Farmland Investment

ANDERSON LAND COMPANY HISTORY IN THE MAKING

IS IT TIME TO OWN A FARM?

The age old question is real estate: " Is the price of this farm too high?"

The answer is simple.... If buying, ALWAYS

If selling, NEVER

But let's look at it a little more closely. Usually, only one person is willing to pay this much for a farm but many are willing not to pay that much, so does majority rule, making the price too high? Or is it too high for some but not all? Is the sale price, where the Buyer and Seller both agree then, the right price (value)? Is it fair to relate previous farm prices to today's price? I challenge you to find me a person who bought a farm thinking they were under paying for it the day the deal was done.

Three rules usually dictate buying a farm:

First, it must be for sale. Obviously, you cannot buy the White House, it is just not for sale, although there are some whom seem to be trying.

Second, you must have the money or access to the money. This becomes a little more complicated. Few buyers have enough cash to do a purchase, so if borrowing is necessary, someone else has to want you to do the deal.

Third, and most important, you must WANT to do the deal. Even if you have all the cash, do you want to exchange that for the land? And if you need to borrow some of the payment, what terms are you exposing yourself and your family to acquire this land.

The first two of these conditions are important and you need give them time for thought. However, I am not going to spend time on the first two conditions now, but instead focus on number three..

Why do you want to own a farm? An old story about a man who kept saying he wished he could own a farm was asked WHY, he said so I could SELL it. This is the reason why he will never own one, at least not own one for long!!!

Second, the old wives' tale, the Buyer will wait to buy a farm only when it cash flows. That is even harder to happen. Why? Well, cash flow is not an exact science. Even if there is a price that actually does cash flow, if it will, then it will for everyone. Hence, this then will always allow someone else, maybe unjustified, to continue raising his offer beyond cash flow level. Also, if at a certain price, cash flow is attained, then why does the seller want to give up the investment at that level and why won't EVERYONE buy those investments and just sit back and let it pay for itself?

All buyers need to study the motivations for most sellers. Clearly, every situation has various factors but generally, the sellers believe they can use the value of their land investment better than its cash flow and the buyers believe the land is a better use of their resources against their own cash flow situation.

Now, for some hard numbers. My dad bought a farm in 1968 for $700 per acre, borrowing most of the money at 7% interest. (Yes, I know, I did ask why he didn't he buy all the farms in the township or county, so I could inherit them, but read on). That farm was yielding 90 to 120 bushels of corn to the acre with average elevator price $.90 to $1.20 per bushel. Using averages of 100 bushels times $1.00 = gross acre income of $100.00. Cost of growing that acre of corn, i.e. seed, fertilizer, chemicals, excluding machinery and his time would have been $40.00, interest of $49.00, taxes &8.00, principle payment $35.00 and miscellaneous expenses $10.00 leaving him negative $42.00/acre. Losing $42.00 and acre on a $700 investment. This turns out to be a negative 6% cash flow investment. Let's compare this number to today. One buys a comparable farm for $10,000 per acre borrowing at 4%. Yield is 200 bushels and average corn price $4.00 = $800 gross income, expenses to raise crop near $400, interest $400, taxes $20, principal payment $500, and $80 miscellaneous expense leaving me negative $600/acre. Losing $600 an acre on a $10,000 investment is that magical 6% negative cash flow. Now you can tweak any of the numbers to your heart's desire but I challenge you to find a farm sale any time since World War II and averages will be the same. (The only exception might be the early 1980's when interest skyrocketed before land prices adjusted which might prove why so many farms and farmers went into bankruptcy).

It should be noted the buyers of these two farms did not receive any compensation for wearing out their machinery, their back or making a living, all that was done just to OWN the land. I contend that my Negative 6% cash flow factor is a fairly good constant when evaluating value.

Again, buy when it is for sale, when you have access to the money and the desire to do it and you will become the proud owner of a farm!

Future topics:

How much do you need down to make a farm purchase work?

When is the wrong time to buy a farm?

When (why) should you sell a farm?

How do you decide when to sell your crop?

What does the government have to do with all this?

How good were the good old days?

What is leverage?

Is it really greener on the other side of the fence?

Please email more topics that you would like me or my associates to spout out our 3 cents worth on (inflation even affects hot air).

Thank You,