Tuesday, 13 February 2018

5 Things To Know Before Buying a Farm Land

A farm is an area of land that is devoted primarily to agricultural processes with the primary objective of producing food and other crops; it is the basic facility in food production.[1] The name is used for specialised units such as arable farms, vegetable farms, fruit farms, dairy, pig and poultry farms, and land used for the production of natural fibres, biofuel and other commodities. It includes ranches, feedlots, orchards, plantations and estates, smallholdings and hobby farms, and includes the farmhouse and agricultural buildings as well as the land.
Questions to Consider before Buying Farmland
1. Have you created a pro-forma cash flow? Research the sales trends and expected revenue of a potential plot of land to determine if the purchase fits your plan. Does the potential return meet your objectives? Talk to your banker.
2. Given your revenue forecast, are you overpaying? If you’re paying a premium land price, how long until you recoup your investment? After determining how much you can prudently spend, and the revenue needed to justify your purchase, be sure to stay within those targets
3. Have you given it long and careful consideration? 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.
4. Does it make more financial sense to lease the land than own it? Leasing rates have risen recently but leasing vs. purchasing frees up cash. What will you total land payment per cultivated acre-owned be and how does this compare to lease rates in your area? However, it is often difficult to lease land for an extended term and many landlords prefer the flexibility of shorter term 3 to 5 year leases. Even with renewal options added to a lease, many of the renewal provisions amount to a non-binding agreement to try to agree unless the rental payable during the renewal term is specified or clearly calculable. As a result, you can face some uncertainty and risk if you are equipped to farm a set number of acres, but lose 20% or more of the acres if leases are not renewed.
5. Should you go all in with your cash? Talk to your banker or accountant about alternatives to using all cash in the purchase transaction. Land is an illiquid asset and using all your cash will impact your farm’s liquidity and possibly its ability to meet all of your commitments as they come due. Look at the loan amortization length, and resulting loan payments to see if the payments meet your cash flow and your ownership goals. A longer loan amortization with a prepayment privilege may provide less stress on cash flow should crop margins tighten.

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