One of our favorite qualities about farmland investing is the advantage proper farm valuation can allow.
Unlike public stocks, there are few data points and metrics which define a clear and comparable valuations of any given farm. Very few farms trade within a small geographical area and even fewer that are similar in quality in that area.
This can make farm valuation challenging, but it can also present opportunities for those who understand the asset.
In the second of our articles on farmland valuation, we explain the thorough due diligence process by which AcreTrader ensures we have a solid understanding of value factors.
If you haven't already, take a look at the first article in this series on determining the value of farmland.
The AcreTrader Valuation Process
So now that we know the ways to determine value and the questions to ask, how do we at AcreTrader qualify farms for investment?
There needs to be documentation to validate the answers to all of our valuation questions. Further, we cannot spend the time to do a full due diligence process on every farm we see, so how does AcreTrader determine which farms get different levels of due diligence?
AcreTrader conducts 3 levels of research, each of which requires increasingly more time and deeper research.
First, we do a “sanity check” of the farm to see if it meets our return expectations or if it has any obvious problems.
Second, we move to the “documentation and verification” stage where we obtain supporting documents, build financial models, create maps with layers of information on the farm and gain an understanding of the qualities of the asset.
Our final stage is our “ground check” where we improve our understanding of the local region by speaking to local farm managers and tenants in the area, find comparable sales information, and go to the farm itself.
These stages work like a funnel with many farms going through the first stage, fewer going through the second, and very few going through the third.
Primary Stage - “Sanity Check”
The first stage of due diligence is the top of the funnel where we check to see if the farm is worth investigating in detail. This is usually done electronically and/or through our first or second conversation with a farm seller.
Here are a few of our initial checkpoints in the "Sanity Check" stage:
- Price - Does the farm have the correct capitalization rate (annual rent/total purchase price)? Is the total purchase price reasonable for the area? Is the rental rate reasonable for a farmer to pay over time?
- Problems - Are there any immediate problems with the property that can or cannot be fixed, and if so, at what cost? Is the percent of tillable acreage to total acreage too low (i.e., too much land that cannot be farmed)? If there is a long-term lease in place, is it favorable to the landowner?
- Probability - How likely is this farm to successfully pass through the second and third stage? What are the seller’s intentions? Is it in an area that is favorable to investors?
Secondary Stage - “Documentation and Verification”
The second stage of due diligence is about verifying the initial data as well as researching the individual farm.
This stage occurs after we have collected most of the useful documents for selling your land, and have begun to check the layout of land. This allows us to verify ownership, returns, layout of the property, and more.
We typically conduct our own financial and spatial analysis at this point as well. Below are a few of the tasks we complete during this second stage.
- Software Analysis - Place the farm into our proprietary deal flow system which manages properties at each stage and aggregates data for each farm.
- Mapping/Acres Verification - Build maps with several layers including property boundaries, well locations, slope/elevation analyses, crop delivery points, soil data, drainage analysis, Farm Service Agency maps, etc.
- Financial modelling - Build financial models for each farm which forecast potential earnings, appreciation, estimate a reasonable rent, and value other assets and income.
- AT Score - Pass the farm through our proprietary scoring matrix which provides an abbreviated, objective analysis of the property. Income verification - Analyze documentation specifically related to income from the farm.
Final Stage - “Ground Check”
This stage is about understanding the “context” of the property. We need to analyze the area, the people who live near the farm, other potential farmers, and other land in the area, as well as see the farm in person.
In this final step, we need to be sure that not only is the property good, but also the land market, tenant base, and the surrounding factors are favorable for investment in the area.
Below are a few of the items we investigate as we do our final due diligence checks.
- Area diligence - Research surrounding area for chemical and seed vendors (ease of work for tenant), speak with grain merchants (for ease of delivery), review where the farm lies with respect to the tenants other farms and to the nearest town.
- Manager calls - What do our local partners think about the area? What are the local culture’s positive and negative aspects?
- Tenant calls - Speak with current tenants to ask them what they think about the farm. Speak with other farmers in the area to understand how they view the surrounding farms and the target farm.
- Comparable sales - Deeper research into previous sales in the area and how they compare to the current farm.
- Government database data - Gather USDA and FSA data to provide context around the subject farm and the information we gather on site. Compare the government data to our analysis as a last step to make sure our assumptions and calculations are reasonable.
- On-Ground visit - Visit the farm to ensure that all prior research is valid. Check out soil, property lines, drainage ditches, slope of the field, and health of the current crop. Ensure that the visual check matches all other data collected.
AcreTrader reviews several farms a day and very few make it all the way through our due diligence process.
Having a process that checks for quality provides the best chance for our investors to enjoy the impressive returns that have historically been provided by farmland.
The better our understanding of value, the better AcreTrader can make our systems, which in turn , allows us to sift through farms that aren’t right for our platform.
Please note: this article is meant to be a topical overview and, as such, does not include specific financial advice. Every situation is unique, and you should consult with a licensed attorney, accountant, and/or financial advisor prior to entering any written contract or verbal agreement.