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Serving: WI

Uncle’s generous gift may help purchase of farm

Farm Progress Aerial view of farm
BIG BOOST: A discounted purchase price for a parcel of land is considered a gift and can help finance the purchase. This gift could also be used as the down payment when applying for a loan and reduces the likelihood that additional capital will be needed.
Agrivision: The gift of a discounted price for land may be used as a down payment.

My uncle lives 2 miles down the road from me and operates the farm where my dad grew up. My dad died 10 years ago, but my uncle and I remain close. He is 68 years old, and he and his wife don’t have any children. He’s asked me if I want to start buying his 240-acre farm. He will sell me 40, 80, 120 acres or the whole farm minus the house — whatever I feel I can afford. Good farmland is bringing between $6,000 and $7,000 per acre in our area, and this is good farmland. He says if I want to buy 120 acres or all of the land, he will sell it for $3,000 an acre. He wants it to stay in the family. If I can only afford 40 or 80 acres, he will charge me $3,500 an acre. He currently farms the land but is planning to retire.

I know this is a gift, but it is still a lot of money. I’m 40 years old, and my wife and I own 200 acres, our home, and all of our machinery to farm 700 acres, but we have debt. I owe $400,000 on my farm and house, and $160,000 on machinery. I also have a few cattle ­— 50 dairy-beef crossbred steers that I plan to sell in four to six months. I’m not sure how much more the bank will loan me and how much more debt I can handle. We have two teenagers, and my wife is a full-time nurse at the local hospital. Who should we talk to? My uncle says he will help me if I am really interested in buying at least half of the farm. What are your thoughts?

Tom Kestell: It is great that you have a good working relationship with your uncle, and he is willing to pass his farm on to you at a reasonable cost. Farm legacy means more to many farmers than getting maximum dollars for their life’s work. This is a hard concept for nonfarmers to grasp, but it is a real part of the rural fabric of life. That said, now you must decide what to do with this opportunity. They say, “You shouldn’t look a gift horse in the mouth,” but it is best not to be surprised by the changes that will come with the new responsibilities and obligations of the added investment. In my opinion, because of the reasonable price your uncle is offering, there is little downside to this investment.

The first person I would have a serious conversation with is your wife. Is your wife comfortable with the extra debt? Next, have a serious conversation with your children. Do your kids have interest in your farming operation? Third, have a reflective conversation with yourself. Can you be comfortable with the new debt level? There is good debt and bad debt. Good debt is backed by assets that cash-flow and exceed the value of the debt. Next, talk with your uncle and see if he wants to be cashed out, or will he be content with a land contract sale? Next, talk with your banker and do a detailed cost analysis of the pros and cons of the purchase.

Great opportunities only come around a few times in our life, so never pass over them lightly, but don’t allow perceived opportunity to put you in a lifetime of worry and mental anguish. Do your homework, get comfortable with the realities of the situation, and then thank your uncle for his generous offer and great opportunity.

Sam Miller: This a great opportunity to purchase land at a discount, but you have quite a bit of work to do before making a decision. First, put together a budget for the business by listing all of the farming revenues and expenses, including debt service obligations. Then complete a family budget with the net farm revenue and any off-farm income less family living and income taxes. This should indicate if you have any additional debt service ability for added land.

Next, complete a partial budget for the additional land — start with the expected revenues less expenses for the added land, and subtract the debt service at the reduced purchase price. Contact your local Extension ag agent or farm technical college instructor for forms and/or assistance completing these budgets.

Next, you will want to discuss the discounted purchase with an accountant to see if there are any tax obligations triggered for your uncle if he sells to you at a discounted value. If there are, it may change the purchase price, and you would need to recalculate your budgets. While you have some budgeting hard work ahead, it is worth exploring the opportunity. Good luck with your plans.

Katie Wantoch: The purchase of farmland is a huge investment and one that you won’t make too often in your farming career. Carefully analyze this decision to determine the feasibility of the purchase and whether it will be profitable for you in the short term and long term. Often, owned farmland is profitable over the long term, but may not provide sufficient cash flow in the short term if purchased with substantial borrowed capital (debt).

The generous offer by your uncle to discount the purchase price is considered a gift and would help you with financing the purchase. This gift could also be used as the down payment when applying for a loan and reduces the likelihood that you may need additional capital.

Consider other financing options besides your local financial institution. Farm Service Agency loan programs provide financing directly to farmers and also work with lenders to assist in meeting farmers’ capital needs. Seller financing may be an option, and your uncle would take the role of the lender. Depending on your uncle’s cash-flow needs in his retirement (i.e., needing the full purchase price at time of purchase or monthly installments), this may or may not be an option for him. Finally, land contracts (i.e., rent-to-own) might be an option if your uncle is willing to spread the payments over an agreed-upon length. But you would not own the property until you make the final payment of the contract.

Either of these strategies might work for you. Do thorough research on which option works best for you, your wife and your uncle so you have a successful result in the end.

Weighing purchase options

For the past 15 years, I have delayed building a machine shed on my farm. Half of my machinery is housed in a smaller shed on our farm and the other half sits out year-round. It doesn’t look junky, but there would be less wear and tear on my equipment if it were all under roof. I think I will finally have enough money to build a $100,000 machine shed this fall, but now my mechanic tells me my combine is on its last legs and needs to be replaced. As you know, even decent used combines cost at least $200,000 to $300,000. I farm 300 owned and 900 rented acres. I am 52 years old, and I owe $125,000 on my farm and $160,000 on equipment. My lender says I should build the machine shed, and he will loan me the money for a combine if I don’t spend too much on a used one. Please advise.

Tom Kestell: To build or not to build ... that is the question. I also had to struggle for many years with the decision to make the investment in a new machine shed. We seldom build them big enough because our needs continue to grow. Do you have an adequate shop for repairs? Maybe you could incorporate a new space for a shop in your new storage shed.

It has always been curious to me that dealers do not store their equipment indoors but sell it to their customers, who then take ownership of the care of their new equipment. Storage is an expense, but also a necessity in the long-term care and maintenance of your machinery investment. A properly built and maintained machine shed should last you a lifetime. I would build the shed — and make sure it is high enough, wide enough and in a handy location. I would also put in overhead doors with openers. Sliding doors are high maintenance and much more difficult to use.

As for the combine situation, I don’t know the age or overall condition of your combine, but a lot of maintenance can be done for the cost of replacement with another used combine. Many times, replacement combines have many of the same issues that your current one has. Buying from a private owner you trust can be a good alternative rather than buying from a dealer or combine jockey. Don’t jump at the first opportunity you get, because there is a lot of used equipment available. This year is not the best year to be buying a used combine because used equipment prices are at a historical high. Be patient and check out the many options available.

Sam Miller: This is the time for a partial budget exercise to evaluate your two capital expense options. Start by determining the difference in cash flow by purchasing an upgraded combine, including improved performance of the new unit and the added debt service vs. the reduced repair expense for the existing combine.

You indicated you had the money to build the machine shed. Since this is a longer-term asset, it may make sense to borrow for the machine shed and use the cash for the combine. The amortization of the machine shed will be longer than for the combine, meaning a lower cash-flow burden.

Complete a total farm budget to determine how much your breakeven cost per bushel will increase by adding the additional debt. This will provide you with information to make an informed decision about making one or both investment decisions. Your Extension ag agent, farm technical college instructor or banker can assist in the evaluation of these options. Good luck with your decision.

Katie Wantoch: As you mention, there are expected benefits of machinery storage, including less deterioration, more reliable performance and better resale values. The value of equipment downtime is expensive and can be difficult to estimate. Hopefully you have thoroughly evaluated the amount of equipment storage you may need to reduce downtime. When you consider the price of new equipment along with interest rates and other costs, the cost to build a storage facility to increase the life of your equipment appears to be more important than ever.

Besides farmland, combines rank as one of most expensive purchases for a farmer, and are a key component to an efficient and successful harvest. Iowa State University Extension provides information on custom rates specific for varying grain harvest equipment. You should consult this guide when considering which combine would best match your harvesting acreage needs. For example, the guide reports that machines in the over 500-hp class harvested an average of more than 3,000 acres in 2015.

Retired ag economist William Edwards suggests grain farmers should have enough equipment to complete harvesting in 25 to 30 working days or a little less. This includes having an adequate number of grain wagons and trucks, and labor for harvesting, transporting, drying and storing grain. Replacing your combine could mean a difference of thousands of dollars if your harvesting is delayed. Analyze your situation and see what makes financial sense and results in a profitable return to your grain business.

Agrivision panel: Tom Kestell, dairy farmer, Sheboygan County, Wis.; Sam Miller, managing director, group head of agricultural banking, BMO Harris Bank; and Katie Wantoch, Extension agricultural agent specializing in economic development, Dunn County, Wis. If you have questions you would like the panel to answer, send them to: Wisconsin Agriculturist, P.O. Box 236, Brandon, WI 53919; or email them to [email protected].

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