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The Land Market Push...How Long Will it Run?
By Randall V. Hertz, ALC, AFM, CFP
Land prices have been up 10% to 20% or more the last couple years. A March 1 survey shows land values up another 6.5% over the last 6 months.
What is propelling the land market? In the long run, asset values are determined by income and market returns. Most landowners enjoyed record yields and excellent commodity prices last year, and the livestock sector has been profitable. The housing market has indirectly boosted demand for farmland, through high prices for land “in the path of progress” with sellers reinvesting in farmland through 1031 tax free exchanges.
An example of the domino effect of the housing market is an auction we conducted for a client who owned two farms near the Iowa/Illinois Quad Cities. One parcel was 160 acres, located near town, but probably not developable for decades. The second farm, 200 acres, was mostly inside city limits, but still a couple years from being developed. Upon our recommendation, they decided to have us auction their farms.
Auctions provide sellers a unique set of benefits:
- Sellers set the terms, conditions, and closing date of sale. The buyers only compete on price.
- Buyers come prepared to buy. The property sells with no financing contingencies.
- A sense of urgency is created. The auction brings interested parties to a point of decision.
- Maximum exposure is focused on the property auctioned. A properly structured and promoted auction will funnel prospective buyers to create increased competition for the property. It will “freeze” activity on other properties for sale.
- Buyer benefits include knowing the seller is committed to sell, they are paying a fair market price and the negotiating time is reduced
- Sentimental and emotional value is realized. Buyers can get caught up in the auction process.
Our clients chose to auction the farms because of the strong market, and their belief an auction would provide them the best sale. The results paid off nicely. The 160 acres sold for $6,250 per acre to the tenant, and the 200 acres sold to a development company for $10,000 per acre.
Our auction process is a system. We determine an opinion of market value, and if appropriate a reserve price. Facts and details about the property are inventoried. A marketing plan is developed and implemented. An informational marketing brochure is assembled and provided to prospective buyers and decision influencers. The property is extensively advertised, promoted, and included on our web page. Our goal is for every potential buyer to know the property will be auctioned.
On auction day, our professional auction team executes a well-organized, energized and competitive auction. At the conclusion of the auction, details are handled to assure the closing happens in a timely manner.
While the above properties were influenced by their location near a metropolitan community, the high selling prices are an indication of the current strong land market.
Looking ahead, there are changes occurring that may take the strength out of the market. First, the housing market may cool, and negatively impact land prices. There are some spots of housing market weakness appearing.
Second, interest rates are rising. An increase in rates would negatively impact land values.
Third, commodity prices globally, including energy, food and metals, have rallied the past four years. As higher prices filter through the world economy, the markets may adjust.
Fourth, government farm program payments may be reduced.
Good investments are hard to find. The recent decline in stock market prices does nothing to attract money to stocks or give investors confidence. While there are some clouds on the horizon, Midwest farmland should continue to be a solid investment.
