What is in this article?:
- Whether using cash or borrowing money, buying farmland should include a well-researched financial plan.
The increase in crop and livestock prices have generated significant profits for many farmers, which some are using to buy additional land. Growing demand has driven land values to record highs in many areas. Whether farmers are using cash or borrowing money, buying land should include a well-researched financial plan.
“Farmers should consult their banker throughout the land buying process, to ensure decisions made today best position them to prosper and obtain credit in the future,” said John Blanchfield, senior vice president of agricultural and rural banking at ABA. “When it comes to buying land, you cannot spend too much time researching all of the contingencies.”
Given current market conditions, ABA’s Agricultural and Rural Bankers Committee, made up of leading agricultural bankers in the country, has developed the following recommendations for buying farmland:
1. 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. Are there other opportunities that can provide a better return?
2. Have you created 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.
3. 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.
4. 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. 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.
5. 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. What will be your total land payment per tillable acre owned and how does this compare to cash rents in your area?