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The impact of contract for deed financing on Minnesota forest land prices was estimated using nearly 8,000 sale records for 1989-2003. Even after accounting for favorable financing terms, contract for deed forest land sales commanded a substantial premium over comparable properties not sold on a contract for deed basis. Small forest land tracts and those sold earliest in the study period generated the greatest contract for deed premium. The study documented that virtually the entire price premium can be attributed to factors beyond the net present value of favorable financing terms. Possible explanations for this premium and the implications for forest resources management and conservation policy are discussed.
The price of forest land is influenced by myriad values and uses. These include benefits from forest land ownership that are readily traded in the marketplace1 as well as those benefits where markets are limited or nonexistent2 Studies of willingness to pay for forest land, while few in number, have historically focused on in situ parcel characteristics3 and location characteristics4 as major determinants of price variability.5 More recent studies have found that buyer and seller characteristics can significantly influence forest land prices.6
The terms of financing agreed to by a buyer and seller can also affect the negotiated sale price of forest land. For example, when a buyer of forest land secures more favorable financing than could otherwise be obtained in the market (e.g., lower interest rates), the below-market financing arrangements can influence the sale price negotiated between the buyer and seller. Such favorable arrangements often occur when land is sold on a contact for deed, also called a land contract or contract sale. When land is sold on a contract for deed, the seller and buyer enter into a contractual agreement specifying the terms by which the seller will receive present and future payments for the land from the buyer.7 In effect, the seller acts as a bank by providing a loan to the buyer. Typically, once the terms of the contract (i.e., loan) are satisfied, the property's deed is transferred from the seller to the buyer. While the use of contract for deed financing and its impacts on real estate markets have been widely discussed in finance and appraisal literature, it has not...