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Estimating land value

Investors see Prairie farmland as a good, long-term investment sure to return dividends, but how should it be valued?

No one is busy making land anymore! True enough, and land transactions on the Prairies show an upward pattern in dollars per acre, but the process of establishing a value for the land is not the same across the board or across the years. “Working out a fair price will take legwork. It comes down to being knowledgeable about the land you’re buying and the market you’re buying in. There’s no free lunch out there,” says Doug Janzen, a senior appraiser with Farm Credit Corporation at Abbotsford, British Columbia.

There are many considerations when deciding how much this piece of land might be worth. (Photo by John Dietz) Advertisement

While the value trend is upward, actual prices being paid for similar land in different markets can be quite different. Janzen says that by just crossing the border, it changes. It is very hard to know why but, over time, he says the markets will even out to some degree.

Doing an appraisal, Janzen blends informal and formal approaches. “I talk to realtors, to other appraisers, to farmers who’ve recently bought and sold land. I find out what they’re paying, and look at what they’ve bought, and then compare that to whatever it is you want to buy or have.”

FCC’s is proprietary information. It does not become common or public knowledge. The reason, primarily, is that a lot of information gathered is confidential. “You don’t want your neighbour knowing what you paid for your land unless you tell him yourself.”

For people venturing beyond “home base” to buy land and start farming, they need to be especially careful, but that information is available. Janzen says, “If they understand your intentions, especially in the farming community, people are very helpful. If you walk into a new place and say something like, I grew up somewhere else but I’ve looked at this area for years, I love it and I’d like to farm here, they’ll answer questions. Talk, and listen. Spend time in the
coffee shops.”

What about selling farmland?
On the other side of the transaction, Janzen says it takes a good deal of thought to dispose of land and get top dollar. “Take good care of it,” he says. “Control the weeds, keep it fertile, and take care of buildings. Keep it looking nice and keep following good farm practices. If something looks beautiful, people are going to be attracted; if it’s an ugly mess, people won’t be in a hurry to pay top dollar.”

More than anything else, failure to keep up with technology detracts from sales value. It is a common problem: as farmers face retirement, they become less willing to spend money to rebuild or stay current, and a kind of deterioration begins that has more to do with technology than buildings. “Whether it’s a good investment to keep up with technology when you’re going to retire is another issue. To maximize the price, keep it all shiny, nice and clean, with up-to-date technology; to maximize the dollars that stay in your pocket, sharpen your pencil and figure out whether it makes sense to do all the upgrading,” says Janzen.

The value of the farmyard site really depends on the area and the farm, on how much consolidation is occurring locally, and proximity to major urban centres. “A guy with his new mansion and a nice yard, who’s looking at expansion, may not put much value on buildings. He may say, ‘I can use the bins, that’s about it.’ Another may look at a mid-size farm 20 miles from downtown Winnipeg and say, ‘I’ve got a great job but I want to farm on the side, and my wife wants a nice country house. That’s just what we need.’”

Sellers also need to consider the impact of local market conditions. News of a local factory expansion, for small to mid-size farms, may be a good reason to postpone selling. Generally, new industry has an upward pressure on prices. A hundred new families looking for places to live have an immediate effect on value. “A new industry in town definitely affects the value of real estate and small to mid-size farm holdings, but has less effect for large commercial farms,” Janzen says,

Industry profitability also affects sales value. The Peace Country has oil, gas, timber, lumber and farming. When those industries are down, land prices go down, but maybe not if the crop prices are good; one change can offset another.

Professional advice is often needed?
Terry Betker began his career as a Manitoba farmer. He became a certified agricultural consultant, moved on to partner in the accounting firm, Meyers Norris Penny and today is director of Practice Development – Industry and Government in Agriculture for MNP agricultural services. The firm’s 15,000 agricultural clients today farm a large portion of the Prairies. “If you’re about to invest, talk to an independent advisor, not so much about price, but about the decision. Anyone in a somewhat marginal financial situation should make sure they talk to their lender,” Betker says.

Betker recommends that purchasers shop around to make sure they have credit lined up before the deal is made. What lenders say about whom they lend to, how they lend, and some of their considerations is changing a bit. “Some interesting changes have occurred in how some deals can be financed and, I think, there are some changes on the horizon about access to capital,” he says.

Attitude to land ownership also may be changing, Betker notes. In the United States, some farmers are thinking of land like an investment portfolio. They will buy when better land comes for sale, and if they have to, they will off-load some less productive land. “That’s a progressive approach with some merit in it,” he says.  

When selling, tax management comes into play as well. Selling at fair market value has a lot to do with whether the title is transferring to a family member or to an “outsider” at arm’s-length.

To manage taxes and stay on side with the Canada Revenue Agency, make sure the right legal structure is in place to help do things like optimize capital gains exemptions and transfers to family members. If the plan includes parting with some land in two or three years, talk to an accountant about it. Getting a strategy in place definitely provides benefits to the kids that are taking over.

An exit strategy also is sensitive for anyone who will be cashing in from an incorporated farm.

Betker says, “If they are incorporated, they can become off-side and be ineligible for some of the tax deferrals that are available to farmers. Be careful with that. A $500 discussion with your accountant or lawyer to ensure you are on-side can affect the outcome of six-figure numbers.”