Every now and again, opportunity can come knocking by way of land becoming available across the road from land you already own or your home farm.
I take calls all the time from folks interested in our land auctions. Maybe they live in Arkansas and are interested in land in North Dakota after receiving a postcard in the mail. Or they’re a farmer who drives by the land daily on their way to catch parts, drop the kids off or check crops.
I would say that more often than not, folks who call are interested in at least bidding on the property, if not outright “just buying it.” The latter, of course, is the kind of confidence I like to hear in advance of an auction sale.
Occasionally, though, the decision isn’t quite made.
Do we use the transaction as an opportunity for a free appraisal of sorts? Do we take the opportunity to pick a threshold to bid to and half-heartedly participate in hopes of keeping the final bid number honest and, in turn, the bankers comfortable and the net worth number on our balance sheet muscled?
These are difficult questions to answer that highlight all sorts of issues.
You still have to pay for it
This is a biggie, obviously. If you can’t make the payments or support the purchase, you probably aren’t going to be much of a player.
But assuming you can make it work, what do you do when that opportunity comes knocking?
I’ll start with the obvious: the opportunity to buy land within close proximity to your farming operation is a rarity. Sure, we’re in the midst of a major wealth transfer that will present a few more opportunities than we’ve seen in recent years, but nonetheless, these sorts of opportunities are rare.
It isn’t unusual for us to sell a farm that has been held by the same family for multiple generations and well over 100 years. Looking at our upcoming auction calendar, there are a dozen or more examples.
Will the land ever be offered again? Often, not.
That same mentality of “never sell land,” because land is your lifeblood when it comes to the farm, is often pervasive with most of our bidders and buyers. Few bidders and buyers approach land with the idea of speculating for a quick buck or flipping the property. It’s a long play.
Appraisal vs. reality
An appraisal, by very definition, is an opinion of the marketable value of farmland within a given time, or date, and based on the opinion, knowledge and belief of the appraiser.
Comparable sales, the income approach or how much the land can generate relative to other “known sales” and other factors are all considered. But at the end of the day, it’s just an opinion.
Sure, it’s based on facts, reasoning and a methodical approach, but farmland appraisals can vary wildly from real sale outcomes. I often tell prospective clients that I’ve sold land for 200% or more and 60% of “appraised value,” all within six months of the appraisal being completed.
I don’t tell folks this to scare them or brag about how good I am, but to remind them that it’s not an exact science. Something is worth only as much as someone is willing to pay.
That’s why when land next to you becomes available by way of an auction sale, it’s a phenomenal opportunity to get a lens into the actual marketplace.
Sure, there can be anomalies in the farm auction world. Appraisers call these “outliers,” and often throw them out in future reviews of other land. But when land becomes available across the road, it truly is a fantastic, almost “free” appraisal. It is really hard to argue with the results of a well-advertised auction sale.
Half-hearted approach keeps values up
Bidders can sometimes take the approach of, “I’m interested, but it depends on the price.” Of course, price always matters. But there is a difference between being interested in owning the land and being interested only if you can buy it for what you see as below market value.
If you’re coming away from a land auction with a purchase agreement, chances are you felt like you got kicked in the gut because you think you paid too much. History shows us that it’s almost always that way on the good stuff. As my grandpa Bob always said, “It is always too much” when it comes to buying land.
I think a prudent approach, if it isn’t a “gotta have it” farm, is to pick a threshold where you can make it work and bid toward that number. And everyone knows that threshold is almost never at a level that “cash flows.”
That brings us to the last approach.
‘I’m just going to buy it’
Farm families that have taken such a leap have historically “overpaid,” going back to Grandpa Bob’s wisdom as a farmer and auctioneer for over 50 years.
History also tells us that these same families are often the ones that are most well off if they’ve been able to swing it.
They’ve taken this approach when the opportunity is right. When the farm is across the road, it fits in nicely, and they know it’s “good land.”
Over the long run, and if you’re able to pay for it in the short term, it’s hard to go wrong.
If you’re in the business and you farm or own land, I think the latter two approaches are probably the ones to take.
Nobody ever gets anywhere sitting on the sidelines. Get in there and take a chance at building something or adding on to something that is already great with a piece of land.
You might pay too much. You also might look back 10, 20 or 30 years from now and wonder how you ever got so lucky to have the opportunity.