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Case Study: Auction Land Swap
A few weeks back my family had the opportunity to bid on farm ground through public auction. We had a land swap opportunity during the purchase to consider as well. Here is everything we considered and how it played out.
The online auction had 3 tracts. Tract 3 had 73 total acres that my family was interested in. The property was next to 80a they currently own with our pivot on the property line. It is within 5 miles of our farm’s headquarters. Tract 3 was being farmed and sold as dryland. Our pivot would have to run hard to windshield wipe Tract 3 due to an acreage which was not included in the sale, but we would be able to water it. The property does have around 2 acres of trees to clear out which then could be farmed. No wetlands or separate easements on the property.
I personally looked into buying Tract 1. It was 154 total acres with 150a farmable as dryland. Just 1 mile away from Tract 3. This property was also unique in that there is a very long driveway and acreage cutting across the field, which would have meant a lot of extra end rows. I decided against bidding due to not enough time elapsing since my previous 1031 exchange as it is recommended you wait two years before moving on from the property. It has only been 15 months for me. Also, I would have needed to get a strong private sale agreement on land I currently own to have enough proceeds for the purchase.
I did all my homework though and ran scenarios. If I had bid, I would have looked to go up to $8,600/a on this dryland ground. I also considered buying shares with my family on the 73a on Tract 3 but decided against it to keep cash available for another 1031 exchange in the future.
Before the sale a land swap was offered to my family. If we would buy Tract 1 (154a), neighbors would have offered to buy 160a irrigated we own 8 miles away from our farm headquarters. The 160a were in the neighbors’ backyard and Tract 1 was closer to ours. Here is how the auction could have played out with the land swap:
Get Tract 1: 154.31a dryland bought for $8,750/a for a total of $1,350,212.50
Get Tract 3: 73.03a dryland (which we will irrigate) bought for $9,200/a for a total of $671,876.
Sell through land swap: 160a irrigated bringing at least $12,000/a for a total of $1,920,000.
We could have got 154.31a dryland and 73.03a irrigated at the auction for a total of $2,021,998.50 while giving up 160a irrigated for $1,920,000.
It would have netted us 67.34a costing just $101,998.50 or $1,515/a dryland. Pretty good deal!
What did we do?
It was pitched to us that we could irrigate Tract 1 154.31a dryland to make it irrigated to not lose many irrigated acres out of the transaction. In speaking with 2 well companies (who are also family, love the small town connections! 😊), there haven’t been any new irrigation wells put up in the area in the past 5 years. It seems unlikely we would win the lottery to the water rights. Also, with the strange layout of the driveway (including power lines) and acreage, we estimated we would only be able to pivot irrigate around 100a. This would require expenses for a new well and pivot costing over $160,000 to possibly irrigate 100a IF everything falls into place.
The water is a huge deal to us. There is a huge value to keeping the better farm with guaranteed water under it as there are deep droughts and uncertainty with adding more water in the future.
The other issue is efficiency. We would be giving up a completely clean 160a field to be taking on not 1, but 2 suboptimal field layouts to farm in Tract 1 and Tract 3. Tract 1’s 150a would take longer to farm and manage than our current 160a farm (not including time spent irrigating).
Other items to consider is future landlord buyouts. It would be great to add the 73a right next door to our current farm without putting much additional debt on the books. There are active landlords always considering selling which we need to be prepared for. Adding the 73a without any debt keeps powder dry and makes us ready for the next purchase immediately.
One family member voted for the swap, one voted to keep what we had.
In the end, the deciding factor was relationships. While the swap would have kept debt levels low to buyout a landlord, we will always have the option for a swap in the future when that time comes. My family has a very close relationship with another farm family next to the swap ground who we would really like to have that property someday. That family has notified us when our pivots are down, dug our combine out of a spring with their backhoe in the middle of harvest, and attends every family funeral. They have 3 boys back and would like the ground too.
We only bought the 73a and decided against the swap to a different neighbor for the time. We can always reconsider down the road. Sometimes the right decision for you and the operation doesn’t always have to make sense financially.
Have a great day,
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.