How to Sell a Farm: Farmland Value
If you’re considering selling a piece of farmland, you’re probably thinking about price. It’s usually the first thing people consider when selling any kind of property or investment, and rightly so. Pricing too low means you lose money on the sale, while pricing too high can prevent your farm from selling.
While many unique factors can play a role in a given farm’s value, agricultural land is generally valued in two primary ways: comparable sales and farm income. This guide will look at how these impact a farm’s price and explains how you can use them to establish a starting value for their property.
Keep in mind that valuing a farm is a nuanced process. It’s a good idea to consult a professional for a more accurate valuation of your property.
Comparable sales, also known as "comps," are used across the real estate industry to establish a property value.
Farmland is no different, but it can be harder to find relevant comps than for, say, residential real estate. It doesn’t change hands as often, the land market is more opaque, and even nearby properties can be vastly different when it comes to factors that affect price.
That just means you’ll have to dig a little deeper to make smart comparisons. For instance, you can use nearby sales and adjust their prices based on estimated values of their different qualities.
Let’s say a non-irrigated property just down the road sold for $3,500 per acre last year. Your farm is of very similar quality, except that it’s irrigated.
If the value of that irrigation were estimated at $500 per acre, you might take the value of the non-irrigated comp and add $500 to the per acre price ($3,500+$500=$4,000). So you might list your property at an asking price of $4,000 per acre.
Points of Land Comparison
A strong valuation will consider many different farm qualities to adjust comparable sales. These might include:
- Tillable acres
- Soil types
- Outbuildings and other structures
- Road access
- Concentration of potential tenants in an area
- Availability of delivery points for the harvested crop
Of course, the best comps are those very close in quality to the land being sold. Some properties will be so different that you can eliminate them from consideration, and others will have differences that shed meaningful light on your starting price.
Use a Variety of Comps
You’ll definitely want to look at multiple comps for a full picture of land prices in a given area. That’s because any single property might have factors at play beyond the intrinsic qualities of the land.
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. A large family farming operation might meaningfully overpay for a long sought-after neighboring parcel.
Usually, five to ten comparable sales can give you a good idea of your property’s local market value. As with any research, the more data points you have, the clearer your understanding of the situation. Industry tools like Acres, which helps you find and value land, is a good place to start.
How to Find Farmland Comps
Some of the most common sources of comps and regional land prices are:
- Land managers
- Government websites
- Other farmers
- Online maps and tools
You have to be careful to weed out incorrect or dated information. The more familiar you are with your market, and the more sales you see, the better your eye will be for what matters.
That’s why many sellers choose to work with an experienced land brokerage, like AcrePro. A professional land specialist sees many sales per year and has an awareness of not only the local land market, but also regional and national markets.
Further, an agent or broker can supplement comps with in-depth research and financial modeling, giving you confidence that your asking price is reasonable and attainable.
Limitations of Comps
Finally, comps can only tell you so much. For one, they’re backward looking; they only tell you what people have paid in the past. Further, this data is often delayed by months or longer.
They also leave out what kind of annual income can be expected from a property, which is a major consideration for farmland buyers. The next section covers this factor in more depth.
Farmland’s ability to produce income makes it a unique type of real estate. If you’re selling farmland, historical income is a key part of farmland valuation and will play a major role in where you start your price negotiations.
Farm income is generally calculated as an annual amount. If you’ve been working the farm yourself, you’ll have a good idea of how much crop yield your property is able to produce.
Regardless, it’s a good idea to compile historical data in order to look at the bigger picture since the dollar amount a yield brings in every year fluctuates.
When looking at historical data, consistency can be an important indicator of future success for a buyer. In most cases, consistency is based upon how much crop a field can grow, how consistent the yields of that crop are, and how much of and how easily that crop can be sold in the local area.
Consistent income for a farm can be judged by historical performance, the physical qualities of a farm, and the quality of the farmer on the farm.
How Buyers Can Determine Farm Income
Below, we have included a few questions buyers may ask to estimate potential income.
- Production History: What are the yields from the last 5 years on this farm? Would this justify higher rent?
- Soil Quality: What kind of yields can be grown on soil of this type? How do other farms with this soil type in the area perform? Productivity Index
- Field Quality: Is the field shape rectangular or irregular? How many different types of soils does it have? Is it flat or hilly?
- Water Quality: Are there water rights issues? How much water does the well pump? Will there be a lack of water in this location in the future? Are there salinity issues?
- Tenant Quality: How many tenants are in the area? Are they producing yields above the state average or below? Are they willing and able to pay good rents?
- Commodity Distribution: How easy is it to get crops to market? How many options are there for farmers to deliver grain?
- Alternative Income Sources: What potential income streams does it provide? For example, are there wind turbines, grain bins, or building sites?
While comp sales and farm income are important aspects of farm valuation, many extrinsic factors impact the price of a farm too. From politics and climate to supply chain and commodity prices, the world outside of your farm is constantly changing and influencing the price of land.
Year over a year, a lot can shift in or out of your favor when it comes to the value of your land. Before you sell, consider macroeconomic factors in relation to your farmland and remember: timing matters.
Comparable sales and farm income are often evaluated together to determine farmland value. Ultimately, this process requires not only market knowledge of rents and prices but also of farmers and farm budgets.
Most often these numbers are similar. When they are not, you’ll need to do more research to understand which number is incorrect and adjust one or both to align a price with what the market will pay.
Here are a few points to remember:
- While comps can help you identify typical prices in your area, taking the time to determine your farm’s income will help you understand the return for a buyer.
- Take into account nuances, like soil quality or irrigation, when considering comps. Even neighboring properties can have significant differences that influence price.
- Even if you have been working your farm for years, ask questions about your local market to understand the potential income a buyer could earn from your property.
- There are extrinsic factors that affect farmland values, and timing matters when it comes to selling.
- While it’s a good idea to do your own research, working with a professional can help you determine a fair market price more accurately.
To find out more about selling a farm, reach out to an AcrePro Land Expert or continue reading to part 3, where we discuss various deal terms to consider when selling your farm.