Hot Market Makes Land-Buying Decisions Tough

March 19, 2012 09:30 AM
Hot Market Makes Land-Buying Decisions Tough

Use this checklist to help with your purchasing decisions

Decisions about whether to buy farmland are never easy ones, particularly in the present market, and have long-term ramifications. To assist farmers in making the decision, the American Bankers Association has developed the following checklist to guide producers through the process.

Access 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?
Create a pro-forma cash flow. Research sales trends and expected revenue of a potential plot of land. Does the potential meet your objectives?

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 purchases and revenue needed to justify your purchases and stay within those targets.

Give it careful thought. 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, presenting the offer.

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? Land is an illiquid asset and purchasing it will impact your farm’s liquidity. How will you cover other need purchases if you commit all of your cash? Does it make sense to preserve some cash and finance part of the land acquisition?

Are there any environmental problems? The last thing you want to buy into is a costly environmental problem. Paying for an onsite environmental audit before  you buy the land may well be worth the cost and will help ensure you are not buying into an expensive cleanup.

What does the land appraise for? Are there some comparable sales in the area? Appraisals are expensive, but they are the best way to establish values.

What is the soils story? What is the capability of the soil you are buying and how does this impact your revenue forecast?

How is the property zoned? Will your plans for the property conflict with existing zoning restrictions?

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