By John Blanchfield and the American Bankers Association’s Agricultural and Rural Bankers Committee
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.
The American Bankers Association’s Agricultural and Rural Bankers Committee, which is comprised of leading agricultural bankers in the country, has developed these recommendations for buying farmland.
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.
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?