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Ultimate Guide to Selling Farmland

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Table of Contents

At Tillable, our mission is to simplify owning and managing farmland. But when it comes to changes in ownership, we know the process can feel anything but simple. We’ve put together this guide to help lay out some considerations and best practices, from the right documentation to gather all the way through to closing.

Setting the Stage

With the recent increases in commodity prices, many landowners are seriously considering selling their farms now. We do expect a flurry of selling activity over the next few months. Below, we list out some things to consider if you are just beginning to think about a sale.

Understand Your Cash Position

The most obvious consideration is your family’s cash position. Selling your farm will provide a one-off influx of cash, and if you’re looking to make a big purchase or pay off debt, this could be a great solution (we’ll talk about tax ramifications below). However, whether you are an operational or non-operational landowner, you know that your farm can provide steady income, while likely continuing to appreciate in value over the long term. We recommend sellers plan out their expenses over the next few years and determine if selling the farm, renting it out, or operating it yourself puts you in the best financial position for your family’s needs.

Research Local Land Values

Doing local research will prove invaluable. If you live in a farming community, talking to friends and business partners could help get a pulse check on the market. Tillable also provides proprietary information on local land values – just give us a call to get a personalized market analysis and learn more about recent sales in your area. Make sure to look at all the variables when examining local sales – tillable and gross acreage, parcel shape and size, county average rent, soil quality, and yield information (if available). Many variables factor into the sale price of land, so make sure you’re knowledgeable about where your land falls across the spectrum of recent sales. 

Local-Land-Values_image

Check For Existing Liens / Leases

If you have any existing liens or leases on your property (or if you are unsure), make sure to check in with your county recorder or a title company to be clear of this information. Having a mortgage on the property won’t inhibit your sale – but any tax liens or other penalty liens could jeopardize your ability to sell. However, don’t worry if you are in the middle of a long-term rental lease. The lease will likely continue on with the sale of the property and can often add value to the sale. Prospective buyers will just need to know the terms of the lease. 

Consider Your Ownership

You may not own your farm individually – we see a lot of people co-own farms with siblings or business partners. The decision to sell your farm can be an emotional one and usually takes some time to get all parties on board. Make sure everyone is aligned about the sale – timeline and method of sale are common roadblocks. Feel free to give us a shout if you need a sounding board. We can create a market analysis to help you with decision-making.

Who to Hire

Selling a farm can be a lot easier with the right team by your side. Most people hire a broker or real estate agent, and an attorney can be helpful for certain sellers. Additionally, we would recommend working closely with any financial advisors or accountants you already use.

Real Estate Agent / Broker

A trusted real estate broker will be your main partner throughout the sale process. They will be responsible for advertising your farm, listing the farm, sourcing offers, presenting them to you, and providing a gut check on pricing. Picking the right broker is one of the most important decisions you’ll make throughout the sale process. If you’d like to chat through ideas or concerns with a member of our Brokerage team, please call 1-800-970-3881. We’re happy to help you think through this decision.

If you are thinking of holding an auction (we go into more detail on auctions below), you’ll need to hire an auction house. Typically, the auction house will run the marketing of the auction and all organizational details. You may not need a broker in this case.

Lawyer / Finance Professionals

A lawyer or financial advisor can help figure out the most tax-efficient way to sell your farmland. Additionally, your lawyer could draft up sale documents specific to your situation (most broker documents are templates). If you have circumstances that lead you to believe your sale could be complicated, attorneys would be advised.

Documents You Will Need

It’s best practice to gather all your farm documents at the outset of the sale process – a lot of people will be asking for them! Most common items (and where to find them) include:

  • Legal land description (Section, Township, Range) → Tillable
  • Digital maps → Tillable
  • Existing leases (farmland rental and hunting) → Farmer
  • Planting / application / harvest / yield maps → Farmer / Precision Ag equipment 
  • Yield history → Farmer
  • Recent soil test results → Farmer / Soil test service
  • Improvement project records (tiling installation, etc.) → Farmer / Contractors
  • FSA maps / documents (FSA 156) → FSA
  • Government program inclusion (CRP, WRP, etc.) → FSA
  • Crop insurance statements → Crop insurance agent
  • Third-party agreements (wind turbine, etc.) → Third-Party

This can seem overwhelming, but putting in the legwork to gather all your documentation can help prospective buyers with their pricing analysis and weed out low-ball offers. The more information you have (including documents not listed above), the better. Reach out to us if you need help sourcing any of this documentation – we’re happy to help!

Different Methods of Sale

You only get to sell your land once – of course it’s important to secure the best offer. How to do that can depend on multiple factors. Below, we list out the target audience for listings and auctions.

Listings

Listings allow the landowner to set an offer price, as well as certain terms for the sale. The landowner has control over the listing price and has a benchmark to compare incoming offers to. The landowner can include a set sale date, if they prefer, or they can take their time and work with the broker to figure out how long to keep the farm on the market. The longer time frame can benefit landowners who do not need cash immediately and would prefer to target a larger pool of buyers (including investors, who may have to spend more time doing diligence than folks who know the farm locally). Listed farms are typically negotiated between buyer and seller. The buyer will often submit an offer that is less than the listed price, and typically there is some back and forth between the parties. As a landowner, if you have the time and interest to negotiate, the process can be really interesting. If you would prefer to sit back more, an auction may be more appropriate.

Farm Listing

Auctions

Auctions can take place in two mediums: in-person and online. There are some nuances between the two that we’ll touch on. Both kinds of auctions take place at a set date and time – which means, upon completion of the auction (usually within an hour), your farm can be sold! This alone makes auctions highly valuable to some sellers. There is typically no negotiation between buyer and seller – the terms of the sale are laid out at the onset of the auction. In an in-person auction, prospective buyers place bids – each higher than the last – bidders keep over-bidding each other, and the farm settles at the highest offer. Auctions are designed to be charged with emotions: pride, disappointment, and excitement. Studies have found that this atmosphere can lead to a higher ending offer. That’s not always the case – since the auction is held at one time and place, people who can’t make it (because of travel or other conflicts) will not attend. An auction process cannot hold out for every potential buyer to make a bid.

Online auctions function similarly, but bidders can remain anonymous. There are pros and cons of this – likely more bidders will attend, and certain bidders prefer to remain anonymous. However, not being live in the room live removes the emotional element of an auction, which could be a negative con for people who thrive off that electricity.

Sealed-bid auctions are another popular avenue. Bidders submit sealed bids that are opened at one time and place. The landowner can decide whether to accept an offer or host a live auction with a number of the bidders. Because the bids are not publicized, potential buyers typically give their best and final offer – they have no idea what others are bidding and don’t need to bring their offer up for anyone.

The chosen method of sale can depend on so many factors: demand within the area, the farm’s qualities, local conventions in your region, and the landowner’s preferences. There is no “right” answer, but there might be a favored route. Be sure to talk through all alternatives with your broker and list out the pros and cons. You only get to sell your farm once, and it should be successful!

How to Determine Sale Price

Regardless of the method you choose, you’ll have to have a sale price in mind. If you list, you’ll need to publicize that sale price, so it’s important to be realistic. The best method to set the price is to look through recent sales data in your area (contact us if you need this). But you can’t just take an average of recent sales and hope for the best! 

Start by comparing your farm’s qualities soil’s productivity index against comparable sales (sales are comparable if they’re in a similar area, grow the same crops, and are roughly the same size / geometric shape). Higher-quality soils will certainly sell for more, so PI is extremely important. Sale prices are usually listed on a $/acre basis (per gross acre or tillable acre). Using similar data, you can triangulate around an appropriate selling range for your farm. However, there are still variables that can impact your sale price quite a bit. Any improvement projects will increase the value of your land, and any third-party agreements that pay out for use of the land can also increase your sales value (that’s why it’s important to have those documents early!).

Another method for determining a sale price is via a capitalization (“cap”) rate. The cap rate is a real estate term and just shows the rate of return on a property annually. For example, let’s assume a farm is worth $1,000,000. The farmer pays annual rent of $35,000, and property tax is $2,000 per year. The cap rate would be: ($35,000-$2,000)/$1,000,000 = 3.3%. This means that annually, a landowner can expect to earn 3.3% cash return on the farm. When you look at comparable sales data, you can calculate the cap rates, apply the same rate to your farm, and see where you end up.

CapRate chart

For this method to work well, you must be earning fair rent from your farmer, or at least know what fair rent is. If you are in a long-term lease with your farmer, investors will certainly calculate the cap rate and determine if it is within an appropriate range for their expectations. If you have any questions or concerns about this, please contact us. We can help talk through rental expectations and how that would translate to your land value.

Selecting the Buyer

In an auction, the buyer can almost be selected for you. In a listing, you have more independence to select the right buyer. Price is likely going to be the most important factor, but it’s also good practice to make sure the buyer is someone you trust to work with through the negotiation / closing process. When you receive multiple offers during the listing, you are not obligated to negotiate with each bidder. In the case you know you do not want to work with someone, you can feel free to turn them away. Typically, we find more negotiation occurs with realistic offers – when landowners receive low-ball offers, they usually just turn them away.

The type of buyer can also be important to certain landowners. Do you want the land to stay under local ownership? Do you know farmers who you would like to see the farm go to? Or do you have no preference and will select the highest offer? There’s certainly no science to this part – it’s purely up to you and your family who you select. Make sure all owners are aligned on their goals for this. Selecting the buyer can move very quickly (within a day), and you don’t want to waste time aligning with live offers on the table.

Tax Considerations

Congratulations, you’ve selected a buyer and you’re getting paid! Except….taxes. How much you actually earn out of the transaction depends a lot on the tax structure of the sale. We’ve listed out some common tax structures employed the major sale strategies, but this is where an accountant or lawyer that knows you and your financial situation can be extremely valuable. 

Capital Gains Tax: Capital gains tax is a tax that’s applied to how much the underlying asset has grown in value between purchase and sale. If you bought a property at $1,000,000, and it’s now worth $1,200,000, you will be charged capital gains tax on the extra $200,000 of value. The top capital gains tax rate in the US today is 20%. This tax can be high, but it can be avoided under certain strategies.

1031 Exchange: Under the IRS 1031 Exchange, a taxpayer can sell property and use the proceeds to purchase another property without paying capital gains tax. In some cases, “another property” can mean a house or apartment building (not other farmland). A lawyer will help determine the appropriate use case for you. The 1031 Exchange is currently under scrutiny for reform. Biden’s administration has called for the abolishment of this tax break for appreciation above $500,000 (meaning if a property has gained over $500,000 between purchase and sale, capital gains tax would be applied). It is unclear at this time whether the proposal will pass Congress, and if so, at what time.

664 Charitable Remainder Trust: A landowner can establish a CRT and transfer the farmland into that trust. When the trust sells the farmland, it is a tax-exempt entity, and will not accrue capital gains tax on the sale. The proceeds from the sale will generate income for the beneficiaries. This method can be combined with a 1031 Exchange.

121 Principal Exclusion: The Principal Exclusion allows an individual or married couple to exclude $250k – $500k of appreciable value from the taxable portion of the sale of their principal residence. This can also be combined with the above strategies across your parcels.

Needless to say, there are several pathways to navigate capital gains taxessave on taxes, and given the high value of farmland, taxes can be more cumbersome than you may have expected. A tax accountant or attorney can be extremely helpful to you.

Closing

If you’ve made it to closing, you can breathe a sigh of relief, you’re almost there! Closing usually requires minimal involvement from the seller – this is mostly time consuming for the buyer’s team. They need to perform a title check and appraisal (hopefully the outcomes of which are not surprising). In the case that the title check does come back with outstanding liens, you will have to work to rectify them to maintain the purchase price.

The entire closing process usually takes around six weeks. Attorneys and brokers draft the sale documents, while the title and appraisal are being performed. They will transfer the property tax accounts from your name to the buyer’s, along with the deed. There has historically been a closing meeting, where parties sign the closing documents together. – We’re seeing this slowly transform into a digital process, which is even less time consuming for all parties. With a little luck, the closing process can could be pretty seamless. The better prepared you are for the sale, the more seamless the closing process typically is. Contact us if you want to make sure you’re well prepared for the sale.

Conclusion

We hope we can continue to be of help to you and your family. Tillable can help you all the way from determining if a sale is the right course of action, to finding the buyer and closing on your property. Give us a call to get started.

*Tillable is a registered broker in Illinois, Iowa, and Minnesota, and has relationships with brokerage firms in most US states.

WHAT COULD YOUR FARM SELL FOR?

Your free Market Analysis will include:

• Recommended asking price
• Recent farm sales in your area
• How your farm compares to other farms based on price, soil quality, and more

Related Resources

Guide to Farmland Valuation

Considering selling your farmland but don’t know its true value? Our guide helps any landowner who is considering selling their farm in 2021.

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