Dear Michael: I have been working on my parent’s farm since I got out of college. At the time I returned, my dad was still using old farming methods and his crop production showed it. I learned in school about no-till farming and other methods of bringing up his crop production. Because of this, the land he owned – and the land that was added since then – has doubled in production and, of course, doubled in value. Actually, it’s gone up fourfold since then. My parents still hem and haw about what to do with their will and I’m still not sure if they even have a will. If they should die now, I’d have to buy out my four brothers and sisters. With the price of land the way it is, I’m not certain I could do that? Was helping them out the worst decision I ever made? – My Own Worst Enemy.
Dear My Own Worst Enemy: The cryptic answer to your question of ‘could I even afford to buy them out?’ is ‘No, you couldn’t’.
In order to buy them out, lenders will require you to have at least a forty-five percent ownership stake in what you own versus what you are buying. In other words, if you are buying one million dollars’ worth of property, you’d better have four hundred and fifty thousand dollars net worth to put on the line with this purchase.
If you are buying out an eighty percent share from your siblings with no offsetting equity, it’s going to be a short visit with your lender.
Many young people fail to see this upcoming disaster looming in the future due to their parents’ inability or unwillingness to deal with this situation. In most cases, because parents don’t really have a handle on what they should be doing, they put it off and wait to see if the answers become clearer down the road.
Some questions they may have are ‘Will you ever get married?’ If you are married ‘Is the woman our son married to invested in the farm’. ‘What happens if they have a divorce?’ ‘Is our son committed to farming the way we are (were) committed to farming?’ ‘If he should die, where does the farm go then?’
Other questions rolling around are ‘How can we be fair and equitable to the other children in our estate plan?’ Many people today are absolutely frozen waiting to see what land values do in the future. Many believe they will drop. Historically, this would be an unusual event unless we see a repeat of the eighties – eighteen percent interest, crop prices at record lows, embargos, a national fuel crisis, inadequate crop insurance – all rolled into a five year period of time.
We are a far, far cry from eighteen percent interest as this was brought on by run-away inflation during the early eighties. It was an unprecedented event and our government handled it poorly by raising interest rates to unbelievable highs. They learned a valuable economic lesson.
Land prices will always be a function of profitability and with crop prices decreasing (inevitably the seven year drought was going to break which occurred through the breadbasket of our country) we will see stabilization of land values across the country.
In your specific case, however, it really doesn’t matter what the FMV of land is or is going to be. It will be whatever your parents will states you will pay for the land – or pay to your siblings. With no will or an old, outdated will, this will be the auction value of the land as an auction is the only true way to establish the value of land on any given day. Unless you have millions of dollars in equity – as will other buyers who will be there have – you’re not even going to make it to the second round of bidding.
Let’s take a lesson from our government. Right now, they are stuck with two very radically different viewpoints refusing to cooperate and run our government efficiently. Stuck in limbo, we all suffer the consequences.
You, stuck in your parent’s limbo, have the same issues and the same dire consequences ahead of you. You should be rewarded for coming back and increasing the value of your parents estate – and being a part of increasing the holdings of the estate with your labor and knowledge.
But if your parents refuse or procrastinate on working with you, their partner in the operation, you better start building your own estate – land, machinery, buildings, and/or livestock – outside your parents estate to make certain you have the equity necessary to buy what you can at the time of their deaths.
Sometimes you’re given a long time to accomplish this – sometimes not. I’ve always said the average farm career is about forty-five years (age twenty to sixty-five – give or take). If you’re now forty, your opportunities for income are now down to twenty-five years and each progressive year without planning, the margin gets thinner and thinner for success.
“Keeping the Family Farm in the Family”
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