February 21, 2019
How to Sell a Farm: Introduction
Despite the fact that millions of acres transact every year, there are few resources available to guide those who plan to sell their farm. Some immediate resources are wealth managers, trust companies, lawyers, and land brokers.
While each of these have varying experience and expertise, exploring additional options and opinions with a third party like AcreTrader can be of tremendous value.
Overview of the Sales Process
This post is an introduction to a series of posts where we discuss the process of selling a farm. It also provides good information for those who might be interested in purchasing a farm either by understanding AcreTrader’s farmland investing process or by doing their own research. However, this is not by any means the only resource one should use. It is a thorough introduction meant to help guide one’s own research and understanding.
All that said, below is an introduction to the factors one should consider when initiating a transaction to sell land.
Price is the first component any person considers when selling an investment.
“What did my family or I pay for this investment? How long ago was it? How much will someone pay me for my best property? I heard land in (some place) was selling for (some price).”
We have heard all these questions and many more. Ultimately, the best price is usually the one where the land will transact in a reasonable time frame under the terms for which you are hoping.
Investors value farmland in two primary ways.
First is comparable sales: this is where an investor compares similar land that has sold recently in the same region.
Second is capitalization rate: this is where an investor tries to understand what the rent will be as a percentage of the purchase price of the land (for example, $5 rent on land worth $100 is a 5% capitalization rate). The investor will have a percentage range to hit and will need to adjust either the rent or the purchase price accordingly.
Most investors look at both methods and derive a price by reconciling the two different methods.
Sellers who match their land purchase price with the market will have the best chance of finding a buyer willing to work with them.
Terms are one of the most under appreciated parts of any transaction. As we have been reminded many times, the saying “your price, my terms” can be either dangerous or lucrative. Terms can be anything from time to close and who pays for the transaction costs to other contingencies.
Common terms and contingencies we see are sale leaseback agreements, life leases for homes on a property, carve outs for portions of a property on which there are buildings like a farm office, hunting rights, mineral rights, and right of first offer on resale.
There are many things a seller might want besides a purchase price, and all of these should be considered before selling, as they may affect the ultimate value of the transaction.
Sellers should know about the details of their property in order to understand how their property compares to other sales in their region, as well as to understand who might want to buy their property.
Property size, tillable versus non-tillable acres, field slope, irrigation, drainage tile, distribution of different tracts over an area, soil quality, crop yield history, and the buildings and other assets on a property all make up what the property’s price will be.
Each of these factors can also make a property more or less attractive for a certain type of buyer.
For instance, farms of a smaller size may get the best price from a neighbor or local investor, while farms over 1,000 acres are often bought by land funds. We at AcreTrader work with farm land at both ends of the spectrum.
Knowing what kinds of different farmland buyers exist in the land market can help a seller understand who should help them sell their land.
If a seller owns a property in an area where auctions are common and price is well defined, then it may be easier to sell a property there than in an area where there are few buyers locally and state laws make corporate ownership of land difficult.
What leases are currently in place matters to buyers. Many farm buyers are farmers themselves and would prefer to take over farming the land.
Land investors are more likely to work with the existing seller, and they often prefer longer term leases, because it requires less effort on their part to find a farmer year after year.
From a farmer’s perspective, it is good to have a long term lease because they can make long term decisions based on having a certain amount of property to farm.
However, a buyer may not be interested in buying a property that has seven years left on a lease if there are no rent increases over that time. The rent would not keep up with commodity prices or inflation. Further, the farmer and new owner might not get along.
To summarize, farmland leases can serve as an asset to some and a liability to others, so it is important to understand expectations for all parties involved in a land transaction.
Financial and Structural Characteristics
Sellers and buyers should also understand typical structural and financial preferences involved in a transaction.
If one sibling wants to sell but three others do not, then that sibling will have a difficult time selling an undivided interest.
Selling a corporation that owns a property instead of the property itself can be extremely difficult, even though it may be the only tax efficient way for a property to sell from an owner’s perspective. Many other problems may exist like outstanding liens, disputed titles, or disputed property lines.
Making sure one understands the financial and legal implications of selling a property is imperative for a seller. However, many kinds of buyers exist.
There are those like AcreTrader and some of its partners who specialize in complex transactions. Finding the right buyer for your farmland is necessary to make almost any sale go through.
There are many farm documents which can help a buyer understand all of the information above.
Many of them are readily available from the government, current and past tenants, and title companies who have done work on the property in the past.
We have compiled a list of initial information and documents that AcreTrader and most buyers would request to get started you can download below.
Note that not all documents and data are required, but the more information the seller can compile up-front, the easier it will be to value and ultimately sell the land.
Many properties have special situations that a buyer and seller will have to work through. Many of these were listed in the terms we laid out before. However, all of the various circumstances should be considered before agreeing to sell a property.
Special situations may include sale leasebacks, retaining hunting rights, mineral rights, pre-existing easements on a property, environmental waste issues that exist on a property, transferring a property enrolled in a government program which does not allow the land to be farmed, selling a property either in or soon-to-be in foreclosure, or selling a property with questionable water rights or availability.
Again, buyers of all types are looking for different qualities in a property and are agreeable to all kinds of special situations, but information and communication are critical.
Selling a farm can produce material cash and flexibility that enable a seller to have freedoms that he or she might not otherwise enjoy.
However, having a solid understanding of all of the qualities on which a buyer might judge a property is fundamental to achieving the best outcome for both the buyer and the seller.
The AcreTrader team has experience with all kinds of buyers and transactions, and we are able offer attractive solutions for complex situations that may have few viable alternatives.
Our goal is to make the process easy for both buyers and sellers of land, while also providing up-front transparency to investors, buyers, landowners, and farmers.
If you have a farmland asset or questions about farmland investments, we would love to speak with you. We know farmland. It’s what we do.
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.
Learn how farmland can be a great diversification tool by viewing farmland's correlation to major asset classes like stocks, bonds, timberland, gold, and more.
AcreTrader eliminates the issues associated with farmland investing. While private equity farm funds and farmland REITs provide access, they also insert risks.
Learn how to use Self-Directed IRAs as investment vehicles for farmland offerings. The article reviews Self-Directed IRAs and crowdfunded farmland investments.