Homeland- Spring 2017: Questions land buyers should ask, but often don’t
February 24, 2017
Land is usually the biggest investment in an agricultural operation. Whether considering a purchase or lease, making sure you are asking all the right questions will help you avoid costly issues down the road.
Tyler Krug, Land Manager for People's Company in Iowa, works with many different types of land purchases and has been approached with a variety of questions. Jeff Garrett, Real Estate Broker for Farmers National Company in Spearfish, South Dakota, has years of experience matching up the right seller with the right buyer.
Q: Are there any easements on the property?
A: This is an important question because this isn't something that is always recorded in a document. Depending on the easement, it may lower the value of the property and cause you inconvenience. Additionally, you should check into whether there are any easements required to gain access to your property. If the only access to a piece of property is through the neighbor's, you want to make sure they can't lock you out. Krug emphasized checking into even "handshake" agreements. If there are any "handshake" agreements in place, you may want to get them in writing before purchase.
Q: How are the fences?
A: Fencing is time-consuming and expensive, so if the fences are in poor condition, you need to figure those costs into your initial investment. Garrett pointed out that it's important to know who is responsible for the fences. He recommends asking your realtor which fences belong with the property and the condition of the fences that the neighbor is responsible for, and how the neighbor is to work with on maintaining fences.
Recommended Stories For You
Q: Who are the neighbors to the land?
A: Garrett has been in the real estate business long enough to know that asking about the neighbors is a smart business decision. It goes hand-in-hand with the fences. It's a good idea to know who your neighbors are, and how they are to work with, especially since you'll be sharing a fence. A good relationship with the neighbors can make a piece a property a lot more appealing, while difficult neighbors may be enough to sway your decision.
Q: How does the price compare to similar property in this area?
A: While an appraiser uses comparable sales to come up with the actual value of the property, other factors may affect the sale price of property. Krug said some established farmers or ranchers may be willing to pay more to have land that's close to their home place or that has sentimental value, or otherwise contributes to their overall net worth—such as by providing water access for an otherwise dry pasture. Influences outside of agriculture, like recreation and development, can also dramatically influence the value of property in an area. When you're looking at comparable properties to price-check, make sure you find out if any of those factors are at work in the area.
Q: How is the property watered?
A: You can count on putting a lot of money into a piece of property if it doesn't already have access to water. Make sure you know who owns the legal water rights and/or irrigation rights. Again, make sure these are in writing prior to purchase. If you count on a creek or river, are there any dams upstream that will affect your access? Does it run year-round? If the property has access to a rural water system, check on monthly costs and the possibility of adding more taps for livestock water. In times of drought, if you have to haul water, where is the nearest location you can get water? Without water a piece of property is practically useless for agriculture, so make sure you check into this one thoroughly, Garrett said.
Q: Are there any utilities available to the property?
A: Along with your water supply, you may need electricity or want it later down the road. Garrett pointed out that if the land doesn't have electricity this is an extra cost that isn't cheap to do.
Q: Are there any pipelines or buried utilities going through the land?
These can cause issues when putting in fence or planting trees, Klug said. Also, if there are utilities of any kind on a property, you may need to check into the conditions of the easement, so there aren't any surprises if the cable company needs to dig up their line for an update, for example. You should always call 811—the hotline which provides a location service for underground utilities for free—before you do any digging. If you don't get a locate done before you start digging, you can be held financially responsible for any damage you do to utilities.
Q: Are there any environmental concerns with this property?
A: Garrett recommends getting an environmental assessment done on the ground, if it hasn't already been done, to have a solid understanding of the condition. An environmental assessment checks for contamination and soil, air and water quality. If there are undisclosed issues—toxic spills or waste buried, for example—they can end up costing you a lot of money in cleanup and mitigation down the road.
Q: What is the best way to buy land?
A: The best answer is cash, but that's rarely an option. For those just starting out, Krug recommends using the Farm Service Agency's Beginning Farmer's Loan, if you're eligible. An option that can benefit both the buyer and the seller is to work with the landowner on a contract for deed, which can provide tax benefits for the seller, and more flexibility and lower closing costs for the buyer. State departments of agriculture often have programs in place to help ag buyers find financing and sellers deal with the tax implications of a large sale.
Q: Do all the improvements of the property convey with the sale?
A: While looking at ground you may see new gates, fences, or water tanks and think it's all included. Garrett said to never make that assumption. Make sure that everything you see is either included or not, and get it in writing. You want to know exactly what you're paying for. Along with this, Garrett suggests asking if the mineral and water rights covey with the sale also. When purchasing ground you don't want to overlook anything that may seem obvious.
Q: What is the historic carrying capacity?
Garrett said it's easy to overestimate how much livestock a piece of property can support. Keep in mind that not all cattle are the same size or have the same nutrition requirements, and management styles can vary dramatically. Take the time to examine the grass and soil to see if it's been overgrazed.
Q: Are there any noxious weeds or varmints (such as prairie dogs) on the property or surrounding areas?
A: The landowner is legally responsible for controlling noxious weeds, like leafy spurge and Canada thistle. That can have a huge price tag in both herbicides and labor, and is sometimes an influencing factor in selling a piece of property. If the neighbor's property has a noxious weed or prairie dog problem, it's just a matter of time until it moves onto your property. Make sure you know the actual situation and adjust your offer accordingly.
Q: What are the annual property taxes?
Property taxes can be a major part of your operating costs. Garrett said this is a helpful in making sure you are aware of the actual amount of capital it is going to take to purchase the land.
As far as land availability, Krug said, "There is going to be a large transition to purchase farmland in the next 10-15 years. There isn't a lot of turnover on farms, but the majority of farmers, right now, are over the age of 65. In the next couple of years land will be passed down to the next generation or sold. The price of farmland, even though crop prices aren't great, is still high because there aren't that many farms for sale."
Land is considered a stable investment, but if you overpay for it or find it was misrepresented, you may end up in a situation there's no good way out of. Take your time, ask questions, and invest some time in researching what you want your land to do for you.