Questions to consider when selling farmland
Answers to guide the farmland selling process
Selling farmland can be confusing unless you have all the answers! We answer questions that many sellers face when making their sale decision. I've sold over 400 farms, collectively our team has conducted over 3000 auctions and we have a very strong understanding of what it takes to help a seller achieve a desirable outcome at auction.
Do auctions bring sellers very low prices?
NO! Auctions always sell property for its true market value. Auctions are the premiere sale method for rare and valuable items. With today’s increasing population and decreasing amount of arable land, what is more valuable than a high-quality tract of Iowa farmland? Auctions consistently bring land its true market value over public listings and private sales.
What is the difference between a Reserve Auction and an Absolute Auction?
There are two types of auctions: Reserve Auctions and Absolute Auctions. It is important for sellers – and buyers! – to understand both.
Reserve Auctions: During a Reserve Auction, the seller has the right to set an undisclosed price the farm must reach before it can sell. The reserve is not the asking price, but it is a protection point for the seller and it should never be disclosed to the bidders. A reserve price is a very important tool in an auction. There is an art to setting it as it should always be set below the land’s market value. For example – if the market value is $8,000 per acre, a reasonable reserve to yield the best outcome should be set at around $6,000. Your auctioneer’s intention is to motivate buyers through that gray area in between the reserve price and the market value. Skilled auctioneers can control the bidders in that gray area.
Absolute Auctions: During an Absolute Auction, the seller guarantees that the item will sell to the highest bidder regardless of the price. Absolute Auctions are very motivating for buyers and typically guarantee more buyer participation. Many times, unskilled auctioneers will switch between the two types of auctions. They may start the auction as a Reserved Auction, then take a break and announce the auction as an Absolute Auction. This is very dangerous to a seller, and is illegal! Once the auction is moved to an Absolute Auction, the high bidder can then withdraw their bid at anytime and take the current bid back to $0. Since the auctioneer has now announced the auction has been moved to "Absolute" the reserve price no longer stands, and the seller must sell to the highest bidder! In reality and by law an auctioneer simply can not change an auction from its original reserved status to an absolute but it is a common practice in farmland auctions across the Midwest and something all sellers are cautioned to consider. When evaluating auctioneers to sell your farm it's important to understand their methods and exactly how your farm will be offered and sold.
It is crucial for a seller to hire a trained professional auctioneer to guide them through their auction experience. Untrained auctioneers can make extremely costly mistakes. DreamDirt requires all our auctioneers to be certified – even though many states do not require auctioneers to be licensed to sell your farm for you.
What if nobody bids at an auction?
Many farmland sellers ask this question, and there are many answers as to why they do not need to worry. Land is an extremely valuable resource in today’s world of a growing population and disappearing farmland. A farm would have to have significant issues for nobody to bid on it and even at that we have a hard time imagining a scenario where not even one person would be attracted to the farm. I have never seen a farm auction with no bidders, and I don’t expect to see one in my lifetime.
In the rarest case that no one bids on the farmland, the auction can close and the sale can move forward privately as a listing. The lesson in this is to choose the proper sale method ahead of time. Lower quality pieces of land may sell better through a listing or private sale, but high-quality farmland will always bring the best price at auction. It is nearly impossible to not attract bidders with the large amount of traditional and modern advertising DreamDirt publishes for each auction.
Can I sell farmland that has a tenant or crop?
Yes! Farmland that has a tenant or a crop can still be sold. If the sale is held in the middle of the crop year, the crop prices can be pro-rated to the new buyer. The new owner can also decide whether or not to keep the current tenant for future years. If they want the land immediately, they can possibly buy the lease from the tenant and take immediate possession if the tenant agrees. If they want to use the land in the coming year, the new buyer must give the tenant notice for the following crop year, and the tenant must surrender the property to the new buyer once their tenancy is expired. Or, the buyer can continue to collect rent from the tenant. Basically the tenant is a part of the farm when the farmland is sold and your agreement with the tenant stays intact. The tenant rights are transferable from the seller to the buyer – the relationship between landlord and tenant stays the same, the landlord just changes.
Can someone in my family estate or trust buy the farmland through auction?
A lot of farmland is sold from families who inherit land. These sellers are often estates or trusts. There are many individual interests in an estate or trust, and the tensions can rise if those interests do not align or co-owners have differing needs and plans. In an estate or trust, each member owns a percentage of the farmland typically. For example, if there are three siblings selling 100 acres, each sibling likely owns 33% of each acre – and each sibling will get 33% of the money each acre sells for. These are known as undivided interests. Trusts do differ from estates but the inheritance may be very similar.
Sometimes, one of the members has an interest in buying the entire piece of land or a portion of the land to keep it in the family or just for the sentimenal value. The land can still be sold at auction if this is the case. At an auction, the land will be sold for fair market value ensuring the family members wishing to sell are fairly compensated at a fair market price. When families try to sell the land privately to the interested buying member, there is all-too-often a family riff when the buying member tries to purchase the land at a discounted price. If the buying member buys the land cheaper than fair market value, the selling family members left money on the table – plain and simple. As an auction company, DreamDirt believes in delivering fair market value to the sellers. Selling estate or trust land at an auction is the best way to do that.
Are auctions a last-resort sale?
Auctions get a bad rap for being the ‘desperate’ option. This is simply untrue. The numbers show that farmland auction prices are better than private sale prices. In fact, around 54% of Iowa farmland sells by auction – the remaining 46% is split between public listings and private sales. I am not in favor of telling people how to do business or what to do with their farm inheritance, but I am in the business of giving advice on how to get the best price for your farmland in the most fair way. Auction are the best first choice to sell the farm. You know what does look desperate? Trying to sell farmland through a listing first, then changing it to an auction. Buyers will know how much the land was listed for and it may never reach that price at auction or may actually inhibit your auction outcome because it was priced in the market at one time. Land that goes straight to an auction can achieve the best price because the bidders are competitive against one another and do not have any preconceived notion of price in their mind. Imagine being a bidder at an auction for a farm that was on the market for $8000 per acre and the bidding reaches $7900 per acre? Would you be motivated to bid at that point? Many bidders may see that as a stopping point not wanting to go above the previous price.
Why do auction terms and conditions sell using cash bids?
Cash bids require that buyers bid as if they are spending cash, but it does not require buyers to pay only with cash. In most cases, buying farmland requires financing for the buyer. This is the standard for most sales we process. Buyers may still finance the purchase with the bank however when they bid they must bid as if they were spending cash, in other words they are giving a guarantee they will close the transaction with no excuse they were not able to obtain the funds. Cash bids conditions just ensure they are bidding as though they already have the money lined up.
DreamDirt is ready to answer your questions!
If you have questions about farmland auctions that weren’t answered here – get in touch! We are always happy to be your guide through the process.