The golden rule of real estate: location, location, location. Does it apply to farmland? Absolutely! As you would expect, there is a big difference in the value of two high-quality, productive grain farms if one is located in the Mississippi River delta and the other is in central Illinois. The differences are easy to spot – the type of soil, yield potential, the need for irrigation or drainage, access to grain markets and the rent levels the area is able to support.
But what about two high quality farms both located in central Illinois? Those differences might be harder to see. Let’s say we have two farms: both picturesque rectangular 80-acre properties, each with a Productivity Index rating in the low 140s, that drain well and have easy access off a paved road. One is located in Piatt County, and the other in Sangamon County – about 80 miles apart as the crow flies. Both of these farms were sold at auction in the 4th quarter of 2017, and general consensus is that both sold well with good auction attendance and spirited bidding. When the dust settled, the farm in Sangamon County brought $13,400 per acre while the farm in Piatt County “only” brought $10,750 per acre. Why such a difference?
In the above scenario, several factors come into play. While the farms are statistically similar, the major differences may be the location and the strength of the surrounding neighborhood, both financially and from a demand perspective. At MWA, we keep a close eye on various land markets across the country. When we are contacted about selling a farm, one of the first questions we typically are asked is, “What is my property worth?” This is the start of our questioning process. To really answer the question takes a bit of effort. We have to look at the strength of the local operators. Are they well capitalized? Will there be multiple bids for top-of-market rents to an investor? We look at neighboring farm ownership. Will these direct neighbors – or neighbors down the road – be potential buyers? Is the number of adjoining neighbors limited as the farm is cut off by an interstate highway or railway? Sometimes, just the name of a county or area will demand a higher price as investors like to say they own land in a certain location and want to buy only there. We also look at sales data to see if there have been a high number of sales in a particular location, taking some potential buyers off the table as they have already made purchases.
This is where having an experienced firm such as MWA Auctions and Real Estate on your side will help ensure you do not overpay as a buyer or let a farm go for too little as a seller. We always dig just a little bit deeper to help you better understand the potential value of a piece of property.