Farmers selling land for debt relief
the wrong, and right, ways to sell in today's land market
In 2019, we've seen the strain of the poor farm economy more than ever. Land and machinery prices are softening, and in response many farmers are looking for debt relief by liquidating farm real estate assets. Hearsay around local coffee shops inspire these struggling farmers to search for a very specific land sale agreement with a very specific buyer. Ultimately, searching and holding out for these 'golden ticket' sales are causing the farmer to lose more money in the long-run.
Keep reading... I'll explain.
When faced with needing debt relief, these farmers can spend months of their time trying to market their farm in the "off market" to find a very specific buyer with very specific conditions. These farmers have heard that 1031 exchange investors have the money to pay full-price for the farm, that leasebacks or buybacks can be negotiated (where the farmer is still able to rent the land and possibly buy it back in the future), and that the whole exchange can be accomplished privately without their community and neighbors being fully aware.
Is it possible? Yes, it is possible, and it does work out sometimes.
Is it probable? This is the bad news: It's really not that easy. Privately-negotiated 1031 exchange leasebacks are one of the most difficult-to-market properties and the buying pool is severely limited by the "secret" nature of the dealings. This scenario is nearly impossible, yet it is what every farmer is trying to do in this market. In the interest of being completely and brutally honest, the situation really becomes a case of "you can't have your cake and eat it too". There has to be some give somewhere.
misconceptions about selling land for debt relief
If sellers opt to market their farms privately or secretly so that others in the community don't know about it, then they are cutting out the majority of the competition for the farms and there is no mechanism to push the price to the top of the market like an auction does.
Buyers of distressed farms often know they have leverage. They know it is not being marketed on the open market, and that becomes a real disadvantage to the seller of the farm in the negotiation process. Buyers also know or sense there are financial issues because active farmers would not be selling land if it were not for financial distress. Buyers are businessmen just like producers - they are trying to make their deal as profitable as they can, most especially when they sense weakness. Likely, they will negotiate to get a lower price.
At DreamDirt, we've continued to sell farms consistently and effectively at auction, but struggle to market acceptable leasebacks where the buyers and sellers agree on the terms. This is the case industry wide - those are just difficult deals to make happen. I do want to make it clear that we continue to see strong results in the "on market" and auction side of farmland.
The point is: struggling farmers are spending a lot of time chasing those privately-negotiated 1031 exchange leasebacks - their idea of a 'golden ticket'. They waste time while the land market continues to drop every day, and those buyers are in a position to negotiate a low price for the farm.
What are your options if you are experiencing financial distress?
If a land owner wants to sell their farm off market, they will have to accept the notion that it will likely sell at a discounted price because of the lack of participation by buyers. In exchange, they may get a more private experience and possibly be able to negotiate a long-term leaseback - maybe even an eventual buy back or first/last right of refusal.
I know it seems like since the farm down the road sold for $8,000 at an auction last week, they should be able to get the same price. But the auction worked because of the competition for the asset - the sellers had the upper hand. In a private sale, sellers aren't able to easily transfer that value to your their farm unless it has some desirable or rare characteristic that the buyer really wants.
By selling a farm in the on market using an auction, farmers are more likely to see a higher sale price in a shorter period of time. A possible downfall for some sellers is that it will be public knowledge that they are selling land. This may be the best place to note that the seller controls the terms and conditions in an auction environment. Just because one sells at auction does not mean they cannot negotiate a leaseback. Just because one has an auction doesn't mean they cannot offer a farm with a first/last right of refusal attached to it. Those are not necessarily ideal terms and conditions, but they are possible and have been used where they were an absolute necessity for the seller. An auction date is also more likely to quell bankers' demands for progress and set in motion a process that will pull someone out of a difficult financial situation more quickly.
If a farmer is experiencing financial distress, the best thing they can do is to immediately go to auction. The land market isn't getting better, and if they waste three months chasing that 'golden ticket' buyer, then they can be worse off. They could eventually find that buyer, but will be pressured to negotiate a lower price. Or, they could have no luck finding that buyer, and by the time they decide to have an auction, the land prices have dropped even lower. If a land owner's goal is to get the most money for their land asset, an auction is the best option.
LOW Stress Online Land Auctions
Fears of an auction might not be well founded, and an auction can likely be the best path forward. Our land auctions at DreamDirt offer a wide variety of low-stress options that can help sellers avoid the friction of an auction. In my mind, I think that is really the goal of every person in this situation. They want a good price without the friction, stress, or pressure.
Having worked with financially distressed farms many times, I've been able to create selling experiences that not only lacked the friction of a live in-person auction, but also created results that were much more acceptable than what we see in "off market" situations. When we launched our upgraded Timed Online Land Auctions platform in 2018, we saw sellers begin to choose this method overwhelmingly over live in-person auctions. We are currently selling around 80% of our land volume with Timed Online Land Auctions, and only 20% with live in-person auctions. Online land auctions create better results and experiences for the seller, and buyers enjoy the convenience of it. This auction method helps insulate sellers from the social pressures they don't want to experience and reduces their anxiety about the eventual results with a longer bidding period and better bidder participation.
If you are experiencing financial distress, there is a path forward for you and I understand it is a difficult situation. If you are looking for a land buyer, the market shifts daily as new buyers come and go. Give me a call or drop me an email and let me know what you need. Some days we have somebody spending 1031 money, sometimes just investors looking for farms. We can work to get you connected, but also identify other options that can get your assets sold for fair market value. I have worked with, and sold farms, to many of these people in the past so I know how to reach them and how to get your farm in front of them quickly. I have always felt an auction is the best first choice, but at the same time I can understand that you may want to try other avenues first.
Call me at 515-537-6633 or email me at firstname.lastname@example.org and I'll be glad to visit with you about your options and see how we can help create the right path forward for you.