SW Financial Literacy
Farm Buying Decision Tree
Helping you determine how much to bid and borrow for a land purchase.
How much should I bid? How big of a down payment should I make? Is this purchase a smart financial decision?
Help is here!
Step-by-step guide for determining what your bid price could be and how much to finance. (If this auction guide wasn’t already enough: 30 Day Guide to Buying Ag Real Estate on Auction (farm640.com))
The key for acronyms is at the bottom along with a disclaimer. This is a guide, and these are not set in stone rules that are successful every time.
If at any point on the decision tree you do not answer ‘yes’, make the suggested adjustment to your down payment or purchase price. You must then update your balance sheet scenario and start again at the very top.
Here are the steps.
Section 1: Balance Sheet + Scenario Decision Tree Balance Sheet + Scenarios – Farm640 (pw = farm)
Enter your balance sheet. Then go to the scenarios tab to include the purchase price, down payment amount, and loan balance for the purchase.
Calculate and compare to this decision tree. For help with calculations, see: How to Get Financed Part 3: Capital – Farm640
Section 2: Cash Flow + Scenario Decision Tree Farm Cash Flow (farm640.com) (pw = cashflow)
Update your cash flow for the next crop cycle. Be sure to include new wealth, new input expenses, property taxes, and debt payments for this upcoming crop projection.
Calculate and compare to this decision tree. For help with calculations, see: How to Get Financed Part 2: Capacity – Farm640
Section 3: Collateral Decision Tree Calculate and compare to this decision tree below. For help on calculations, see: Collateral for Buying Farms (farm640.com)
I review each item on these decision trees before each land loan that I finance.
For my own land purchases, I run multiple purchase scenarios; reviewing every ratio listed at different bidding increments to see how 1 more bid impacts my willingness to bid again.
Key: > Greater Than < Less Than CF Cash Flow CR Current Ratio DCR Debt Coverage Ratio DP Down Payment FLE Family Living Expenses GFI Gross Farm Income LTV Loan To Value OE Owner’s Equity PP Purchase Price WC Working Capital
1st Disclaimer: These decision trees will give you a general idea of what is typically considered a safe and acceptable financial position. They are all items to consider before making a land purchase. It does not guarantee you will get credit approval from your lender. It does not ensure this will be a financially successful transaction. They may not apply to your situation. Every operation is different with their goals, productivity, and financial priorities. Always review and make decisions with a financial expert who is familiar with your individual situation.
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.