Should You Buy the Neighbor’s Farm?
While the dairy crisis presents tremendous challenges in rural communities, it sometimes also offers unique opportunities to purchase neighboring land that has not come up for sale in generations.
The question is: Should you buy it? That decision should be based on facts and rationality, not emotion, says Todd Davison, a financial officer with Compeer Financial based in Geneseo, Ill.
He urges farmers to pay close attention to three critical factors:
•Solvency: “A well-established farmer should aim to have 50% ownership equity after the purchase,” he says. Young or beginning farmers might not have that equity, but having at least 35% ownership equity after the land purchase could be acceptable, he says.
•Liquidity. “The working capital target is 15% or better of the operation’s average gross income,” he says.
•Repayment capacity: “A farmer needs to ensure that there is sufficient margin after all obligations are covered,” says Davison.
“As much as you may want the piece of land next door, you may need to walk away if the circumstances aren’t in your favor,” he says. “If the purchase is putting you in a bad financial situation or one that could cause unnecessary stress, you may need to pass on the opportunity.”
An alternative might be selling other land that you own, perhaps to an investor and then renting it back. “You can sell other land to get this particular [neighboring] piece, especially if you own a parcel that is farther from home or not performing as well,” he says.
Remember, too, that adjoining land may need improvements, such as tiling or erosion controls, to bring it up to productive capacity. Plus, fertility may be lacking, and bringing back optimal fertility can be a long-term investment.
“As always, I encourage you to bring in your trusted advisors to help you look at the numbers before moving ahead,” Davison concludes.
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