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Auction vs. private treaty: Pros and cons

Land Values: If it’s time to sell a farm, there are two major options. Which do you pick?

By Rob Warmbir

When it comes time to sell a farm, one of the biggest decisions you have to make is how to sell the property. The two main options in the Midwest farm market are public auction or private treaty sale. Both methods can be effective ways to sell your farm.

The auction method involves attracting multiple buyers into a room where they will openly compete, pushing the bid higher until a sale price is reached. The objective of an auction is to attract as wide a variety of bidders as possible.

Auctions are generally highly publicized events. The more bidders you have in the room, the better the chances of a higher sale price. Auctions can be very fast paced, with no cap in the bidding level, often resulting in a strong sale price and a contract being signed on sale day. Let’s look at some pros and cons for auctions.

Auction pros:
Ceiling.
Auctions do not set a ceiling price.
Competition. Auctions create excitement and competitive bidding.
Terms. The seller sets the terms of the sale as well as the auction date and time.
Transparency. Auctions are fair to both the buyer and seller, creating market transparency.
Decision day of. Auctions force bidders to make decisions the day of the sale and be prepared to purchase without any contingencies.

Auction cons:
Head count.
Auctions require at least two motivated buyers.
Slim pickings. It can be difficult to build excitement and competitive bidding on a lower-quality farm.
Missed opportunities. A set time and date for a sale may not allow all prospective buyers to attend.
No sale. A farm may “no sale” if bidders are not competitive enough to reach a reserve price.

A private treaty sale involves listing the farm for sale and waiting for buyers to place offers on the farm. Private treaty sales often occur within days or months of a farm’s listing date. 

However, there is no set timeline with a private treaty sale. The term “private treaty” means the negotiations are generally private, and the terms and price negotiated are not public knowledge. Here are some pros and cons of private treaty sales.

Private treaty pros:
One and done.
A sale only takes one motivated buyer.
Control. The seller has more control on the final price and buyer.
On the table. Everything is negotiable, including the price, timeline and various terms of the sale. 

Private treaty cons:
Limitations.
Generally, the “list price” of a farm establishes a ceiling price for the asset.
Time’s ticking. This type of sale doesn’t force buyers to make a decision, as no deadline or terms are set.
Markdown. If the property is not listed within a reasonable market price range, the listing can become stale or unattractive to buyers.
On the table. Everything is negotiable, including the price, timeline and various terms of the sale.

Although public auctions and private treaty sales are both effective methods to sell a farm, it is important to choose the right option to achieve the highest sale price on your farm. 

Generally, high-quality, attractive farms sell best at auction, as there will be demand from multiple bidders. Lower-quality farms, or farms with blemishes, tend to sell more easily through a private treaty sale process.   

What’s the right sale method for your farm? Be sure to consult a trusted land professional who offers both auction and private treaty sale services. By doing so, you’ll be able to get unbiased advice and assistance in developing a plan that’s best suited for your farm in the current marketplace.

Warmbir is an accredited farm manager with Hertz Farm Management in Kankakee, Ill., and a member of the Illinois Society of Professional Farm Managers and Rural Appraisers.

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