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Six Questions To Ask When Buying Land

Six Questions To Ask When Buying Land
Members of the American Bankers Association say you need to answer some basic questions before making the plunge.

The top six questions members of the American Bankers Association's Agricultural and Rural Bankers Committee say you should  ask before buying land are:

1) What is your business's financial condition? Consider needed investments, expected expenditures, and crop conditions to determine if buying land is the best use for your cash. Are there other opportunities that can provide a better return?

2) Have you created a pro-forma cash flow? Research sales trends and expected revenue of a potential plot of land to determine how well the purchase fits within your plan. Does the potential return meet your objectives? Your banker can help you develop this essential planning tool.

Buying land is a big investment that requires doing a thorough evaluation.

3) Given your revenue forecast, are you overpaying? If you are paying a premium, how long will it take you to recoup? Determine how much your business should prudently spend on a land purchase and the revenue needed to justify your purchase and stay within those targets.

4) Have you thought long and hard about it? Never be rushed by a broker and never confide your best price or financial goals with a party working for the seller. Don't buy impulsively or make a deal before visiting the property numerous times. Rework the standard broker's purchase contract with your lawyer, deleting what you don't like and adding what you want, before presenting the offer.

5) Does it make more financial sense to rent the land rather than to own it? Rental rates are high, but renting frees your cash for other activities. What will be your total land payment per tillable acre owned and how does this compare to cash rents in your area?

6) Should you go all in with your cash? Talk to your banker about alternatives to using all cash in the transaction. Land is an illiquid asset and purchasing it will impact your farm's liquidity. Your banker can work with you to structure a loan that will enable you to acquire the land you need while preserving some of your working capital for necessary expenditures.

For nine more important questions to ask before buying land, see the August 2013 edition of Dakota Farmer, page 72. The issue is available online. Click here.

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