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How to Sell Your Farmland
With another year of low commodity prices, there is more pressure on farmers to sell land to recapitalize their balance sheets. If you find yourself in this position, you aren’t alone. Unfortunately, in this situation, the options for bringing land to the market aren’t ideal.
For high-quality farms, a public auction has been a great way to get maximum exposure and prices for land. However, for farmers looking to recapitalize their balance sheets, a public auction isn’t exactly the message they want to send to the community. It could signal tough financial times.
At my land brokerage firm, Peoples Company, we regularly field calls from farmers and, in many cases, their bankers, about selling land. Our first question is always, “Do you want to lease it back?” If you want to lease it back, you eliminate a significant portion of the buyer pool, as farmers represent about 75% of all farmland transactions. More importantly, farmers are often more aggressive buyers in terms of price.
what investors want
Often, investors are looking for large, contiguous tracts with significant scale. Investors are not emotional and don’t have to buy the piece next door. They aren’t driving by the showplace farm their entire lives on the way to the co-op knowing they will do whatever it takes to buy that piece if it comes to the market. Investors typically are focused solely on the financial returns of the investment. Therefore, they are naturally more conservative than the farmer-buyer, who may look at a potential transaction as a once-in-a-lifetime opportunity.
It’s important to know what type of investor you are targeting. A public REIT (real estate investment trust), family office (family-controlled investment group), institutional investor, or land fund all bring different things to the table. Depending on where you are located, laws may not allow for corporate ownership of land. If this is the case, private investors may be ideal. Understanding the investors’ structure and their long-term goals are important to knowing with whom you want to partner.
If you want to position a farm to investor-buyers, you are likely looking for a leaseback provision and, in some cases, a buyback provision as part of your sale agreement. It’s important to remember that it’s tough to get all you want in this type of negotiation. Recognizing that investors have the ability to look at land anywhere in the country is critically important.
You aren’t in the same negotiating position selling to investors as you are selling to the neighboring farmer. It’s wise to help investors structure the deal so it works for both parties. This often means you need the purchase price and rent to meet their return thresholds. If you want to include things like a buyback provision, you also need to give the investors some upside for including that provision.
In an ideal world, we would only sell farms to other farmers and we wouldn’t need investors. The current environment may make investors a key component to keeping your farm moving forward, and they can make great long-term partners as you expand your acres and operation.
While a few investors make uninformed buying decisions, most are shrewd and sophisticated. They want to put together a fair arrangement with the farm operator. Being incredibly transparent is the key. Investors generally want a sustainable cash rent figure and can quickly see through inflated rents.
Negotiating these deals can be tough. Attempt to understand investors’ point of view. If you can agree on a fair rent number that can meet their return thresholds, you can usually put a deal together. This often translates into a lower sales price than the public auction might bring. Ultimately, the question becomes, “Do I want to maximize price or do I want to continue to rent the land back?”
about the author
Steve Bruere is the president of Peoples Company, an Iowa-based land brokerage with a diversified offering of land management, land appraisal, and land investing services in 20 states.