SW Financial Literacy
Situation:
Farmer heard some rumblings that a land might be moving and reached out to the owner expressing interest in renting the ground. Landowner called back after a few months, and said they are not looking to rent to a new tenant anymore but would prefer to sell. Asking price established is way above what can reasonably cash flow and what the farmer feels comfortable paying. I was consulted on how to move forward.
Here is how I would approach this specific situation: Create options.
Go ahead and give the owner the top dollar you are willing to purchase at. Remind them of the fact that this ground has been in the family for a century and many of those earnings will have to go towards paying capital gains tax.
Give them a second option of selling on contract. If they want some money upfront, you can structure this to get a downpayment to them. You then may be able to structure the seller carry financing in a way that reduces their capital gains tax and your total purchase price to help Cash Flow. This could involve lowering the purchase price (reasonably) and then paying interest to the owner to increase their total profits. Always run these terms by an attorney and CPA.
The third option we discussed, which the farmer prefers, is to rent the ground. The ground was previously rented below market value, and we could greatly increase the annual income for the owner by bringing rent up to market value today. We also talked about creating a flex rent on top of the cash rent, allowing the owner to take part in years with greater profit. (Side note, flex rent arrangements the last two years could have paid over $200 an acre above the initial agreement and still have been profitable for the farmer. You can draw up some scenarios for the owner and show this potential if yields are high or prices rebound.)
Detail the options in a professional looking presentation and give to them in person if possible. Make sure you are able to answer any questions they have.
By presenting multiple options to the owner, you are not creating a situation where you present them with a ‘lowball’ offer. You’re opening up the lines of communication to see what works best for them. They should appreciate this creativity as they probably weren’t aware of all these potential benefits they could take advantage of. You are showing them that you are someone they should be working with now and for future deals. You are building trust.
Find negotiating tactics that create win-win situations. The stronger your financial literacy, the better options you can present for a more competitive offer.
Have a great week!