Every major purchase requires due diligence. With a purchase as pricy and as important for meeting financial goals as buying farmland, all that research becomes even more critical.
It’s not only about the upfront costs of buying farmland. You also have to consider how the land you will finance the purchase, how the land will fit into your operations and how you will ensure that it generates enough income to make good financial sense.
But as part of the due diligence process, you should always seek as much information as possible. The best way to make sure you have all the information you need is to ask questions. Many questions.
Throughout your search, these are the questions that you absolutely need to get answers to before you go forward with a farmland purchase.
1. Why are you interested in buying farmland?
This is a question that you can only answer yourself, but those are often some of the most important.
Consider why you are buying farmland. Sure, available farmland is often a great opportunity, but why do you want to go through with the purchase? Will you be using the land as it’s currently being used, whether that is for crops, livestock or a different use?
Or, is this more of an investment? If so, then you may need to work with a tenant farmer or with a farm management company that can connect you with the right tenant.
2. What is your cash on hand situation?
One of the better ways of settling a land purchase is cash because you avoid loans and the interest rates that come with them.
Now, sometimes taking on debt to finance a land purchase can be the right route. But it’s always a good idea to examine what your operation’s current cash flow looks like and how much cash you have available to you now so that you can begin to discuss with a financial advisor or lender about how much cash you want to use for the sale.
Don’t just consider the now, either. Be sure to go over upcoming purchases or investments, such as equipment repairs or other farming operation costs, that may make your cash situation change in the coming months. The last thing you want to do is overextend your finances and find yourself in a tough spot.
3. How healthy is the soil?
Once you have a handle on the financial side of the equation, you need to start asking questions about the land itself.
For starters, ask about the soil health. Without quality soil that is complete with nutrients and the right organisms, crop yields, productivity and, ultimately, income will suffer.
Be sure to check the soil composition based on what crops you intend to plant, too. Different crops do best in different soil compositions. Purchase a soil testing kit to measure the pH and nutrient levels.
If the results from the soil test come back to your liking, then perfect. If not, then the land may need correcting or it may just not be the right fit for your needs.
4. Is it enough land?
Just like you would not buy a house that did not have enough room for your entire family, you shouldn’t purchase land unless the property is large enough to meet your production needs and goals.
Take a moment to consider the future needs of your operation, too. Will this land help you move closer to any future goals you have for your business? Or could it possibly be seen as an investment property?
5. Why is this land being sold?
Why something is being sold can say a lot about its value and quality. When it comes to farmland, be sure to ask questions that could sniff out whether there was a production issue or if it was a particularly high-performing piece of land that would be a welcome addition to your operation?
Also be sure to ask about the seller and who currently farms the land – are they the same person or is a tenant farmer handling that end of the operation? It’s a good idea to inquire about neighbors, as well.
These types of questions can raise red flags or confirm that the land is a good deal.
6. How much does the land appraise for?
To make sure you would be receiving a fair deal, make sure you find out what the land appraises for and not just take the asking price at face value. Always confirm dollar amounts by getting either a full appraisal or at least looking around for comparable sales in the area.
This is the best way to confirm a fair purchase price and inform your offer.
7. How has the property been zoned?
Some land has restrictions on how it can be used. Be sure to check local zoning for the property you are considering buying.
In addition, check for conservation easements that could determine how the property can and cannot be used.
Land that has too many zoning restrictions or conservation easements may not be as valuable as you first thought, especially if there are restrictions that would require you to change your plans for how you would use the land.
8. What is the water source?
Our final question, but by no means the last question that needs to be answered, is how does the land source its water? Ask whether there is an irrigation system, if there is a well on the property or if water rights come with the property.
Depending on what you find out, you may need to account for water access in costs associated with the land.
Work alongside an ag real estate professional
There are many other questions that should be asked when you are buying farmland. The best way to know if you are asking all the right questions is to not go it alone.
Be sure to work closely with an experienced farm real estate agent who is familiar with your situation, your goals and the area where prospective land is located.
Contact Midwest Land Management to begin your farmland search.
