family member down the road. I'm sure he would be too.
2. The result is that two like-minded cousins will own the property 50:50.
3. It will probably take about 7-9 years to recoup the money spent on this. Not bad.
4. This is an ongoing source of income.
5. All of our income occurs at the end of the year. If I do this now, I get to keep his portion of the income.

Should I take out a loan?
Should I sell some equities?
Should I do this?

What do you all think?
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Old 08-17-2015, 10:00 AM   #2
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I would buy them out and consider the investment as part of my fixed income allocation. From what you have written, it sounds like a stable, income producing investment.

I assume that the $100k is 25% of the land value of the entire property. If they are keen to sell you might be able to swing a better deal but that might not be possible if you have already offered them $100k. But even at $100k that will be a 4.0-7.5% return annually, so much better than bonds with probably similar risk.
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Old 08-17-2015, 10:28 AM   #3
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I actually think I'm getting a very good deal. They aren't going to take the time to get it appraised, and they won't spend the money, LOL! Uncle is always trying to get others to pay for things he should be paying for, even though he belongs to a country club and has a million dollar home. Cousin is just like his dad.

The property was appraised at $360K in 2009.
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Old 08-17-2015, 10:41 AM   #4
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If I were in your situation, I would definitely buy your cousin out. I would take out an investment loan for most of the $100K. If you pay in cash, annual returns from the extra 25% will be $4000-$7500 per annum, or 4-7.5%. However, if you borrow $80K and put a deposit of $20K, you will get the same returns on 20% of the cost, ie. a ROI of 16-30% per annum, minus interest, which I presume is tax deductible. If you wish, you could repay the principle aggressively by using the extra income generated.
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Old 08-17-2015, 10:53 AM   #5
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Quote:
Originally Posted by EastWest Gal View Post

Should I take out a loan?
Should I sell some equities?
Should I do this?
What would be the tax liability of selling equities, and how would this affect your asset allocation?
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Old 08-17-2015, 11:13 AM   #6
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I live in farm country and grew up on a family farm. There is NO other industry in the world that is as complicated and has more dynamics than a family farm. Every farm family has the crazy relative to deal with (if yours doesn't...that means you're the one).

Sooner or later you're going to have to deal with these relatives and the sooner you can buy them out the better. The fewer owners the better and it's even better if you're not dealing with multi-generation owners where the ownership percentage gets smaller and smaller.

I'd buy it out if I were in your position. It should be very easy to get financing for a long term loan at a very favorable rate.

I've lived around farm families for 50 years and have seen countless families struggle with perpetuating their farms. One consistent outcome is that 99% of sellers spend all the money and have nothing to show for it in a very short amount of time. Then they wish they had their farm back.

My dad bought out some relatives to close an estate decades ago. My dad worked years and got it paid off and it's appreciated nicely. One of the relatives he bought out built a nice house and new car and is now broke. She still reminds my dad that she sold him land cheap and isn't above asking for a handout.

Get the relatives out of it and good luck with your farm.
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Old 08-17-2015, 11:14 AM   #7
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I'm doing some changes in asset allocation this year, but LTCG at 15% of $100K is $1500. Sounds like I should do it, the question is how? I'm going to approach my bank about an investment loan and pay it off early. I expect to get a big chunk at the end of the year. I'm cash poor now since I loaned other cousin $45K to pay off his mom's Medicaid estate recovery bill. That means he's paying me back with his orchard allocation, add that to mine, and now the other cousin's, and I'll be looking at a nice Christmas present. Most of that can go to paying off the loan.
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Old 08-17-2015, 11:31 AM   #8
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I'm doing some changes in asset allocation this year, but LTCG at 15% of $100K is $1500. Sounds like I should do it, the question is how? I'm going to approach my bank about an investment loan and pay it off early. I expect to get a big chunk at the end of the year. I'm cash poor now since I loaned other cousin $45K to pay off his mom's Medicaid estate recovery bill. That means he's paying me back with his orchard allocation, add that to mine, and now the other cousin's, and I'll be looking at a nice Christmas present. Most of that can go to paying off the loan.
Sounds like a plan!
But 15% of $100K is $15,000.
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Old 08-17-2015, 12:00 PM   #9
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Find a lender that specializes in ag loans and understands orchards, you shouldn't have any trouble getting a long term note on similar terms to a home mortgage. If you were in the Midwest I could point you to some.
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Old 08-17-2015, 12:14 PM   #10
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If I were in your situation, I would definitely buy your cousin out. I would take out an investment loan for most of the $100K. If you pay in cash, annual returns from the extra 25% will be $4000-$7500 per annum, or 4-7.5%. However, if you borrow $80K and put a deposit of $20K, you will get the same returns on 20% of the cost, ie. a ROI of 16-30% per annum, minus interest, which I presume is tax deductible. If you wish, you could repay the principle aggressively by using the extra income generated.
The cost of the financing has a significant impact on the return.

Let's say she takes out an 80k loan that costs 4%... the interest is $3,200.
So her net profit on her 25% share will be $800 ($4,000-$3,200) to $4,300 ($7,500-$3,200). So on a $20k down payment that would be a return of 4% to 21.5%.

Of course, plus the return on the 25% that she already owns.
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Old 08-17-2015, 12:21 PM   #11
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The cost of the financing has a significant impact on the return.

Let's say she takes out an 80k loan that costs 4%... the interest is $3,200.
So her net profit on her 25% share will be $800 ($4,000-$3,200) to $4,300 ($7,500-$3,200). So on a $20k down payment that would be a return of 4% to 21.5%.

Of course, plus the return on the 25% that she already owns.
Absolutely. 4-21.5% net return (plus building equity) is still a good deal.

What interest rate is EastWestGal likely to get?

I've just obtained an investment property mortgage (5 year fixed) at 2.59%. YMMV.
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Old 08-17-2015, 12:27 PM   #12
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2.59% is a great rate... probably because the term is so short. You snagged a great deal.
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Old 08-17-2015, 12:43 PM   #13
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Oops.


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Old 08-17-2015, 12:44 PM   #14
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You're wanting to buy 25% of a small farm to where you and a cousin own the property 50/50. Do you have the ability to borrow the funds without putting the farm up as collateral? Most lenders would want the entire farm as collateral.

The good cousin's 50% ownership is lien free, I assume? He shouldn't have to mortgage the property for you to buy the other cousin's 25%.
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Old 08-17-2015, 12:45 PM   #15
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Re: cap gains tax--oops.
Re: mortgage. Where did you get 2.59%?


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Old 08-17-2015, 12:47 PM   #16
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Re: mortgage. Where did you get 2.59%?
I'll send you a PM.
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Old 08-17-2015, 12:56 PM   #17
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You're wanting to buy 25% of a small farm to where you and a cousin own the property 50/50. Do you have the ability to borrow the funds without putting the farm up as collateral? Most lenders would want the entire farm as collateral.

The good cousin's 50% ownership is lien free, I assume? He shouldn't have to mortgage the property for you to buy the other cousin's 25%.

It will be lien free because I'm loaning him the money. Orchard is what's left of a 3000 acre ranch bought in 1908. There's some history there.



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Old 08-17-2015, 02:21 PM   #18
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Doc,

I would be thinking of buying out both cousins.....
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Old 08-17-2015, 03:49 PM   #19
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The other one is the one that checks on the orchard. I live 2500 miles away and can't make sure things are ok. He also really needs the income right now. He left a good paying job (never went to college) to take care of her in 2005 when she got really sick. He is working nights and barely making ends meet. No need to buy him out. He wants the income. It's like a small annuity to him. Anyway, I don't have that kind of cash.
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Buying out family member partner-farm property
Old 08-19-2015, 09:09 AM   #20
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Buying out family member partner-farm property

Farm loans are not as easy to get as a home loan. For one, the lender will want an appraisal and there are very few farm appraisal specialists and corresponding appraisal fees are high. Then you can add on origination fees, closing fees, ect. If the lender demands a survey, that will be another expensive issue to resolve. At most you will be able to get 80% financed and it would not be surprising if the loan amount was only 50%. So the financing costs will not be cheap. You would better off paying cash or playing off a margin account if you hold equities.


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