This is the fourth and final post of a four-part series 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 how AcreTrader’s process works 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.
A Seller's Guide to Farmland: Buyers
The most successful people I have met in any industry or profession always begin with the end in mind. In this series of posts we have walked through many of the details and outcomes a farm seller might want to consider. The final perspective through which a seller must consider selling his farm is through the eyes of a buyer.
In fact, one of the top questions for a seller to ask is: "Which type of buyer?"
From the neighboring farmer to the private equity land fund investing pension money over multiple continents, all buyers have preferences and parameters they seek. Understanding each of these buyers and which would be most flexible in different aspects of the selling process helps a seller to position his property on the market.
Buyers can generally be grouped into two sizes and two acquisition strategies. The larger size category usually consists of institutional buyers, whether that is a pension fund or an ultra-high-net-worth individual. The smaller size category usually consists of individuals, whether that is a neighboring farmer or a dentist from the nearby town looking to invest in some land for hunting as well as investment purposes.
Broadly speaking, the two acquisition strategies are buy-and-hold or value-add. While these categories are guidelines that may have many exceptions, the four combinations of these categories will provide any seller with a strong framework for understanding who might be interested in purchasing any given farm.
Disclaimer: This is a method of dividing a diverse group of market players. While it can serve as a useful tool, it is by no means a hard-and-fast split of the market. Many of these players will dip in and out of different strategies throughout their careers. However, we find it useful when considering what land fits which buyer-type.
Most large funds are focused on the buy and hold strategy. These funds have massive amounts of capital that they invest. It is difficult to purchase billions of dollars of farmland at a cheap price. Therefore, while these funds do improve some of the land they own, they focus more on finding land which will most likely appreciate in value over time and buying it at a price that will allow room for appreciation over a very long time period (15-20+ years).
Since the largest institutional buyers have so much money to deploy, they tend to buy larger farms that are 1,000 acres or more. This allows them to spend more of their investment dollars at a faster rate and more easily manage the investments they do own using fewer people, since larger farms tend to be in one contiguous area.
The farms for which they look tend to have good irrigation, at least one shop building in good condition, a large base of farmers nearby, and often they are within an hour or two of a large city. The majority of farms these institutions buy have most of these characteristics, and they will work to improve them over time. In return, they expect to receive market or above market rent from large or very large farmers.
The seller hoping to attract a very large institution is well-served to find a trusted party like AcreTrader that understands and works with large buyers, as the institutional buyers are very sophisticated and will have expectations around how a transaction should be handled.
Smaller Fund or High-Net-Worth Individuals
Do not let the “small fund” title mislead you. Most smaller funds still have between $50 million and $1 billion in assets under management. These funds or individuals tend to be more specialized, though. They often have high return targets and are creative in how they invest their money.
For example, a smaller fund might buy pasture land, build an irrigation system, and convert the property into row crops. Or, a smaller fund might aggressively seek properties at auction that are undervalued. These buyers are looking to find a discrepancy in the value perceived today and what they believe they can do to improve the value in the short-to-medium term.
The smaller institutions will buy farms of varying sizes, though they rarely pay a large premium. Depending on the farm and the location these funds, they may buy properties that are as small as 80 acres. However, they most often look for properties that are in the 800 acre range or more. As they purchase these properties, they try to find ways to improve their returns by active management. This may come in the form of managing hunting rights, doing land forming and increasing rent, or even farming the land themselves.
A seller wanting to work with a smaller fund may be able to get more favorable terms in trade for price concessions. A smaller fund or individual is often willing to be flexible on more issues in order to get a good price and return potential. These buyers are used to working with sellers of all types, and the more of them a seller has the ability to contact the more likely a seller will find the right terms.
Individual Investor (Long-Term)
An individual investor who wants to buy-and-hold may have many different motivations. Some people want to diversify their asset base. Some want to just own a piece of the earth and have a place to go drive around on a Sunday afternoon. Some want to hunt and have a way for the cost of that hobby to be paid for by some farm income. The largest group of buy-and-hold investors are farmers themselves. These farmers will most often and most quickly know when a neighboring farm comes up for sale.
These long term investors will buy farms of varying sizes, but they are usually on the smaller end of transactions (under 800 acres). The farms these individuals buy are of every type but are often within driving distance to where they live. While not always the case, this group can be the most price-insensitive. A neighboring farmer may pay a higher premium, but he may see benefits and returns that few others would see because of the proximity of the property to his own. On the other hand, these individuals can be the most difficult on terms, since they often plan to use the land themselves.
Individual Investor (Value-Add)
Just as there are funds who specialize in purchasing property to improve it, there are individual investors who like to buy property, improve it, and sell it to someone else. These investors may buy catfish ponds and level them to create cotton fields. They may buy a poorly drained field and add tile to it. They may buy a low-lying field with woods in order to add a hunting cabin and several hunting areas to sell it as a weekend retreat along with a little income from crops or livestock. These people often have some previous experience with land. They tend to come from farming families or those who worked in a related industry.
The value-add individual investor often searches for property at a deep discount. They most frequently buy land that is in parcels of 300 acres or less. It may be totally unimproved, have rolling hills, poor drainage, or seem ill-suited for farming. These people understand there is no such thing as bad property. They often find the best uses for any individual piece of land. These investors are very unlikely to pay a high price for land, but they will buy land that is more difficult to sell as-is. They will also work with a seller on terms.
Understanding your land and who might want to buy it is yet another piece of understanding the market and your asset before you begin the selling process. The better understanding you have of your property's characteristics and the kind of deal you hope to make with a buyer, the better your expectations will be and the faster and more seamless the sale of your property will be.
AcreTrader has the experience of going through this process and would love to help you as you consider what to do with your property. Give us a call to discuss how we might help you.