Despite the fact that millions of acres of farm and ranch land change hands every year, resources to guide sellers through the process are scarce.
Your average real estate agent probably doesn’t have the specialized knowledge to structure a farm sale. And while wealth managers, trust companies, and lawyers can help, if you haven’t worked with them in the past, you might not know where to start.
The expertise of a land brokerage and a trustworthy agent (like those at AcrePro) can make the difference between a good and bad experience, but you can educate yourself too!
Here are the primary factors you should consider when initiating a transaction to sell land:
- Land characteristics
- Financial and structural characteristics
“What did my family or I pay for this land? How long ago was it bought? How much will someone pay me for my best property? I heard land in (some place) was selling for (some price).”
We’ve heard all these questions and many more, but they can often muddy the waters as you work towards an asking price.
Generally speaking, the best price is the one where the transaction closes in a reasonable time frame under your desired terms. And that will depend on multiple factors. Buyers and sellers value farmland using two primary metrics:
- Farm income is a key aspect of productive farmland and helps the buyer determine what kind of return they’re going to get on their investment in the land. Income depends on many factors like historical yields, soil quality, water availability, and, for leased farmland, cash rental rates.
If the farm was purchased as a land investment, you may need to use farm income to extrapolate the capitalization rate, a metric used by investors to represent profitability.
- Comparable sales are transactions of similar land that have occurred recently in the same region. They’re not always easy to find, but they can provide great insight into current market conditions.
Most buyers look at both and derive a price by reconciling the two methods. Sellers who match their land purchase price with the market will have the best chance of finding a buyer.
Farm Sale Terms
Of all the elements of a transaction, terms are likely the most underappreciated. You may have heard the saying, “your price, my terms.” It captures the “give a litte, get a little” quality of negotiation in most transactions.
Terms (also known as contingencies) can address any detail from the close date to who pays the transaction costs. In farm and ranch sales, we commonly see terms that protect the needs of the seller, such as:
- sale leaseback agreements
- life leases for homes on a property
- carve outs for portions of a property on which there are buildings (e.g. a farm office)
- hunting rights
- mineral rights
- right of first offer on resale
While the purchase price is always a primary consideration, you might have other needs or concerns, and they could affect the ultimate value of the transaction. Your land agent can help you advocate for these during the drafting and negotiation of the contract for sale.
Special Situations in a Farm Sale
Sometimes you have special situations that go above and beyond terms, and these will need to be addressed long before you reach the stage of drafting a purchase agreement. Some situations we have seen include:
- 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
- a property either in or soon to be in foreclosure
- questionable water rights or availability
Every property, seller, and buyer is different. There’s no reason a unique situation should keep you from achieving a sale, but upfront information and communication are critical.
Sellers should know the details of their property to understand how it compares to other sales in their region, as well as to understand who might want to buy it. Some key characteristics include:
- property size
- tillable versus non-tillable acres
- field slope
- irrigation and water availability
- drainage tile
- distribution of different tracts over an area
- soil quality
- crop yield history
- buildings and other assets on a property
All of these not only inform the property’s sale price, but also may make a property more or less attractive for a given buyer. For instance, farms of a smaller size may get the best price from a neighbor, while farms over 1,000 acres are often bought by land funds. (We at AcrePro can help navigate all transaction sizes.)
Understanding the mix of buyers in your land market can help you determine the best way to sell your farm.
For example, a property in an area where auctions are common and price is well defined may be easier to sell through a local listing. On the other hand, a farm in an area where there are few buyers locally and corporate buyers are the norm might require the professional network of a brokerage.
Leases are very common in the world of farmland, and they can serve as an asset for some and a liability for others. It’s important to understand the expectations of all parties involved in a land transaction: seller, buyer, and tenant.
Sometimes, farm buyers are farmers themselves and would prefer to take over farming the land.
Others may be purchasing farmland as an investment. These buyers may be able to be more flexible with sellers and tenants. Many buyers would welcome a built-in tenant who already knows the property and will offer a friction-free transition, and so might be open to honoring a lease.
Long Term Farm Leases
For land investors, longer-term leases require less effort on their part to find a farmer year after year. From a tenant farmer’s perspective, a long term lease is desirable because it facilitates long term decisions based on having a certain amount of property to farm and thus generate income. However, an experienced agent may warn land sellers that long term leases without rent increases built in can hurt a seller since rent may not keep up with commodity prices or inflation.
Financial and Structural Characteristics in a Farm Sale
Let’s say one sibling wants to sell but three others don’t. That sibling will have a difficult time selling an undivided interest in a property. Outstanding liens, disputed titles, disputed property lines—complexities like this crop up in farmland transactions all the time.
They don’t have to be barriers to a successful sale. An experienced land agent can help you plan for the financial and legal implications of selling a property.
Documents Needed to Sell Farm Land
Clearly, there’s a lot of information that plays into a land sale, and there are myriad farm documents that you’ll probably need to provide a buyer, not to mention use to hone in on your asking price.
Common documents needed to sell land by an owner include:
- descriptive information (i.e. physical description, ownership structure, leasing history, etc.)
- farm maps
- comparable sales
- Farm Service Agency documents
- crop insurance records
- crop yield records/verification
- recent soil tests or maps
- irrigation, well, and water management information
- government program enrollment
Your land agent can help you gather many of these. Other resources include government offices, current and past tenants, and title companies who have dealt with the property in the past.
Not all of these documents and data are required to make a sale, but the more information you and your agent can compile upfront, the easier it will be to value and ultimately sell the land.
Selling your farm is a big decision, but it can bring material cash, flexibility, and freedom. A solid understanding of all the factors of the sale will enable you to achieve the best outcome for you, your family, and your buyer.
If you’re thinking about selling your farm, get in touch with an AcrePro agent today for personalized and hassle-free assistance through the entire process.
Please note: this article is meant to be a topical overview and, as such, does not include specific financial, legal or professional recommendations or advice. Every situation is unique, and you should consult with a licensed attorney, accountant, and/or financial advisor prior to entering any written contract or verbal agreement.