The decision to purchase a farm is a big one. Here are some tips to consider when starting the process.
By Kate Ayers
Continuing the family farm operation is an exciting prospect when relatives can pass on a farm to the next generation. However, the thought of carrying on or establishing a farm operation on a new property can be daunting.
Farmers can make the process more manageable by working with an experienced professional to develop a sound financial plan, said Joseph M. Hentz, an associate with Lerners LLP in London.
“A good financial plan is the basis of any business plan,” he said to Farms.com. Within this document, farmers and their advisers should address debt obligations, cash flows and financing options.
“And farmers should have a contingency plan built in so they can deal with the effects of bad weather or poor markets” should these challenges arise after the farm purchase, Hentz said.
The first and most significant details producers should address in their financial plans is their budget and financing options, he said.
“Farmland is still very much in demand” so, “if land enters the market, multiple competitive bids may be submitted,” Hentz said.
Fortunately, producers have a few loan options for farmland purchases.
Some financial institutions, such as Farm Credit Canada “offer loan programs for young farmers,” Hentz said.
To assist in the mortgage application process with banks or credit unions, first-time buyers may “request a loan supported by a parent or relative, either by guaranteeing the loan or offering their own property as additional security” he added.
Purchasers could also ask a potential vendor if he or she would be interested in a take-back mortgage. This option “is a unique kind of mortgage where the seller of the property extends a loan to the buyer to secure the sale of the property,” an Investopedia article said.
Before submitting offers on properties, potential buyers also need to review the answers to such questions as
- Where is the farm located?
- What is the farm type?
- Do any zoning or regulatory restrictions exist?
- Does the property have any water or environmental issues?
If buying land is not in the cards when a desired farm becomes available, leasing may be a better option if the vendor is open to such an arrangement.
“Leasing land allows you to expand your land base without incurring the capital costs of paying for it,” Hentz said.
Leasing “frees up some capital that you can spend on equipment,” for example. The decision to buy or rent land “really depends on your business plan and how you see your farm moving forward,” he said.
Given the competitive nature of the farmland market, it’s important to be prepared.
“These market opportunities are rare and, if you’re not prepared to jump on them, you might miss out,” Hentz said.
“Work with an accountant to develop that financial plan so you have it in place and know what you’re capable of doing,” he said. Then, you can take advantage of purchasing “opportunities when they present themselves.”
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