Introduction[1]
Author: Michael Duffy
Reviewing: Tim Fevold and Ed Roach, American Society of Farm Managers and Rural Appraisers.
The land purchase decision is one of the most important decisions farmers will make in their life. Yet, it is a decision that is seldom made. Because the decision is not often made and due to the complexities surrounding the decision, it is too often a decision based on emotion rather than careful analysis.
A 1997 Iowa State University study showed that over a third, 37 percent, of the farm land in Iowa was owned by people over the age of 65. Another study in 2000 revealed that only 29 percent of Iowa’s farmers had identified a successor for their farm. This study further showed that only 45 percent of the farmers had an estate plan.
These studies show that over the next several years a significant portion of Iowa’s farm land will change ownership. Further, the studies also reveal that few people have planned what will happen to their farm upon their death. This means there will be a number of people who will be facing the decision whether or not to sell the land and whether or not to buy land.
The purpose of this course is to provide relevant information to help evaluate the land purchase decision. Remember as you go through the course land price and land values are not necessarily the same. The price of land is determined in the market, whereas the value of the land is an individual determination.
This course is designed for purchase of agricultural land in Iowa. Most of the basic concepts, however, will apply to other real estate purchases as well.
To help analyze the land purchase decision, the course is divided into five lessons.
Lesson 1: Land Value Trends and Other Considerations, provides an overview of the recent history of the land market and its performance. This lesson also includes a brief discussion of some of the more important considerations with respect to the land purchase decision.
Lesson 2: Using Soils Information, will cover the basics of the soil and what it can tell us. The lesson will cover establishing realistic yield goals, using historical yield records, soil maps and soil productivity potential.
Lesson 3: Appraisal Techniques, presents a discussion of the various approaches used by professional appraisers. These individuals make a living estimating the current market value of land. It is extremely important that the farmer understand the approaches used and know how to interpret the results.
Lesson 4: Financing Considerations, will discuss the variety of financing tools that are available for a land purchase. The method of financing is a critical determinant in the advisability of a land purchase. There are several alternatives available and these must be compared and contrasted.
The final lesson, Lesson 5: Feasibility of a Land Purchase, will present a straightforward, step-by-step technique for estimating land value. This lesson will cover the cash flow feasibility of land purchases and the expected profitability of the investment.
The land purchase decision involves long-term projections and substantial capital investment. As such, it is always a risky decision that can have major consequences. The decision must be carefully analyzed. Hopefully this course will provide a sound basis for making this important decision.
[1] This is an update of a 1988 version of the home study course. This revision is dedicated to the memory of our friend and colleague Gary Vogt who originally conceived the idea for the course. Gary’s leadership and friendship will be missed.