Increasing crop and livestock prices are making land purchase possible for many farmers. However, the growing demand for land has driven prices to record highs in some areas. Whether you use cash or borrow money, there are a number of questions farmers should ask themselves before investing in land.
Given current market conditions, ABA's Agricultural and Rural Bankers Committee, made up of leading agricultural bankers in the country, has developed the following list of questions buyers should answer before purchasing land:
1. What is your business's financial condition? Consider needed investments, expected expenditures, and crop conditions to determine if buying land is the best use for your cash. Are there other opportunities that can provide a better return?
2. Have you created a pro-forma cash flow? Research sales trends and expected revenue of a potential plot of land to determine how well the purchase fits within your plan. Does the potential return meet your objectives? Your banker can help you develop this essential planning tool.
3. Given your revenue forecast, are you overpaying? If you are paying a premium, how long will it take you to recoup?
4. Have you thought long and hard about it? Never be rushed by a broker and never confide your best price or financial goals with a party working for the seller. Don't buy impulsively or make a deal before visiting the property numerous times.
5. Does it make more financial sense to rent the land rather than owning it? Rental rates are high, but renting frees your cash for other activities.
6. Should you go all in with your cash? Talk to your banker about alternatives to using all cash in the transaction. Land is an illiquid asset and purchasing it will impact your farm's liquidity.
7. How much land are you acquiring? See if the land has been surveyed and make sure it matches the details of the offer.
8. What does the land appraise for? Are there some comparable sales in the area? .Even if you do not get a full appraisal, attempt to find some comparable sales to determine if the purchase price is reasonable.
9. What is the soils story? What is the capability of the soil you are buying and how does this impact your revenue forecast? Know the type of soil and history of crop rotation.
10.What is the water source? Is the property irrigated? Do the water rights convey with the property? Make sure all water wells are registered with the appropriate authorities.
11. What do you know about the gas, mineral, and wind rights for the property? Do these rights convey to you as the purchaser? Have they been surveyed or severed from the surface rights? Are they currently under lease? If so, under what terms?
12. How is the property zoned? Will your plans for the property conflict with existing zoning restrictions? Are there conservation easements that could restrict use of the property?
13. How will you hold deed in the property? Will you own it individually, jointly with a spouse, in a family owned entity (corp., LLC, LLP) or in a trust?
14. Are there any environmental problems?
15. How long will you actively farm? Make sure your financing plan matches the rest of your intended career as an active producer. Will you fully retire all debt from the acquisition before you retire? Do you have sufficient life and disability insurance?
No one knows more about financial budgeting and cash flow planning than your banker. ABA recommends making an appointment to talk with your banker about the significance of purchasing land and how it will impact your business.
Source: The American Bankers Association