https://media.acretrader.com/news/how-to-sell-farm-part-1-introduction.jpgAcreTrader

Selling A Farm

February 21, 2019

How to Sell a Farm Part 1

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 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.

All that said, below is an introduction to the factors one should consider when initiating a transaction to sell land.

Price

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 __ was selling for __.” 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.

Land investors value land 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

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.

Land Characteristics

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.

Buyers

Knowing what kinds of different 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.

Leases

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, 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.

Documents

There are many 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 our free farm seller packet here. 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.

Special Situations

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.

Conclusion

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.

You might also like
AcreTrader

Overview of Land Buying Options

Investing in agricultural farm land is difficult. That is why options for investing in land have historically been limited. Before we get into the discussion, let's take a quick look at why AcreTrader is the most attractive option to diversify your portfolio with an attractive long-term investment in farmland. Farm Fund Private Equity vs. Agriculture REIT vs. Buy Land vs. AcreTrader.png

While farmland investment funds, REITs and outright ownership of land all provide solutions for investing in land, each have distinct drawbacks:

Investing in Land With Private Equity

Agricultural Land Funds offer institutional alternative asset investors the ability to invest in land at scale. Indeed, the attractiveness of farmland as an investment has attracted a large amount of investment in farmland private equity, as the chart below shows over $25 billion raised by global farm funds since 2007. image-3.png Many of these private equity funds measure their assets in the hundreds of millions or even billions of dollars, and we think there is upwards of $10 billion in the U.S. market alone (for context, the value of total U.S. farmland is measured in the trillions of dollars). This type of scale provides great leverage in farming, back office functions, and ability to participate in auctions of large farms. However, this scale also means that these funds are creating a much more "efficient" market with these large farms, as multiple funds show up as bidders on the mega deals. AcreTrader works with a number of farmland private equity funds in the U.S., as our focus is on the less-efficient (read: additional upside opportunity) small farm market (typically 40 acre to 500 acre lots). We also provide investors the ability to invest in farmland with as little as $1,000 and an opportunity for liquidity. That's very different than private equity, where investment minimums are often $1 million and lockup periods can be 10+ years. To reiterate, we think farm funds have a place in the U.S. market, and some of these funds have great teams, processes, approaches, and returns. However, for the overwhelming majority of investors looking to diversify their portfolio with farmland, AcreTrader offers a far more practical approach.

Investing in Ag Land With Publicly Traded REITs

Real Estate Investment Trusts (REITS) are an asset class that has been around for a long time. They are publicly traded companies that typically own and operate real estate utilizing debt to pay out attractive dividends. Agricultural REITs are relatively new, with the 2 publicly traded companies having been listed just in the last 5 years. While publicly-traded farmland REITs provide investors easy access to farmland, they also lack many of the highly attractive reasons why investors buy land in the first place: to get away from the stock market and to reduce volatility. For example, one of the publicly traded REITs, Farmland Partners, Inc., was recently written up by a short seller saying the company risks insolvency. For the purpose of this article, the contents of the short seller report and their truthfulness aren't the concern. If the contents are manipulative or inaccurate, then we feel incredibly sorry for the company's investors and employees. However, while the report may be debatable, the impact on the stock is not. See if you can spot when the short report was published: image-2.png

Importantly, the company owned roughly the same assets a month before and a month after the report. Unfortunately, for investors involved with this agricultural REIT, the stock saw a negative correction of over 40% around the few weeks of July 2018 when the report was published.

To reiterate, REITs do provide an easy way for investors to access farmland. But, this comes at a high cost of being in a volatile stock market. In addition to market exposure, a lack of transparency and the burden of debt makes investing in farm land REITs a potentially dangerous proposition.

Buying Land Directly

The most common method to invest in farmland BY FAR is direct ownership. Despite the exceptional friction and headache that can accompany investing in farmland, some astute investors have historically invested directly in farmland. Indeed, over 30% of of U.S. farmland is owned by non-operator landlords: image-4.png

Though direct ownership in farmland is well established, it historically required investors to commit hundreds of thousands of capital (taking portfolio concentration risk) and manage the business and complexities associated with it.

A typical outright investment in farmland goes something like this: search for and identify attractive land, conduct due diligence, negotiate terms with a bank, coordinate a lengthy closing process, identify a manager and/or farmer for your land, open bank accounts, negotiate leases and contracts, manage payments and collections, pay taxes and insurance, deal with problems, constantly monitor operations, etc.

You get the point. Buying land directly is HARD. But, AcreTrader eliminates the friction involved by allowing investors to skip the above pain points with a few clicks and keystrokes.

Conclusion

Each of the above options provide access to buying land. However, these land purchase options tend to work only under certain circumstances and leave the majority of investors without a real ability to invest in agricultural land under attractive terms. Thus, despite the highly-attractive and historically safe investment components of farmland, it hasn't been highly publicized as an investment alternative.

AcreTrader changes this. We are democratizing the farmland investment process by providing users transparency, security, liquidity and access otherwise unavailable. AcreTrader. Investing in Farmland. Simplified. To see our current offerings, please click here.


Note: The information above is not intended as investment advice. Data referenced herein Preqin, USDA, Yahoo Finance, and Company Filings, with additional calculations and analysis performed by AcreTrader. Past performance is no guarantee of future results. For additional risk disclosures regarding farmland investing and the risks of investing on AcreTrader, please see individual farm offering pages as well as our terms and disclosures.

How to Invest in Farmland: The 3 (Now 4!) Different Ways to Buy Land

AcreTrader

We have watched with excitement and awe as the online commercial and residential real estate crowdfunding market has grown from practically nothing 5 years ago to a multibillion dollar industry today. As a whole, we view the real estate crowdfunding market as an exciting alternative asset for accredited investors, and we note that most platforms and offerings look great at first glance. However, buyer beware; those 13% IRR figures don't come without significant risks. Below we note several risks that may or may not be obvious when it comes to online real estate crowdfunding.

Leverage

As we note in our post "Leverage: A Dangerous Amplifier," debt is a great tool of modern finance that is not without risk. Most real estate crowdfunding sites offer properties with Loan-To-Value (LTV) rates of 75% to 80%, though some of them are even more levered. In an investment with an LTV of 80%, the owners' equity portion is only 20% of deal value, while the debt accounts for the remaining 80%.

While this leverage can amplify your returns, it also amplifies the downside. An economic recession, poor site selection, poor management, increases in local competition, government regulations, or even just a negative cycle in commercial real estate can drive down the value of the property by 20% or more pretty easily. If the value is down just 20%, this means that the investors' portion of the deal is worth ZERO.

Deal Terms

While often overlooked, the articles of organization and subscription documents can hold important information. Sometimes, the grizzliest of these limitations are buried in legalese that is hard to decipher. While most real estate industry terms are standard, look out for predatory terms or unfavorable treatment in the case of default.

Unknown Sponsors

Many of the well-known crowdfunding sites work with established multi-deal sponsors on their sites. However, that isn't always the case, as we have witnessed well-funded deals that relied upon sponsors that had little or no experience. Even in the case of well-experienced deal sponsors, local real estate knowledge is important, and we have seen examples of seemingly well-intentioned sponsors putting together dangerous looking deals in unfamiliar territory.

Due Diligence Limitations

For an example of the above, we recently came across a hotel recap and remodel offering from one of the industry-leading crowdfunding sites in a southern state. The sponsor had experience in neighboring Texas, but none in the target state where they were (successfully) raising millions of dollars to do a heavily-levered hotel deal. Unfortunately for the investors, and likely even the locally-inexperienced sponsors, there is a mostly-unannounced $100 million development being planned across the street that includes two hotels. At the time of capital raise, it is possible that only local developers knew the massive development was going to break ground soon. While the investors' pitch on fixing up an old hotel looked great on paper, a flood of hotel room supply across the street may end up destroying a lot of value... all because the developer was speculating in a new market.

Heavy Cyclicality

As multi-billion dollar commercial real estate lender Bank of the Ozarks said during its July 2018 conference call, competitors that are getting more aggressive with credit structures and pricing may "set of concerns across the banking industry." It is no secret that commercial real estate is a very cyclical industry. In fact, it is not uncommon to see the real estate industry go through 10%, 20%, or greater corrections (see chart below). For this reason, as well as the reasons listed above, we remain cautious about real estate crowdfunding online. Screen Shot 2018-07-21 at 3.34.09 PM.png

Note: The information above is not intended as investment advice. Data referenced herein and in the chart above is through year end 2017 and is sourced from Bloomberg and NCREIF, with additional calculations and analysis performed by AcreTrader. Past performance is no guarantee of future results. For additional risk disclosures regarding farmland investing and the risks of investing on AcreTrader, please see individual farm offering pages as well as our terms and disclosures.

The 5 Big Dangers of Online Real Estate Crowdfunding

AcreTrader

While the value AcreTrader provides to investors is clear, we are often asked “what do you do for the farmers?” The answer is: a lot! Our management team has historically been involved with farming before founding and working at AcreTrader, and we understand many of the challenges today’s farmers face. While we don’t have a magic wand to solve every farm problem, we do help farmers in a variety of ways.

Ability to Expand Operations

Perhaps most obvious is AcreTrader’s ability to offer farmers access to capital. For example, there are times when a farmer wants to expand his farming operations onto a neighboring parcel of farmland but doesn’t have the funds to purchase it. This farmer can present the land to AcreTrader’s investors. The investors would then purchase the land and rent it back to the farmer, providing him something he might not otherwise have gotten - economies of scale. He can now use his existing farm equipment and labor on the newly-leased neighboring farm, helping him to grow his business and his bottom line. Another avenue for expansion would be for a farmer to sell a portion of their ownership in some land in order to purchase additional land. Where traditionally farmers would go to a bank and get debt (backed by their owned-land), they could instead just sell some portion of that parcel on AcreTrader and use the funds for expansion. AcreTrader can provide another tool for farmers who hope to grow their businesses.It’s one of the qualities of our business about which we are most excited. With more financing options, farmers can choose a solution that helps them reach both their financial and personal goals.

Quick Access To Capital For Improvements

Almost 40% of U.S. farmland is owned by absentee owners that rent the land to farmers. In many of these relationships, the farmer pays a cash rent that is typically up-front before planting season. While some owners will reserve cash for potential capital improvements, others do not or are unable to. This can result in serious problems. For example, the farmer may have the water pump on an electric well break in the middle of the hot summer. If the owner is unavailable, or does not have cash on hand, this can put the farmer in a very difficult situation. The farmer will either have to pay for the well himself (if he has the cash at hand) or risk his crop dying in the field from lack of water. When working with AcreTrader and its management partners, our farmers have support when improvements are needed. Making enhancements and maintaining a farm’s drainage, ditches, and roads not only helps the farmer, it improves the resale value of the farm. In addition to having capital available for on-farm improvements, we move fast. We are always here to answer the call and take action in partnership with our farmers.

Independent Valuation and Information

We work with farms of all sizes and many types of complex situations. From small conservation-focused farms to mega farms, wholly owned parcels to complex family dynamics and ownership structures, we have seen it all. Importantly, we help farm owners and farmers understand their land value and the options available to them as sellers. While we don’t always engage in a commercial relationship with these farmers and owners, we are happy to share our thoughts regarding the value a farm and work through the potential opportunities and options. Understanding the value of a farm and the process of selling can be complicated and stressful; having someone walk you through it can be an invaluable source of both relief and information.

Respectful Farming and Technology Expertise

Farmers know their own business and their land, and we don’t pretend to know better than they do. However, having operational experience over tens-of-thousands of acres has provided us the opportunity to see a lot of problems and solutions. For example, all the new technology offerings from planters and seed solutions to financial software and satellite mapping can, at times, be overwhelming. We have evaluated a myriad of products, and we have seen a lot that are a waste of time and money - the proverbial “solution in search of a problem.” However, we have also seen some true technological advances and products that can immediately help farmers with their business. Here’s an example recent conversation:

Farmer: “Have you guys seen XYZ’s new software for planting season?”
AcreTrader Farming Operations Team: “Yes, but we noticed they were unable to complete their fundraising round, and they have recently gone through layoffs. It’s likely their product functionality and support will suffer. Have you considered solution ABC instead?”

A farmer's localized history and knowledge of the land is irreplaceable. We help our farm partners through our nation-wide knowledge of the agtech industry as well as the nuances of the legal, land improvement, and farm valuation pieces of the business. In short, we let farmers do what they do best and support them wherever we can.

National Presence and Brokerage

As mentioned above, we work with farms of all types and sizes. Farmers usually know their local market dynamics better than anyone around, but our national footprint and years of cumulative regulatory, valuation, and brokerage work help us present additional thoughts and assistance that might otherwise not be available. In addition, we maintain an incredibly unique and large set of relationships with individual and institutional farmland investors alongside a nationwide footprint of partners.

Conclusion

The above are just a few of the ways we work with farmers to make their lives easier and their businesses more profitable. However, every farm is unique, and so are the solutions for its situational improvements. If you are a farmer or farm owner, or someone interested in learning more about investing in farmland, please don’t hesitate to contact us anytime.

Five Ways AcreTrader Helps Farmers