Wallaces Farmer

Understanding farm real estate agreements

Farmers encounter many different kinds of contracts and purchasing agreements and should learn what each means before signing.

Erin Herbold-Swalwell

December 16, 2022

5 Min Read
Couple signing contract
AGREEMENTS REQUIRE CAREFUL READING: Regardless of the type of real estate agreement used, farm families should understand before signing. BongkarnThanyakij/getty images

Last month, I participated in an Iowa Farm Bureau Federation panel discussion for farmers, “Understanding Ag Contracts.” Preparing for the presentation made me think about all the contracts farmers encounter in their daily lives: farm leases, easements, options, farm data ownership agreements, fencing or drainage agreements are agreements farmers could find themselves reviewing. But what about farm real estate contracts or purchase agreements? Most farmers will deal with these contracts sporadically throughout their careers on the farm. With historically high land prices and recent sales, I thought it was a good time to talk through the basics of a land sale.

What makes a contract binding? A real estate purchase agreement or installment contract is just another form of a contract, and some of the same concepts apply under Iowa law that apply to all contracts. So, what are the building blocks of a contract under the law? First, the parties to the contract must have a mutual understanding or be of like mind as to the terms of the agreement. For instance, in a real estate purchase agreement, the parties need to be aligned on the critical terms — such as price per acre and number of acres contained in the parcel, closing date, down payment, and conditions — that need to be met prior to the closing or wrap-up of the transaction.

Second, there must be an offer made — acceptance of the clear and defined terms of the offer and consideration. “Consideration” is just a legal term meaning that each party to the agreement receives something of value in exchange their bargain. Third, each party must perform or “deliver” on the terms of the contract and act in good faith. In my experience, a written agreement that clearly spells out all issues that could lead to later disagreements is the best way to proceed. For that reason, I would encourage everyone to hire an attorney or engage a real estate professional to guide you through the process.

Why are abstracts important in Iowa? One of the first steps in any real estate transaction, and typically a requirement in the agreement, is for the seller of the farm to update the abstract of title for the property. An abstract is a legal document that gives a chronological record of ownership of the property based on an abstract company’s search of the public records. It can be a lesson in the history of our state to look back at the abstract and learn the history of ownership of the farm or review any easements, plats, mortgages, wills, litigation or property assessments that have been entered of record in the county. Generally, each county in Iowa has at least one abstract company that will be able to update the abstract.

One common issue that seems to occur for land that has not been transferred in many years is finding the abstract document. I always encourage clients to find the abstract well in advance of a sale of the farm, because it may take some time for the abstract company to recreate the abstract — which can be quite expensive. Most people store their abstracts in a safe deposit box or fireproof safe with an abstract company or attorney’s office to protect these valuable documents.

Once the abstract is located and updated, an Iowa attorney will review the abstract for any “title defects” to ensure that the buyer will assume the title free of any defects, unpaid mortgages or liens. Free and clear title is important. Unlike most other states, Iowa is an abstract state, meaning that it does not allow the sale of private title insurance. Once the abstract is updated and title cleared, buyers can get protection in the form of insurance through Iowa Title Guaranty, run through the Iowa Finance Authority — a state agency.

“Closing the deal.” Once title has been cleared and other conditions of the contract have been satisfied, then closing on the purchase agreement will occur, and the seller will sign a deed transferring the property to the buyer. Among other things, a declaration of value of the property and a groundwater hazard statement are generally filed along with the deed. Iowa recently adopted a new law that changes the Groundwater Hazard Statement filing requirement. Under prior law, a seller of property or transferor was required to file such a statement and disclose to the buyer any wells, solid waste disposal sites, hazardous waste, underground storage tanks, private burial sites or private sewage disposal systems (septic systems). There were a few exceptions to the requirement for family transfers, etc. The rationale is that buyers should be aware of any potential groundwater issues.

Under current law (as of July 1), which was enacted to simplify the closing process, the seller is exempt from filing the Groundwater Hazard Statement with the county recorder if there are no known conditions, as listed above.

What about an installment contract? In the event of a closing of a real estate installment contract (which spreads the payment out over a period of years) and may include a “balloon” payment at the end of the contract, the deed is not recorded until the last payment is made and the contract terms are satisfied. The contract is recorded, and typically a deed will be prepared and held in escrow to be recorded when the contract is paid in full. Some farm sellers choose to enter into installment contracts to spread any capital gains tax burden over a period of years, rather than paying the entire tax bill up front at a higher rate. As always, consult your attorney and accountant before entering into these agreements.

Herbold-Swalwell is with Parker & Geadelmann PLLC. Email her at [email protected].

About the Author(s)

Erin Herbold-Swalwell

Erin Herbold-Swalwell is an attorney with Brick-Gentry PC in Des Moines. 

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