If you’re in the market to expand your farm footprint, you may feel overwhelmed with the land purchase process. With the right people involved and a clear vision, you can expand your operation with confidence. It all starts with good planning. Here are five tips for a successful land purchase.
Consult with the right people
There are plenty of experts who should be involved to make your land purchase go smoothly. If you’re running your farm with others, you’ll definitely need buy-in from your partners before a land purchase can happen. From there, you should talk to your lender. At Farm Credit we specialize in agricultural lending, so we understand your unique challenges and can work through them with you to meet your business goals. For instance, we have an internal appraisal team of experts who can provide insight into what real estate is selling for in your area. Additionally, our financial officers can run breakeven analyses, so you’ll know what revenue the purchased land will need to provide to pay for itself or what the rest of your farming operation will need to produce to help pay for your purchase.
When it comes time to make the purchase, a realtor or auctioneer can help negotiate contract terms. Once the contract is agreed upon, an attorney will work with your lender to help get the deed transferred and assimilate the rest of the legal paperwork. Understanding the tax implications of a land purchase can be tricky, so consulting with your accountant can help set expectations.
Ask the tough questions
Before you start the land purchase negotiation process, visit with your lender to understand your financial situation and the implications the land purchase will have on your business. Consider the following questions before you sign any paperwork.
- How does this land purchase fit in with your current operation?
- What are the impacts to cash flow if this land purchase is made?
- What are the local sales comparisons for similar land purchases?
- What loan options are available and how do the loan terms differ?
- What is the best loan option to help mitigate financial risk?
- What impact will this land purchase have on your buying ability in the future?
These are just a few questions that you should ask yourself and your lender to better understand the financial consequences of a farmland purchase. In addition, plan to get pre-approved for funding so that you know your maximum purchase price before entering into any agreements.
Be prepared for challenges
Land purchases come with challenges, but your local lending team can help overcome them. One of the biggest challenges for farmers looking to expand is finding good ground and negotiating the purchase price. Farm Credit can help connect you with an attorney or realtor to help with those agreements.
Another challenge farmers face is repayment of the loan after the purchase is made. To avoid trouble down the road, Farm Credit can offer advice based on your current financial position. We can run “what if” scenarios to show you how your financial position would look with the additional land purchase. You’ll be able to see the impact of the purchase and understand your cash flow needs before any money changes hands.
Avoid common mistakes
Too often, anxious producers looking to purchase land rush to calculate the gross income it could provide without considering the breakeven cost. With tighter margins and lower commodity prices, you really need to understand what the purchase means relative to current market conditions. It’s also helpful to know what you may be giving up today to make that purchase and if it fits with your long-term business plan.
Another common mistake farmers make is getting a handshake agreement instead of something in writing. Land purchases are complex, so documenting the details can alleviate any confusion or misinterpretation of terms down the road.
Look beyond today
Planning for a farmland purchase begins long before the transaction takes place. When you’re developing long-term business goals, keep expansion in mind. Ask yourself what you can do today to meet your future business goals. In today’s market, every dollar counts. If you can find ways to cut costs and optimize processes while still maintaining production goals, you’ll be in a better position to finance land when you’re ready to grow.
If you’re working on a succession plan and are hoping to retire in the coming years, Farm Credit has special resources to help ensure a smooth transition. Our Growing Forward® program supports young and beginning farmers with specialized loans to help them get established. It also provides educational resources to empower new farmers to be more successful as they begin their careers in production agriculture.
Expanding your operation is an exciting step and one that will impact your business for years to come. Take the time to ask the right questions and consult with Farm Credit so you can reap the benefits of a smooth land purchase transaction.
