15 Questions to Ask Before Purchasing Farmland
July 16, 2019
When purchasing farmland, there are a lot of things to think about. Financial ramifications must be considered and pitfalls must be avoided. This can be a stressful and emotional time, which is why it’s so important to think rationally and act prudently. Here are 15 key questions to ask during the planning and buying process:
- What is 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.
- Have you created a pro-forma cash flow?
Research sales trends and expected revenue of a potential plot of land to assess whether the potential return will meet your objectives.
- Given your revenue forecast, are you overpaying?
If you are paying a premium, how long will it take you to recoup?
- Have you thought long and hard about it?
Never be rushed by a broker, and never confide your best price or financial goals with a party working for the seller.
- 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 much land are you acquiring?
Sounds simple, but many times there is confusion about how much land is actually being purchased. Know exactly what you’re getting before making a bid. See if the land has been surveyed, make sure that there are no special easements tied to the land and, if there are, make sure you spend time studying them and understanding them completely.
- What does the land appraise for?
Appraisals are the best way to establish value. Even if you do not get a full appraisal, attempt to find some comparable sales to determine if the purchase price is reasonable.
- What is the soil’s story?
Good soil is paramount. Know the type of soil you’re buying and the history of annual crop rotation.
- What is the water source?
Is the property irrigated? Do the water rights convey with the property? Adequate water is essential to establishing the value of the property.
- What do you know about the gas, mineral and wind rights for the property?
Do these rights convey to you as the purchaser? Have a thorough knowledge of property rights, as mining and drilling can have an impact on surface and water quality, access to the property and the viability of the farm or ranch.
- How is the property zoned?
Make sure that you understand the assured leases that may go with the property. Many of the states in the west have a large percentage of their ground that falls into this category (bureau of land management, forest service, state land, national grassland).
- How will you hold deed in the property?
Will you own it individually, jointly with a spouse, in a family-owned entity or in a trust? The pros and cons of how you own the land will depend on your long term goals.
- Are there any environmental problems?
Paying for an onsite environmental audit before you buy the land will help ensure you are not buying into an expensive cleanup.
- Have you considered your age and health?
The debt you may be able to service from production profits may not match the debt service capability of leasehold income. Make sure your financial plan addresses your ability to service any potential post-retirement debt.
ENB is here to help you figure out a strategy to maximize the profitability of your land acquisition. Contact an Agricultural Banking Relationship Manager at (717) 738-5473 or email us here to get started.
© 2019 American Bankers Association. Reprinted with Permission. All Rights Reserved.