Farm Progress

Timely Tips: Two brothers want to buy their mother’s farm.

March 29, 2018

5 Min Read
2 QUESTIONS: How do you decide who gets grandmother’s farm? What is the fair market value?

Each month in Wallaces Farmer, the Timely Tips panel answers questions sent by readers. Members of the Timely Tips panel are Alejandro Plastina and Wendong Zhang, Extension economists, Iowa State University; Leslie Miller, Iowa State Savings Bank, Knoxville; and Rob Stout, Master Farmer, Washington, Iowa.

Grandma needs to sell her 160-acre farm to pay the nursing home. Dad and Uncle Larry both want to buy it. I suggest she hire an appraiser and Dad and Uncle Larry use that price to start negotiations. Dad wants his brother to set a price, with the condition that Larry either buy it at that price, or let my dad buy it at that price. I can see how Dad thinks that’s fair between him and Uncle Larry. But is that approach fair to grandma? Do you have other suggestions?

Stout: Have it appraised, which would give you an accurate value for a starting place for a sale that is going to be kept in the family. From that value the negotiations can begin, which should give a fair price to both Grandma and the two sons who both want to buy it. An added option to consider after the appraisal would be for each brother to acquire an 80, so they each have an opportunity to own a part of her farm.

Zhang: I tend to side with your approach as opposed to your father’s. Letting your uncle or father pick a price could trigger regret, confusion and division. Suppose they both get half of the ownership rights. In one case I heard about, dad was retiring and he stipulated in his will that his one farming son in Iowa and two daughters living out of state inherited the land in equal shares.

The son will have the option to buy from his sisters at 85% of the fair market value, with the value being determined by an average of three appraisals conducted by an appraiser found by the Iowa son, one by the sisters and one by the lender working with the family for decades. I am not suggesting you need three appraisals, but this case gives you some food for thought. Of course, tenancy in common between your father and uncle is another option. I think your grandma would be happy to see the farm stay within the family.

Miller: Two questions: How do we fairly sell the farm to one brother vs. another? And how much do we sell the farm for?

The second question is easier to answer. The farm must be sold at fair market value. If not, the family could become liable for nursing home costs because they sold an asset below market value. With that in mind, how do you decide who gets the farm? If both brothers are comfortable at paying the fair market value, maybe they should each buy half. If not, then whichever brother wants to pay the fair market price can buy it.

One of our customers, in a similar situation, could not agree on who should buy the family farm. The will called for each family member to inherit one-fifth of the farmland. In addition, they decided if they sold the land, capital gains would take most of the value. So, they took out a reverse mortgage loan to cover costs that the current cash rent earnings could not cover. An important point in this case, the nursing home resident was 98 years old.

My dad and I have farmed together for several years. He is retiring. I am buying him out and will pay him rent for the land he owns. He still wants to help. What would be a fair wage to pay him?

Stout: The going rate averages $15 to $17 per hour, depending on the skill needed for the operation. Many farmers would enjoy the opportunity to do some farm work after retirement and might work for less, especially when working for their son who is continuing on his farming legacy.
My father insisted on taking less than the going rate because he loved being part of planting and harvest. I’m sure part of it was wanting me to be able to succeed in farming by doing his part to help me keep my expenses lower, too.

Plastina: As coldhearted as it may sound, the first question that comes to mind is how much you can afford to pay him based on your financial situation. In particular, compare your breakeven price per bushel (including family living expenses and return to management but excluding your dad’s wages) with the net farm price (market price net of transportation and storage costs) you expect to obtain. If the net farm price is higher than your breakeven, then you should pay some wages. How much? An absolute maximum to maintain the financial health of your operation will be the difference between those two prices multiplied by your expected production level.

A second question is whether your dad considers helping you as a hobby or as a needed source of income. In the former case, the “fair” wage can be much lower than in the latter case.

A third question is whether your farm is struggling to cash flow the operations. That could be a major impediment to pay wages. In the end, fairness is in eye of the beholder. And most likely it will be up to you and your dad to have a conversation. Go online to see Breakeven Worksheet for Crops.

Miller: Is Dad only supplying labor, or is he supplying machinery and labor? If he is only supplying labor, most land grant universities will have publications that show the range of costs and the average for hourly paid labor. This should give you an independent source to start discussions. If Dad is supplying a machinery line with his labor, look to the same land grant university to see if it has a publication on custom rates.

For example, Iowa State University annually collects and publishes data on farm custom rates. Again, such publications will most likely show a range of costs as well as the average, so they are a good place to start.

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