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Selling A Farm

February 27, 2019

How to Sell a Farm Part 2

This post is our second of a four-part series where we discuss the process of selling a farm. If you haven't yet read the introductory post, you should do so first.

This article 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: Price

As we mentioned in our first post on selling farmland, price is the first component that most consider when selling an investment. Many factors will play a role in determining price. The next posts in this series will dig deeper into the conditions that might raise or lower a price. However, for this piece, we will look at how investors and farmers tend to find the starting value of a property.

Land investors value land two primary ways - comparable sales and capitalization rate. While these two valuation methods can be done independently, they often affect one another.

Comparable Sales

Comparable sales, also known as "comps," are core to understanding the value of a property. Unlike the stock market, land does not sell on a daily basis much less a second-by-second basis. Further, every piece of farmland is unique and not exactly like any other. Therefore, it can be more difficult to determine what the price of any particular property should be.

The best way to compare a farm is to look at nearby sales and adjust their prices by the value of the different qualities each might have. For instance, consider a non-irrigated property which might have sold for $3,500 per acre nearby an example irrigated, top-tier property of similar quality.

If the value of irrigation were estimated at $500 per acre, then an investor would take the value of the non-irrigated comp and add $500 to the per acre price ($3,500+$500=$4,000). This would give the seller an idea of what might be a good price to list the property.

A seller should look at many different comps to understand the prices in a given area. Any single property might have been sold at a higher or lower price due to issues which might not affect the seller’s land. For example, a farm in foreclosure might sell at a lower price because a bank would rather sell the property quickly than hold out for the best price. Or, a large family farm may meaningfully overpay for a long sought-after neighboring parcel. Usually, five to ten comparable properties can give the seller a good idea of what local market value for a property may be. As with any research, the more data points one has the better one’s understanding of the situation.

A high-quality land valuation will consider many different farm qualities by which to adjust comparable sales. These might be irrigation, drainage, soil type, road access, number of tenants in an area, availability of places to deliver the crop after harvest, and many others. Ideally, though, comparable sales will be close in quality to the land that is being sold.

In other words, a potential buyer should be able to understand the property well enough to throw out the comparable properties that are not close enough in quality, while also identifying enough comps of a similar quality to value it against.

Unfortunately, these comparable sales can be difficult to find. This is one advantage of working with an experienced seller or broker like AcreTrader. People who see many sales a year in a given area will be able to quickly estimate what a seller’s property may be worth.

The best investors and brokers will follow up on this intuitive understanding with in-depth research and financial modeling on a farm. They will analyze many sales in the local area and region and derive a fair market comparable value for the property. This will be a starting point for any further discussion of terms a seller might desire (which we will discuss in later posts).

Comps and county average land prices can be found through courthouses, brokers, bankers, land managers, government websites, other farmers, and even some new technology companies like FarmlandFinder or AcreValue. However, throughout the research process, many times a seller may find dated or incorrect information that can be misleading. Keeping a constant eye on the market and having experience with many different sales is an advantage to any seller. There can be limitations to this practice as well. Since comparable sales are backward looking, they only tell you what people have recently paid. Further, this data is often delayed by months or longer.

Comps also do not tell what kind of annual cash return can be expected on a property. There may be a localized buyer who is driving prices up. Paying too much for any property can hurt the long term return, as can buying a “cheap” property with poor rental prices.

Avoiding value traps like this is imperative to making a good purchase. Knowing not only the local market but also the regional and national markets for land provide a material advantage.

Capitalization Rate

Capitalization Rate, also known as “cap rate,” is the expected rent as a percentage of the purchase price of the land (for example, $5 rent on land worth $100 equals a 5% capitalization rate). Most land investors will have a percentage range they hope to hit and will need to adjust either the rent or the purchase price accordingly. Like any equation, a cap rate can be misleading. For example, buying a farm for $1,000,000 per acre and receiving a $50,000 per acre rent will give a 5% cap rate, similar to buying a farm for $10,000 per acre and receiving $500 in rent. However, at $1,000,000 an acre, the buyer would be grossly overpaying based on inflated rents. A seller must have a thorough understanding of what is typical for both sides of the equation to value a farm. Average rent and farm prices can be found in many of the places that comps can be found. The helpful thing about cap rates is that many more sources may be used. Usually land of varying qualities sells for similar cap rates.

Of the two components of cap rates (rent paid and value of the land), true market rent is the more difficult to find. Government surveys will report an average rent paid, but they are dependent on those responding to the survey. There is little data to show the quality of responses and quality of farmer who responds.

For example, while unlikely, what if fifty percent of those who responded to the survey in a given county went out of business in the following year? In that scenario it would be likely that a large number of the respondents were paying too much in rent. Those who rent land themselves, those who rent their land to good farmers, those who sell land frequently, and those who lend to farmers will know the typical rent in a given area. They will likely know the typical farm price and be able to tell you a typical cap rate as well.

The limitations of cap rates can be linked to expectations as well. Many farm investors would love to have rent equal to twenty percent of the purchase price of their land, but this is virtually unheard of under normal circumstances. On the other side of the equation, many sellers would like it if their buyer expected one percent rent on their investment. Understanding a buyer’s motive and expectation for their return can help a buyer price their land.

Most often a seller aims for a buyer’s cap rate range rather than any particular number. The final price will then come down to negotiation and the buyer’s ability to set a rental rate that makes sense for both the buyer and the farmer.

Combining both methods

These two methods are often combined to find the price at which the property is listed. Comps help the seller find typical prices, and a buyer’s return expectations and rents in the area help back into what price could be paid. Most often these numbers are similar. When they are not, a seller must do more research to understand which number is incorrect and adjust one or both to align a price with what the market will pay.

Ultimately this process requires not only market knowledge of rents and prices but also of farmers and farm budgets. This way a seller can understand what a buyer will be able to expect of a tenant in the future. The only way for a property to continue to return rent and gain value in the long term is to have good farmers who are able to make money and take care of the farm. They are the ones who work the land and keep it productive.

To find out more about selling a farm or investing in land, feel free to contact us here. AcreTrader knows farmers, sellers, buyers, and farmland markets. It’s what we do.

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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.

How to Sell a Farm Part 1

AcreTrader

We at AcreTrader are borderline obsessed with farmland investing. Along with steady income from cash leases and rising land prices, there are countless other reasons to consider investing in farmland and holding it as a long term investment. Underlying this belief, however, is an important consideration: for every buyer there must be a seller. If farmland is such a great asset, why would someone ever sell it? Are buyers taking advantage of owners who should not be selling? No! There are many good reasons to sell land. Beyond circumstantial reasons, there are several financial incentives and structural benefits that lead people to sell farmland when the time is right for them.

Financial Reasons Owners Sell Farmland

The first and most obvious is the right price. There are times when a piece of land is just worth more to a buyer than it is to a seller. If this is the case, then why wouldn’t a landowner sell their asset? Sometimes a seller just wants to realize their gains in asset appreciation or trade land for cash to invest in another opportunity. A frequent circumstance also occurs when a landowner has found another investable property and wants to sell out of one piece of land to invest in another. Often farm owners are able to purchase land they have long sought, land in a more suitable location, or a larger piece of land into which they want to invest the equity they have built in a different property. They will then sell their original property and use the proceeds to fund the purchase of the next one.

Structural Reasons Owners Sell Farmland

Other reasons to sell land may be structural. For instance, there are times when land has been passed down through multiple generations and there are as many as 40 or 50 owners. A family this big may not be interested in personally handling the management of an asset for the return they get on it. Or one of those family members may want to buy the land from the rest. Problems arise when there are many owners without a defined plan for management. Often, it can be better to sell a property rather than trying to align ownership interests among a large group of people. Another structural issue occurs when a land owner buys a farm with several large tracts of land and a small satellite tract. The owner may want to keep the larger tracts but not want the smaller one. This situation provides a great opportunity for farmers in the area as well as strategic investors to gain a valuable asset while solving a problem for someone else. Specified holding periods can be another structural reason for land sale. When a farmland investment fund is formed, it has a limited timeline and must sell the land it owns in order to give money back to investors. In these cases, farmland funds may sell to a competitive fund, to friends in the industry, or even to the next in their series of funds.

Conclusion

AcreTrader works with landowners selling farmland for all kinds of reasons. We understand that transactions can be complicated, and we are unique in that we can allow for more flexible ownership structures. We also often find sellers with nonstandard property types that may fit our investors’ needs better than their own. Farmland investors are fortunate to be in an industry where all parties in a transaction have the opportunity to make money. With appropriate holding periods and a fair purchase price, land has performed very well over time. This allows AcreTrader and our investors to be great partners for people who know it is the right time to sell their land.

Why Do Owners Sell Farmland?

AcreTrader

The AcreTrader Relative Risk Score (ARRS) is a score we designed internally to judge the relative (not absolute!) risk of various offerings reviewed for listing on our site. While we share this score with our users regarding specific offerings, please note the ARRS is not to be relied upon as a single determinant of risk. Additionally, note the information below is not intended as investment advice. Please see disclosure of additional risks here.

What is Relative Risk?

Put simply, standard investment risk and return usually share a somewhat inverse correlation; the lower the risk of a given investment, the lower the expected return, and vice versa. Government bonds for example, are often seen as low risk, but they offer low returns. Inversely, speculating on currencies in developing countries or typical equity crowdfunding may offer high potential returns, but often come alongside high risks.

Agricultural farmland has historically shown what we view as impressive returns alongside relatively low risk (check out our white paper for more info). However, not all farm investing or general crowdfunding opportunities are created equal. Thus, we created 3 basic questions to help us determine our AcreTrader Relative Risk Score (ARRS):

  • Is there existing or planned debt on the subject investment property?
  • Are there necessary or planned improvements for the property?
  • Are there additional business risks (non-core to farming)?

Examples of the AcreTrader Relative Risk Score

Based on the simple yes or no answer to the above questions, we then describe the project's relative risk as one of four categories:

  • A Low ARRS means a "no" answer to all of the above questions. While these properties will typically have a lower IRR, this comes with a low risk relative to other properties we have reviewed.
    • An example might be an existing corn farm with no debt, no external businesses and no planned improvements.
  • A Moderate ARRS means a "yes" answer to one of the above questions. This type of farm may offer a slightly higher IRR.
    • An example of a moderate relative risk farm would be an existing farm where there is a planned investment in improving the grade of the land, but the project is funded with cash raised up front.
  • A High ARRS means a "yes" answer to two of the three questions.
    • An example might be the same farm above with planned investments, but the project is funded with debt in order to increase returns. While the IRR may be increased via debt (as opposed to using up-front cash from investors), the risk profile is potentially higher as well.
  • A Speculative ARRS means a "yes" answer to all three of the questions. These properties will typically offer the highest IRR but come with the highest risk relative to other properties.
    • An example might be a farm with an attached dairy operation, where debt is issued to improve the property and the dairy business output. Most of the real estate crowdfunding deals we see on the major crowdfunding sites would fall into this "Speculative" category given often high levels of leverage, complex organization, "value-add" necessity, and/or other potential business risks.

Conclusion

To summarize, there is no "one-size-fits-all" in investing, and this holds true with farmland as well. While many farms are lower relative risk, this comes with a lower potential IRR. We don't view agriculture and farmland as a get-rich-quick scheme, but rather as a conservative way to earn attractive risk-adjusted returns.


Note: The information above is not intended as investment advice. 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.

A Brief Explanation of the AcreTrader Relative Risk Score (ARRS)