A Word on Farm Prices
Posted by Preston Bristow on June 22nd, 2007 filed in Farm Real Estate Market
A question I am often asked is, “Why are Vermont farms listed at prices that are higher than what their farm income can support?” At the risk of over simplifying, there are two answers to this question: the price at which buyers are willing to buy, and the price at which sellers are willing to sell.
First, let’s talk about the price at which buyers are willing to buy. The median sale price of a residential property in Vermont last year was just under $300,000. Since a typical farm includes one house, and sometimes two houses, plus a number of large barns and a significant area of productive agricultural soils, it’s reasonable to expect that the average farm in Vermont should sell for twice or more than the cost of the average residence in Vermont. Worse for start-up farmers, there are bargain-hunters who have contacted me and said that if I hear of a typically-sized family dairy property that they can pick up for, say, $350,000 to $400,000 that they’re prepared to buy it in cash, no conditions and close in 30 days. Since farm lenders are generally willing to lend only in the area of $275,000 for the real estate portion of a start-up organic dairy operation, that tells me that even if farms were priced at their income generating value they still wouldn’t be available to new farmers — other buyers would snap them up first. (I’m not including here farms subject to an affordability mechanism held by a land trust — that would be the subject for another blog.)
Now comes what is perhaps the more important part of the pricing equation, which is the price at which sellers are willing to sell. Because dairy farming in Vermont has been a depressed industry for so long, many farmers have little retirement and significant debt. It makes no sense to a dairy farmer to sell their farm if, after retiring their debt, they cannot afford another place to live and have nothing to live on. That’s where the old saying among dairy farmers — “I’m loosing money but I can’t afford to quit” — comes from. There are a number of times when I as an agent for the seller have dutifully presented a low-ball offer and had it refused with the answer, “I can’t afford to quit at that price.” This explains why many farm properties will drop from the market, unsold, rather than drop in price.
So who can afford to buy a farm in Vermont? The typical person that I show farms to is not financing the total purchase but brings with them equity from the sale of a home, a business, or another farm, or from an inheritance. Some can leverage the sale of an out-of-state property in a higher-priced market for a farm in Vermont and do quite well. They view the purchase of the land as a separate asset from the farm operation.
What advice can I give to those without significant equity behind them? Despite the famously taciturn and perservering nature of Vermont farmers, there still are and will continue to be distress situations when prices can drop suddenly. You should follow web sites like mine, and be prepared to act quickly!
June 26th, 2007 at 5:02 pm
Hi Preston, Farm/land prices in England have long out weighed the income generating potential of the land itself. Like VT the high cost of residential property has been one factor, but also basic supply and demand plays a part. Everybody wants to own some land, usually for a “pony paddock” and it is not uncommon for small parcels of 5-10 acres [with no development potential] to make in excess of $20,000/acre, the bigger the block of land, the lower price per acre, however as a dairy farmer my business could not pay the interest on such a loan! Vermont land/farm prices seem a lot more realistic than those in the UK, keep up the good work Preston.
Richard Knowles, England.
June 26th, 2007 at 9:45 pm
Richard and I have corresponded before and sometime perhaps he’ll make the jump “across the pond.” The UK through its Town and Country Planning Act and Countryside Commission has stricter regulations to preserve its farms and open spaces than Vermont, yet market forces are what they are. There are cheaper places to buy farms in the US than Vermont, but given the quality of life, scenic beauty, commitment to farming and other factors that Vermont has to offer I feel that Vermont farms are a relative bargain and a good investment.
July 9th, 2007 at 4:24 pm
Hello Preston! Came across your farmsinvermont.com site which led me to your blog. We are considering a move to a New England farm from New Mexico (wife spent a few years working on farms in Vermont while taking breaks from college). You know, four seasons, healthier lifestyle, better schools, yada, yada, yada. A couple of questions come to mind after reading this, and other, entries on you very informative blog.
1. When you say a “typically-sized family dairy property” what exactly is that size?
2. For this “typically-sized family dairy property” how is its selling price changed by a conservation easement?
3. Out here in the West mineral rights are typically owned by someone other than the surface property owner. Is this also true in Vermont, or more generally, in New England? Having a road built through a beautiful pasture to a drilling site can be quite startling!
4. How quickly can one close on a property (cash sale) if the only condition from the purchaser is issuance of title insurance?
5. If a property is in the current use program must it be utilized in exactly the same way as the previous owner to retain tax benefits? Or, can a dairy operation be changed to a horse farm or vegetable farm? I am just a bit confused by the current use program vs the Vermont Land Trust. Is it possible to receive tax benefit from both?
Thanks for the all the information!
July 11th, 2007 at 9:28 pm
Hi David. Good questions, and I hope you do make it to Vermont. The yada, yada, yada’s are worth it! Here’s my response to your questions.
1. I was purposely vague when it came to the size of a “typical” farm because for every “typical” farm it seems there is an exception. However, I’ll come clean. A “typically-sized family dairy farm” in my experience currently averages 200 acres within a range of 150 to 250 acres. Vermont having the terrain it does, that “typical” dairy farm will contain from 60 to 120 acres of tillable land with the rest being non-tillable pasture, woods, farmstead and wetland.
2. I’ll cover the issue of how the selling price of a “typical” Vermont farm is changed by a conservation easement in a follow-up blog entry.
3. Vermont, thankfully, does not have many highly valuable mineral deposits, at least that have been discovered yet, so most farms do come with their mineral rights intact. There are occasional exceptions, oil and gas leases being the most common.
4. If you’re a cash purchaser and all you need is title insurance, and there are no title defects and the lawyers for both sides are willing to hustle, you could close in under 2 weeks. More typically a cash sale takes 5 to 6 weeks to close.
5. Current use is a state tax abatement program for properties in active farm and forest management. Conservation easements are perpetual deeded restrictions held by the Vermont Land Trust and sometimes co-held with state agency partners. Both programs allow changes in uses so long as they fall within the legal definitions of accepted farming and forest management practices. I know that sounds scary, but the definitions are pretty broad.
Hope that helps! Preston