When Penny goes home she is excited to share the news with Mark, but he isn’t as enthusiastic as she is about the arrangement. He doesn’t know too much about the way land contracts work and is worried about the potential for the O’Conners to take advantage of the situation. He suggests they talk to an attorney to figure out the best way to move forward and set up the land contract.

By the time of the farm visit, both Penny and the O’Conners have done their research. After a successful farm tour that has Frank and Claire excited to move forward, they all sit down with a sample contract that Claire found online for them to use as their blueprint. The plan is for them to hash out the details and then have Penny’s attorney review their drafted contract.

Purchase price and repayment terms

Up first for discussion is the purchase price of the land. Penny suggests they use the fair market value of the land by looking at what comparable land has sold for in the area. Penny already had this information from a real estate agent. Claire and Frank agree to pay $100,000 for the land and home. They also agree to pay a 10% down payment of $10,000 to Penny when they sign the contract. This will be a stretch for them, but they’d like to pay as much upfront as possible because any down payment is deducted from the principal of the loan and means no interest will accrue on that amount. This means after their down payment, the loan will actually be for $90,000.

Next, discussion turns to how the loan will be paid back. From her research, Claire knows that there are at least three different options for paying back the loan: (1) monthly installments with interest, (2) monthly installments without interest, and a balloon payment. Penny is upfront about her desire to charge a 2% interest rate, which takes option two off the table. Of course, Frank and Claire would ideally like no interest charges, but they know they’ve lucked out with this arrangement and are willing to pay Penny what they consider to be a reasonable interest rate.

The balloon payment option makes Frank and Claire a bit nervous. A balloon payment means that Frank and Claire would make even monthly payments until the end of a set time period, such as five years, when they would then have to make a lump sum payment to Penny for the total amount due. Frank and Claire know that if they do this option, they would have to get a mortgage to pay the remainder of the loan. If they couldn’t get a loan for the lump sum (which is a concern because of their credit backgrounds), they could lose all interest in the land.

While option two clearly favors the purchasers and option three favors the seller, the group decides to choose option one, monthly payments with interest, which is the most equitable for both parties. Under this arrangement, Claire and Frank will pay back the loan with monthly installments that include the loan amount plus 2%. This payment type is almost identical to a mortgage.

Prepayment option

Claire and Frank bring up the potential of prepayment on the remainder of the loan. There is a chance they’ll come into a large sum of money in the future from a possible inheritance, and they want to know if they’ll be able to prepay the loan without penalty and obtain the title to the land earlier. Penny is concerned about the tax consequences of receiving a large unexpected payment, but Frank suggests that although there will be a tax hit, potentially getting the entire sum at once and being done with the loan could be beneficial enough to outweigh that cost. Penny likes the idea of getting the money earlier and being able to help her son with the expenses that go along with having a child (as well as maybe surprising Mark with a romantic second honeymoon!). She decides she will talk to the attorney or her accountant about the tax implications from prepayment before they finalize the contract, but she is open to the idea of allowing prepayment whenever Claire and Frank are able to pay.

Next steps

With these main details discussed, Penny is ready to bring the adapted sample contract to her attorney for review. Frank and Claire begin to plan for their dream farm, while Penny and Mark tell their son to expect them in Calisun in the coming months.