Sell-Buy a farm OPINIONS

[guage]

OK, so I know a guy who knows a guy that is in a 7 way share of a farm
running as a LLC. (estate)

The farm consists of 240 acres, of that 233 are tillable with the remaining 7 as a homestead (acreage).
The farm is sharecropped, which means the seed & chemical are split in half with the LLC and the cropper (Farmer) who supplies the labor and machinery then the profit
if any is split equally between the two.

The other six partners of the LLC have voted to sell the farm. So it will sell.

Their reasons for selling range from: age, high land value $4,500-5,700 an acre
Low capital gains tax, low interest rates and high crop prices.

The past 10 years the LLC has seen $41,000-$70,000 gross profit a year.
So if we use $55,000 as the gross average per year and we take $20,000 of that for seed, fertilizer and property taxes, which leaves on average $35,000 per year net.

Based on that info would you use your 1/7 th as collateral an buy the others out at $4,500
Per acre and reinvest the $35,000 for 20-25 years as payment and sell later at about ones retirement age of 65( hoping land values increase in that time) or sell out with the others for a very good chance of $5,100 per acre pay the 15% capital gains tax and invest that money for future retirement?????.

[Wodnek]

If the choice were mine, i would buy the others out. As Ethanol and biodiesel use increases, crop prices will rise. Also land does not seem to go down, even if housing itself sees a correction.

But then again, its not my money.

[Hatterasguy]

Lets see if that were in CT I would put a billion 55 and older condo's on it!

I have no freaken idea how you value working farms, but I'm getting about a $1,080,000 asking? $35k a year is only about a 3.2% return on your capital, so no profit from cash flow. If you come in with anything other than all cash its going way into the red. How do loans for farms work anyway? How is the area, what does the potential for appreciation look like?

I have no idea what you should do for retirement, that can't be answerd online. But I'd weigh the options, where else can you put the capital so it may get a better return over the next 20-25 years? 3.2% is weak, so unless there is appreciation I'd look elsewhere. Heck you can buy a CVS and do better than that.

[guage]

The value of this land in 1987 was $800 per acre today it is $4,500 per acre and that's on the low end. that's is almost 600% increase.

In 20 years it could be $800 again or it could be $27,000 an acre.
http://www.extension.iastate.edu/emms/land05/17OH05.html

[Hatterasguy]

Adjusted for inflation that $800 would be worth $1,480.12 today, so @ $4,500 per acre I'm getting a 304% increase.

So if you pay $1,080,000; you should be able to sell it (in today's dollars) in 2027 for $3,283,783.78, if the same trend continues. I guess with land speculation thats the big "if". If the area explodes it could be $50m, if it dies $1m.

If you were to stick $1,080,000 in a bank account at 6% yearly interest for 20 years you would get: $3,463,706.31

I wonder how much carefully chosen stock's would return?

So it looks like as a straight cash deal, this sucks, but real estate allows you to use one wonderfull little tool, leverage...

Lets see I have no idea how much you have to put down on farms, but lets say 20% so $216,000, and lets assume that the farm is self sustaining and you won't have to infuse it with outside cash. Eye balling this, that means you will be getting a 15% compunding return on your capital. Thats pretty good IMHO.

You need to find a local farm expert to really crunch the numbers.

[catmandoo62]

if you don't have some type of contract with the farmer.you could do what they do around here.buy the land kick the sharecropper out and go for cash rent.400-500 an acre for cash rent seems to be about the norm these days.let the renter worry about seed,chemicals etc.leaves you with just the taxes.and even at 400 an acre thats 96,000 a year.

[guage]

Originally Posted by Hatterasguy

A

You need to find a local farm expert to really crunch the numbers.

I hear you on the numbers cruncher. We have plenty of those types around, plus the the banks love this kinda stuff around here.

This is exactly why I brought it here for opinions.

The farm is in Humboldt county,Iowa and has a 73(CSR) crop suitability rating out of 100, which will bring top dollar.

[guage]

Originally Posted by catmandoo62

if you don't have some type of contract with the farmer.you could do what they do around here.buy the land kick the sharecropper out and go for cash rent.400-500 an acre for cash rent seems to be about the norm these days.let the renter worry about seed,chemicals etc.leaves you with just the taxes.and even at 400 an acre thats 96,000 a year.

No contract, just a hand shake years ago. Could get maybe $300 per acre doing that here.

[Larry Delor]

Food is not going out of style anytime soon.

[Skid Row Joe]

Originally Posted by Larry Delor

Food is not going out of style anytime soon.

However, selling the corn crop for ethanol production might pay more than selling it as feed.

[Skid Row Joe]

Originally Posted by guage

OK, so I know a guy who knows a guy that is in a 7 way share of a farm
running as a LLC. (estate)

The farm consists of 240 acres, of that 233 are tillable with the remaining 7 as a homestead (acreage).
The farm is sharecropped, which means the seed & chemical are split in half with the LLC and the cropper (Farmer) who supplies the labor and machinery then the profit
if any is split equally between the two.

The other six partners of the LLC have voted to sell the farm. So it will sell.

Their reasons for selling range from: age, high land value $4,500-5,700 an acre
Low capital gains tax, low interest rates and high crop prices.

The past 10 years the LLC has seen $41,000-$70,000 gross profit a year.
So if we use $55,000 as the gross average per year and we take $20,000 of that for seed, fertilizer and property taxes, which leaves on average $35,000 per year net.

Based on that info would you use your 1/7 th as collateral an buy the others out at $4,500
Per acre and reinvest the $35,000 for 20-25 years as payment and sell later at about ones retirement age of 65( hoping land values increase in that time) or sell out with the others for a very good chance of $5,100 per acre pay the 15% capital gains tax and invest that money for future retirement?????.

I would buy them out in a New York minute! The balance shows $927,000 @ $4,500 an acre. Tell him to do it......quick! Is my advice.

When our family home in Omaha, Nebraska sold recently, it could have been bought at a 20% discount rate, versus fair-market-value, to give the desperate-heirs their quick money.........all with no real estate fees to a shareholder. And, inherited with NO TAXES, using the sale price as the new cost basis. Now is your buddy's exact time to strike. When you have an inside-track to a great deal on real estate, never pass on it.........never!

[Medmech]

You lost me at the six partner part, it's hard enough to have one but six? yikes.

[Botnst]

Originally Posted by Howitzer

You lost me at the six partner part, it's hard enough to have one but six? yikes.

You should check-out the fractional shares of oil well production.

[Larry Delor]

Originally Posted by Howitzer

You lost me at the six partner part, it's hard enough to have one but six? yikes.

Having six partners might sound like fun at first....until that time of the month comes around




Oh...business partners....hehe ...that's a little different.

[dynalow]

Assume sales price = 240 x 4500 = 1,080,000.Lets round that to 1 million.
Your 1/7 interest = 154,000. Lets round that to 150,000.
You plan on borrowing the balance of 850K? At 5%, annual interest is 42,500. So, at the outset, the deal doesn't appear from here to finance itself. (I ignore tax effects). Are you able and willing to put more in up front or along the way until it may generate positive cash flow? What is the cost of farm mortgages these days?

In the long term, I don't think you will loose. Land values go up, and the bonus for you is the location in IOWA, land of corn and ethanol. I don't see Congress's love affair with ethanol ending soon. As Larry said, food isn't going out of style soon either.

If you go ahead with it, do all you can to keep the farm off the market.
Are farm lands out there becoming subject to bidding wars?
You quote a range of 4500 to 5700. If the other 6 list it for 5700/acre, where will that leave you?. The property is now 1,350,000 and the buyout is around a million to the other six members? Can you make that work?

I will say it's my professional opinion that capital gains rates will increase in 2009. If we have a Dem. trifecta, certainly LTCG rates will rise, at least to 20% where they were under Clinton. (They are scheduled to go BACK to 20% for most taxpayers after 2010 anyway).
So, the selling six would and should be motivated to move quickly. They could possibly benefit from the reduction in the 5% capital gains rate (for 10% and 15% bracket taxpayers) to ZERO scheduled to begin in 2008 (and running through 2010 also).

Good luck. And keep electing Chuck Grassley!