Author Topic: Considering an off-market farm land purchase  (Read 844 times)

fixie

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Considering an off-market farm land purchase
« on: April 18, 2019, 02:03:47 PM »
Howdy Mustachians, I am considering an off-market farm land purchase as part of both a life-long dream and a resilience-hedge.  Just a quick back story:
Farm land is very good for what I want to do.
Has what appears to be a valid water right claim(not a water right certificate, which is more of a guarantee).
Has a crappy manufactured home and small metal barn.
Has some water infrastructure that will need repair.
Was recently on the market but fell off when owner was concerned her agent was acting as the buyer's agent as well.
I wrote her a letter about the land and she responded.
On-market price was a bit high but manageable.  She says she received several full-price offers.

Questions:
1.  Is it reasonable to deduct the ~6% agent's commission from my offer, in your opinion?
2.  Owner indicated the manufactured home is not very livable.  Fine.  Reasonable to deduct the cost of demolition and disposal of home, in your opinion?
3.  We have discussed my submitting a boilerplate purchase and sale agreement and have attorneys look at it.  I will also select a title company to work with.  I would add come requirements like "Seller affirms that the water right claim is valid and the water has been used beneficially in the last 5 years"(This is very important in Western water law in assuring continued use of the people's water).  The water right claim has not been adjudicated in this area yet, which. in my view, depresses the value of the use of the water and thus the offering price.  Comments?
4.  What sorts of things would you add to an offer to protect your interests?
5.  Is earnest money recommended or required in such an offer?  How does one assure he can get his earnest money back in such a case?
6.  Agricultural comparables are very difficult in this area.  How would you go about assessing the value when it is basically just raw ag land?
Thanks for your ideas and help, in advance.
-fixie

fixie

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Re: Considering an off-market farm land purchase
« Reply #1 on: April 21, 2019, 09:26:51 AM »
Jeez, crickets!

SwordGuy

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Re: Considering an off-market farm land purchase
« Reply #2 on: April 21, 2019, 10:58:59 AM »
If she's received MULTIPLE full price offers, why isn't it already sold?   

The reality is that she's lying, or the buyers weren't qualified to get financing, or not serious, or found something wrong with it and backed out.

In other words, the asking price may well be too high.

I have no idea what owning this land means to you.  You want to farm it?   Graze cattle?   Live in the country?   I ask because (a) few family farmers make a lot of money and (b) quite a few lose money.   I don't know a darn thing about "water rights" except that the existence of said documents means that there's not enough water to go around for everyone -- so you damn well better make sure you know EXACTLY what water you will need and what water you will have.


You can certainly offer anything you want to offer.   You can offer your daughter's Barbie doll as full payment.  In other words, there is no etiquette about this, just a successful or unsuccessful offer.

If the seller still has a contract operative with the realtor then they will still have to pay the commission to the realtor even if you never talk to the realtor.  If not, then not.

Earnest money is not required with an offer. 

Make sure your clauses contain stipulations that allow you to back out without financial consequence if you find something out about the property that has not been revealed to you.    Always.  PS -- this is part of why you hire a good realtor if you don't know how to do that.   

fixie

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Re: Considering an off-market farm land purchase
« Reply #3 on: April 21, 2019, 06:11:49 PM »
Hey thanks!  Yes, I plan on actively farming it.  I have no illusions about making a million farming or anything, but I won't be doing traditional green slavery or livestock concentration camps either.  I have no doubts I'll be able to make a mustachian income from it, and further down the road be living off of investments as well.

I don't have my heart set on the property, and know what my upper limit is.  I've been researching farmland in this
area for over a decade.  You're probably right about the other offers she had while it was on the market.  I DO know, however, that the previous agent she had cancelled her contract because she woudn't respond...seems a bit weird to me but...so I have some info both from her, and the agent I was talking to months ago.

Once I sell my current home, I will need even less financing than my current mortgage, and I have stellar credit.

Yeah the East coast uses what is called riparian water law, very different out here in the Western states where the water is owned by the people and we are subject to first right of appropriation.  You do not have the right to use or divert surface water or ground water without a water right claim or a certificate. Doesn't apply as strictly to wells for domestic use.

My daughter hasn't discovered Barbie yet, thank Jah.

Again, appreciate your response!

-fixie

tralfamadorian

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Re: Considering an off-market farm land purchase
« Reply #4 on: April 21, 2019, 07:53:50 PM »
+1 Swordguy's comments

Quote
Was recently on the market but fell off when owner was concerned her agent was acting as the buyer's agent as well.
...On-market price was a bit high but manageable.  She says she received several full-price offers.

What seller would fire an agent who brought them several full price offers? And if the offers are full price, who gives a damn if the agent gets double commission?

IMO, she's blowing smoke up your ass. And given that you would be working with her directly, I would be concerned about other things she would lie about.

You mentioned water rights a couple of times; I would not take anything the seller says on her word. Whatever documents are normal and available in this situation in your area, I would make a requirement of the due diligence period.

Michael in ABQ

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Re: Considering an off-market farm land purchase
« Reply #5 on: April 22, 2019, 07:13:25 AM »
Hire an independent appraiser who is experienced in agricultural land and water rights. It will probably cost you $3-5k but I'm guess this property is priced over $100k so it's less than a brokerage commission.

You could even try to tie the offer to the appraisal but the seller may not agree. The asking price is the upper limit. Assume any comparables sold for less than their asking price. With a traditional suburban house it's unusual for it to sell less than 90% of asking. With land it's not uncommon for it to sell at 50% of asking. Price discovery with land is hard and a lot of sellers have unrealistic expectations but can afford to wait years for a buyer because holding costs are minimal.

Fishindude

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Re: Considering an off-market farm land purchase
« Reply #6 on: April 22, 2019, 10:51:18 AM »
I've bought quite a few pieces of farm ground through realtors, direct from owners, etc.    It's really not all that difficult to get a feel for what the ground is worth.   If you have a relationship with a local bank, they most likely have an AG lender who could give you an idea what the ground is worth, based on comparable sales in the area.   An AG appraiser working directly for you is another good resource to get this information.  Be aware however, that loose lips sink ships and the more people that know about the place being for sale, the higher chance someone will come along and snatch it up ahead of you.   A lot of farm ground around here changes hands without for sale signs ever going up.

In the end, it boils down to how little the seller will take and how much you are willing to pay for it.   I always start with a pretty low offer, maybe 75% of what they are asking, and then just go up from there till you hit on a price both are comfortable with.    If you need to finance it, make sure you have that lined up in advance or your offer isn't good for much.  Include significant earnest money as part of your offer (maybe $10,000) so they see how serious you are.   Don't complicate the deal with a bunch of terms and conditions and things the seller has to do, just accept it the ground and buildings as is.   

Probably the most important thing is to do a title search so that you are assured their are no other liens and judgement against the property.   Most title companies that handle these deals do this as standard part of the deal.   If there are currently unharvested crops on the place yet to be paid for, you will need to decide who gets paid for the harvest.  It's not unusual to let the seller go ahead and receive the crop payment since it was his ground when they were planted.   Real estate taxes are generally prorated and settled at closing, then tax bills going forward are on the new owner.

How many acres?   What type of ground?   What state?   Any wooded ground?   Any tillable or hay ground?  Is it an area ripe for housing or commercial development?
A little of this info would go a long way towards some more detailed advice.


nick663

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Re: Considering an off-market farm land purchase
« Reply #7 on: April 22, 2019, 12:13:07 PM »
Have you done the rent vs buy math?  In our area farm land changes hand at very high prices relative to the per acre rental price.  I don't understand why anyone buys but there is a line of buyers ready any time property is available.

caleb

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Re: Considering an off-market farm land purchase
« Reply #8 on: April 22, 2019, 01:48:36 PM »
IMO, she's blowing smoke up your ass.

Not necessarily.  People do crazy irrational stuff when it comes to farmland, especially land that's been in the family for a long time.  However, it may be a sign that the owner isn't approaching it as a simple business transaction.

WranglerBowman

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Re: Considering an off-market farm land purchase
« Reply #9 on: April 22, 2019, 02:46:53 PM »
I'm actually working on something like this right now but in the East.  I think you have some good replies so far.  Here are some of my thoughts on your original questions:
1. Do you know for fact she got full offers?  I would start out about 80% of what it was listed for, if the listing was correct and have a lawyer with experience in ag land put together an offer with contingencies.
2. Run down homes or barns don't seem to warrant reduced price unless there are hazardous materials or they're enormous.
3. Again a lawyer versed in ag land with water rights should keep you straight and I would get all this info from the seller and back check with County/State/Feds.
4. Make sure that you have all the rights you want/need to use the property for your intended purpose and future plans.  Make sure a good title company does a solid title search to catch any rights removed from the property, well worth the cost.
5. $10k seems to be the average amount you put in an escrow account for land up to $500k or so and use your own lawyer to set up the escrow account so there's another layer of protection should the deal go South.  Make sure the contingencies in your offer cover all the assumptions you're working under to cover land rights and your intended use.
6. Comparables are difficult with ag land, especially if any rights have been removed.  I would work with a good appraiser who works with ag land and talk it over with them first.  If you need a mortgage the mortgage company will get their own appraisal so it doesn't really make sense for you to order your own in my opinion. 

I would also talk with the old real estate agent and see if they say anything.  Check as much of the back story as you can, it seems odd that they listed it, had multiple offers but the property hasn't sold, something's not right in my opinion. 

Fishindude

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Re: Considering an off-market farm land purchase
« Reply #10 on: April 22, 2019, 03:06:19 PM »
Have you done the rent vs buy math?  In our area farm land changes hand at very high prices relative to the per acre rental price.  I don't understand why anyone buys but there is a line of buyers ready any time property is available.

It's been my experience that I can make annual income equal to CD's or slightly better on farm ground, the only ongoing expense is taxes which are pretty low, plus it is pretty easy stuff to sell in a hurry if you need the cash.   So, if you have cash to purchase, already have money invested in stocks, etc. and want to diversify, farm ground isn't too bad of a deal.   If you like outdoor recreation, that is another plus of owning some ground, I can hike, shoot, harvest wild edibles, hunt and fish, gather firewood, etc. on my ground.

nick663

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Re: Considering an off-market farm land purchase
« Reply #11 on: April 22, 2019, 03:58:00 PM »
Have you done the rent vs buy math?  In our area farm land changes hand at very high prices relative to the per acre rental price.  I don't understand why anyone buys but there is a line of buyers ready any time property is available.

It's been my experience that I can make annual income equal to CD's or slightly better on farm ground, the only ongoing expense is taxes which are pretty low, plus it is pretty easy stuff to sell in a hurry if you need the cash.   So, if you have cash to purchase, already have money invested in stocks, etc. and want to diversify, farm ground isn't too bad of a deal.   If you like outdoor recreation, that is another plus of owning some ground, I can hike, shoot, harvest wild edibles, hunt and fish, gather firewood, etc. on my ground.
That doesn't match my experience and some googling shows my experience is pretty typical for this area.  Farmland in Illinois sells between 8-10k an acre and rents for $223/acre (on average for 2018).  2.8% return before factoring in taxes, insurance, interest, transactional costs and you're dealing with renters to get it (if your farmer has a bad year... good luck getting paid this year).  If we're looking at this as a pure investment... I'd take the CD route. :)

I don't have any experience with non-farm ground so I can't really comment on the hiking/shooting/harvesting type of land.

fixie

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Re: Considering an off-market farm land purchase
« Reply #12 on: April 22, 2019, 09:32:16 PM »
Wow, some excellent advice there everyone.  Thank you.
Takeaways: 
Due diligence is key, especially with respect to water rights and intended use.
My instincts were about right on original offering price at around 70% asking price when last it was on the market.
Get an attorney versed in farm land matters.
Get an independent appraiser especially for water right claims.
Talk to the county to make sure what I want to do is possible.
Hire a good title company.
Contingencies written into contract with a way to back out.
Bank preapproval is a must. 
Again, thanks all!  Ill keep you posted!
-fixie

Fishindude

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Re: Considering an off-market farm land purchase
« Reply #13 on: April 23, 2019, 07:11:28 AM »

That doesn't match my experience and some googling shows my experience is pretty typical for this area.  Farmland in Illinois sells between 8-10k an acre and rents for $223/acre (on average for 2018).  2.8% return before factoring in taxes, insurance, interest, transactional costs and you're dealing with renters to get it (if your farmer has a bad year... good luck getting paid this year).  If we're looking at this as a pure investment... I'd take the CD route. :)

I don't have any experience with non-farm ground so I can't really comment on the hiking/shooting/harvesting type of land.

You need to be getting more cash rent out of $8,000 - 10,000 per acre farm ground, many around here get $300 or more for that kind of ground.
I've never paid more than $4,000 per acre for my ground (Indiana & Illinois) and taxes average about $20 per acre annually.   One patch I own pulls down $290 per acre cash rent and another couple patches pull down $180 per acre.   You don't really need any new insurance if you already have an umbrella policy, you won't have interest if you use cash, and by transactional costs I assume you mean closing fees?   Closing fees have always been pretty minimal, and that's just a one time deal at purchase.

I've never feared not getting paid by my farmers either, they have always paid in full for over 30 years.   We currently use two different farmers, one pays in full in the spring before planting and the other pays half in spring and the other half after harvest.   Many carry crop insurance to protect themselves against a bad year.

Another item not mentioned is long term appreciation.   In all likelihood the value of your ground will appreciate considerably if you buy it right and hold it for 20 years or more.   Some of the first stuff we bought was $750 per acre, it's easily worth $4-5,000 per acre now.

theoverlook

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Re: Considering an off-market farm land purchase
« Reply #14 on: April 23, 2019, 08:49:12 AM »
What is "green slavery?"

Car Jack

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Re: Considering an off-market farm land purchase
« Reply #15 on: April 24, 2019, 07:06:47 AM »
She had several full price offers but didn't take them because her agent was also the buying agent.

She's a flake and wants $100 BILLION for her property and is fully willing to pay her agent $100 in commission.

Move on.

fixie

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Re: Considering an off-market farm land purchase
« Reply #16 on: April 24, 2019, 02:45:30 PM »
What is "green slavery?"
Green slavery is another term for the hard slog of physical work in annual agriculture.  Without a lot of skill and tight management, it is a lot of work with not much pay.  It's part of why 95%+ of US farms depend on off-farm income.  My off-farm income will be from investments :)
I'll be doing a combination of perennial enterprises along with a membership maker-space where people can use tools and learn new skills and take classes.
-fixie