Tip sheet to help decide on buying farmland
Advising farmers about buying additional farmland has been simplified by the American Bankers Association (ABA) Agricultural and Rural Bankers Committee. A “tip sheet” developed to help producers look at the “financial complexity of acquiring farmland” is being distributed by the ABA.
The tip sheet and a short video on the ABA Web site are focused at farmers but also provides good information for an absentee landowner, farmer, real estate agent or farm manager to generate a discussion.
ABA explained, “Much of the current farmland price boom is being driven by the producers’ profits, not by excessive borrowing.” Just because a farmer might have the money and doesn’t need to borrow much or any, the ABA explained, producers need to do “due diligence and financial planning” before any land purchase. The tip sheet provides guidance on both financial planning and land research, ABA has noted.
To see the tip sheet in ABA layout click here. The full information in the tip sheet is below.
A Hot Real Estate Market Makes Farmland Buying Decisions Harder
Rising crop and livestock prices have generated significant profits for many farmers, which some are using to buy additional land. The increased demand has driven land values to record highs in some areas.
Given these market conditions, the American Bankers Association’s Agricultural and Rural Bankers Committee, comprised of leading agricultural bankers in the country, has developed these recommendations for buying farmland and reminds farmers to consult with their banker throughout the process, to ensure decisions you make today best position you to prosper and obtain the credit you may need in the future.
Land Purchases Require Financial Planning and Due Diligence on Your Part
In this respect, there is no difference between paying cash or borrowing the money.
Buying land should include a well-researched financial plan. Establish a basis for purchasing additional land and stick to the plan. There are once-in-a-lifetime purchases that have an emotional connection for the buyer: land that may adjoin the home farm or once was part of the family farm. These purchases may take precedence over business decisions, but the majority of farm land purchases should meet cold, hard business tests.
Assess your business’s financial condition. Consider needed investments, expected expenditures, and crop conditions to determine if buying land is the best use for your cash. Is there a more effective way to deploy your cash or are there other opportunities that can provide a better return?
Create a pro-forma cash flow. Research sales trends and expected revenue of a potential plot of land to determine how well the purchase fits within your plan. Does the potential return meet your objectives? Your banker can help you develop this essential planning tool.
Given your revenue forecast, are you overpaying? If you are paying a premium, how long will it take you to recoup? Determine how much your business should prudently spend on a land purchase and the revenue needed to justify your purchase and stay within those targets.
Give it thought. Never be rushed by a broker and never confide your best price or financial goals with a party working for the seller. Don’t buy impulsively or make a deal before visiting the property numerous times. Rework the standard broker’s purchase contract with your lawyer, deleting what you don’t like and adding what you want, before presenting the offer.
Does it make more financial sense to rent the land rather than owning it? Rental rates are high, but renting frees your cash for other activities.
Should you go all in with your cash? Talk to your banker about alternatives to using all cash in the transaction. Land is an illiquid asset and purchasing it will impact your farm’s liquidity. How will you cover other needed purchases if you commit all of your cash? Does it make sense to preserve some cash and finance part of the land acquisition? Your banker can work with you to structure a loan that will enable you to acquire the land you need while preserving some of your working capital for necessary expenditures.
Land Purchases Require Research
Know as much as you can so you know what you are getting into.