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Summary of Roundtable:
Join leading financial coaches discuss how to build and pressure test your capital plan ahead of key land deals this year, so you are prepared for any deal that comes across your desk.
Drawing from real client examples, our experts will talk through how farmers can: – Establish tactical growth goals – Determine what deals their balance sheet can support while protecting their cash position – Qualify land deals and know when to chase them
I look forward to joining you there!
NE Current Events
La Nina may not form until later than expected, which could help moisture in the July and August months:
SW Financial Literacy
30 Days for Land Auction Prep
You see a flyer for farm ground selling via public auction in 30 days. You might have an interest in buying one of these tracts, so what do you do next?
In my first 4 years of farming, I bought farm ground once through public auction and a second time from private bidding through a realtor listing. In addition to my own purchases, I have helped finance dozens of real estate transactions as a lender. Here are the steps my borrowers and I have taken to prepare:
Author’s note: I have broken these tasks down into weekly sections and daily to-do’s to help you prioritize. It is encouraged that you read through all tasks up front, as you may need to complete them in a different order based on your circumstances. This list is not meant to be all inclusive but give you a good head start!
Week 1: Familiarize Yourself with Property
Day 1: If possible, attend a different auction from this auction company before your sale. Get a feel for how they go about the event, how many breaks they take, how they take bids, and how they prefer to communicate. Introduce yourself in person to start building a relationship with them.
Day 2: Review all auction resources available to you online or through the realtor. View soil maps on the property and compare to properties you already farm to get yield estimates.
Day 3: Visit the property. Check for areas of poor quality and where improvements need to be made.
Day 4: View the property via Google Maps. You can often view several different years, look at as many images as possible to identify locations of possible yield drag.
Day 5: Call the realtor heading up the sale to discuss the property and ask for any oddities with the ground or listing. Ask them for their honest opinion of the property, how productive they think it can be, and how much interest there has been. Ask if there will be anything different or unique about this auction. Find out why the ground is being sold. Is this an absolute auction? Do not share how much you are considering bidding.
Day 6: Find comparable sales by talking with other realtors, other real estate companies’ websites, through the county courthouse, and by discussing with local appraisers. This helps establish your possible purchase price and how much you probably need to bid to be in contention. Compare these properties to the ground you are interest in.
Day 7: Evaluate what you have learned this week. Can you start to establish a starting bid price? How has what you learned impacted your interest in the property? Has it raised additional concerns that need investigated further?
Week 2: Financing
Day 8: Update your balance sheet to know exactly where your working capital and debt positions are today.
Day 9: Create balance sheet scenarios Balance Sheet + Scenarios – Farm640 (password is ‘farm’) to start determining possible down payment vs finance combinations that work for your operation. If you have an interest in multiple tracts, repeat for each property or land combinations.
Day 10: Update cash flow Farm Cash Flow (farm640.com) (password is ‘cashflow’) to include new income/expenses that would be generated from the farm for your next growing season. Be sure to include new debt payments coming from your balance sheet scenario.
Day 11: Explore FSA financing options and check on eligibility. Have a clear understanding of their programs and timelines. I.E. If you are looking to finance through an FSA joint financing program, you most likely WON’T be able to win this auction and sign the paperwork. Someone else will need to bid on the ground, sign the purchase agreement, provide the down payment, and arrange for their own financing first. For more on this, see previous FSA article FAQ FSA Joint Financing – Farm640.
Day 12: Get pre-approved through your primary lender. They will most likely be needing 3 years of balance sheets, 3 years of tax returns, and a cash flow projection including this ground if you were to get it bought. Make sure you are both on the same page as a plan for the down payment and the terms you could be financed for.
Day 13: Discuss with a secondary lender to get competing rate quote and debt terms.
Day 14: Evaluate what you have learned this week. Do you realistically have the financial position to make a competitive offer? How has what you learned impacted your interest in the property? How has what you learned about your financials this week impacted what you can offer? Has it raised additional concerns that need investigated further?
Week 3: Due Diligence
Day 15: Contact your attorney to read through the listing, checking for any easements, mineral rights, old wells, or other odd language within the listing that may impact you financially and need addressed. Make sure you have clear access to the property if bought. If there are energy/pipeline leases or contracts signed on the ground, have your attorney review. Know the income potential, risks, and your rights to access.
Day 16: Ask the tough questions to yourself. How long will this purchase hamstring your operation? What other goals do I have in mind for the operation over the next 1-10 years? What equipment and farm updates will need to wait because of this down payment and extra loan payments?
Day 17: Who needs to own the ground? Do you have an estate plan in place that will be impacted? Is there a land holding entity that should take ownership? What is going to be the best structure for buying land going forward? Double check options with your attorney and accountant.
Day 18: Alternative forms of purchasing. Would a 1031 exchange be a better fit for my operation or financially? Consider partners. Is there anyone willing to partner on the ground? Maybe the property selling is 120a and you know the neighbor wants 80 of those acres. Could you team up and still acquire 40a through partnership without running up the sale price? Think outside of the box for what is the best fit for you financially.
Day 19: Contact your CPA. What improvements are included in the sale? Could write-offs be available by purchasing the improvements on the ground? If there are improvements included, how will those impact my taxes? How can you improve the ground to force appreciation or generate additional income?
Day 20: Contact your local Natural Resource District (NRD) to verify there aren’t concerns regarding water and water rights. See if the property is in a wetland which restricts how it can be used. If you would have an interest in getting water rights for the property, start learning about the timing of how this process works. This could be time sensitive after you get the ground bought.
Day 21: Evaluate what you have learned this week. Who do you need to contact to find clarity in what you have learned? How has what you learned impacted your interest in the property? How has what you learned impacted how much you should offer for the property? Has it raised additional concerns that need investigated further?
Week 4: Final Checks
Day 22: Discuss with other decision makers within your operation. Do you have ability to add ground or are there plans other members had in mind with growing the operation that hasn’t been vocalized? This includes your spouse!
Day 23: If you are on good terms with the owner or current tenant, you can try discussing the quirks of the ground and get previous yield data to help with decision making. Same goes for neighbors, just be careful as these individuals could also be your competition and you don’t want to sour existing relationships.
Day 24: Check with your local City Clerk to make sure there aren’t any restrictions on this property. There could be city ordinances, water restrictions, or other items in place.
Day 25: Understand what down payment will be needed immediately at the auction for the winning bidder. Arrange to have this completed with your lender. Understand details of the closing timeline and requirements. How will closing costs be paid? How are property taxes for the current/previous year being paid?
Day 26: If you decide to do online bidding, sign-up for a bid number and be very familiar with the website. Have a clear understanding of how the final bid is determined at the end of the sale.
Day 27: Make sure you are on the same page as your lender and professional advisors.
Day 28: Evaluate what you have learned this week. How has what you learned impacted your interest in the property? How has what you learned impacted how much you should offer for the property? Find your ideal purchase price through balance sheet scenarios and cash flow projection. Find your maximum purchase price. Determine down payment amount that best suits your Working Capital How to Get Financed Part 3: Capital – Farm640 and Debt Coverage Ratio How to Get Financed Part 2: Capacity – Farm640 levels.
Auction Time
Day 29: Have an auction plan. Go in with confidence. I prefer not being involved with the first round of bidding war, but you may not have the luxury of waiting depending on how much you are willing to offer. When I decide to start placing offers, I make eye contact with the auctioneer and stay focused on them. If there is a counteroffer, I count to ‘3 Mississippi’ and bid again. If you are slow with your responding bid, it makes it seem like you are ready to cave and your competition can smell blood. A confident bid keeps other bidders on their heels. If the bidding is progressing too fast, or you are getting close to your final offer too quickly, stop bidding for a few minutes before stepping back in. Know your top dollar before going into the auction and don’t go over it. You should know exactly what bid amount works for your operation before showing up, don’t make an emotional decision in the moment. If possible, I try to not have my highest bid be on a $1,000 or $500 (i.e. $7,000/a or $8,500/a). Many individuals like to stop at those points, and 1 bid past those figures may be the winning bid.
Day 30: You are prepared. Good luck!
Pro-tip: Didn’t win the bid? Find new ground and do it again. You may have to bid at dozens of auctions before getting the property you want. It is important to be prepared for each one and show up. You never know which property may sell at a discount and fall into your lap. The more times you take these steps, the quicker and better you will get at doing it.
Double Pro-tip: Didn’t win the bid? Follow-up with the realtor after a week. It is possible there are issues with the winning bidder getting the appropriate financing or they are having trouble closing. I have seen where the original bidder has fallen through and the realtor goes back to the second bidder to see if they will purchase the ground. Insert yourself into that conversation by following up on the status of the ground and expressing your continued interest in purchasing it.
Have a great week!
Grant
All views expressed on this site are my own and do not represent the opinions of any entity whatsoever with which I have been, am now, or will be affiliated. Information provided is authentic to the best of my knowledge, and as such, is prone to errors and the absence of key details. The content of this blog is for entertainment and informative purposes and should not be seen as professional advice to finances or any other field.