Land Values: 11 Factors to Consider
Last year, Steffes Group conducted 697 auction sales in 11 states. Through our work in the auction business serving individuals who are actively transitioning part or all of their family’s land wealth, we are offered a unique perspective on the driving factors of land values. It has now been widely publicized that land values are at all-time highs in almost every region of the country. In the last two years, prices have quickly met and eclipsed previous record highs set in 2012 and 2013. There are many driving factors behind land values which are often different for each transaction. In no particular order, here are 11 factors we often think of in terms of their influence over land values.
Commodity prices most closely influence land values. As a matter of fact, in some of the exclusively corn and bean regions of this country, I think you could say they’re almost correlated at a 1-to-1 ratio. The price of corn goes up, and land values follow suit at nearly an equal rate. Simply put, commodity prices translate to how much money farmers will get for their crops. In periods of higher commodity prices, farmers have access to more capital to make land purchases. The rent markets generally also trend upward, creating a more favorable environment for absentee ownership.
While it is not uncommon for us to see cash buyers for land purchases at our auction sales, it still takes plenty of capital to purchase land. The reality of today’s land markets shows us a million dollars won’t buy you 160 acres in some parts of North Dakota and Minnesota. Down south, it’s double that and then some in places. Having capital to complete a purchase is a necessity. Borrowing money is part of that equation, and the cost of funds or the interest rate paid is factored into the land market when buyers are making land purchases.
Yields & Weather
If farmers don’t have a good yielding crop to sell, they won’t reap the benefits of a good price. Local yields and production closely influence land values within that neighborhood. We’ll see depressed prices relative to other areas when there is widespread crop failure of sorts. Drought, flooding, hail - you name it.
Soil Fertility & Drainage
A piece of land with rock, sand, and water often won’t allow you to do anything but grow grass and feed cows. Conversely, a property with productive silt loam soil will often raise a beautiful stand of corn or soybeans, generating more income. The soil may be incredibly fertile in areas with poor drainage, but good crop growth is inhibited due to moisture, flooding, or alkalinity issues created by poor drainage. This is particularly troublesome in the flat areas of the prairie. Drain tile and modern ditching practices coupled with GPS guidance have drastically improved the drainage issues of the recent past. However, oftentimes there isn’t a place to go with the water, or draining the wet area is restricted by government decree leaving little room for improvement intern influencing the value of the land.
Location & Neighborhood
Geography influences the length of the growing season from north to south. Areas further south can grow longer-season variety crops that often yield better.
Simply put, some neighborhoods are more competitive than others. There are certain farming and ranching communities with many established farm families with youth on their side. This typically creates a more competitive environment for land values and rents.
Intended & Unknown Alternative Uses
Land with the propensity to raise high-value crops will generally make a more significant economic impact than land that can only be used as pasture or hunting land. Most purchasers will buy land and use it in a way that maximizes the economic impact. Appraisers refer to this as the property’s “highest and best use,” the best possible way to use the property.
We often see the land used for uses different from their current use or perceived highest and best use—a bridge for a city, a solar park, a hog barn, or a dream house. With farm real estate, the assumption often is that it will be farmed, grazed, or hayed. Buyers are often understandably coy with their intended use of the property until after the purchase. Unknown alternative uses can drastically increase the prices these buyers are willing to pay.
With sizeable modern farm and ranch equipment, good and legal access is very important. If access is poor or there is no legal ingress to the property, it generally has negative implications on the value of the land. If there are several wide approaches on the land, adjoining well-maintained gravel roads, or highway frontage, these positives will all play into the underlying value of the land.
Previous Exposure to the Market
If a property has been previously exposed to the market, it can have implications at auction or again offered on the open market. Buyers are often apprehensive about giving more than previously asked and or are not interested in bidding due to the perception of the seller wanting what was formerly advertised as an “asking price.” Moreover, if the land is sold and then reoffered for sale in a short amount of time due to circumstances like financial gain and money troubles, we are apprehensive about participating. We find that buyers aren’t usually sympathetic to sellers looking to make a quick profit or in financial hardship.
Large tracts of land in agricultural circles are highly sought after. The ease of farming and ranching on these contiguous tracts is a big plus for producers. For investor buyers, it may be easier to find a tenant on 1,000 acres of pasture or cropland compared to 100 acres.
Local Perceptions & Politics
Compared to other types of real property, the marketplace’s perception of a seller’s motivation to sell is more of a factor in land transactions in tight nit farming communities where everybody knows everybody. A prospective buyer may perceive a feuding family selling as a barrier to even registering to bid, given hypothetical disputes that may or may not arise due to multiple personalities. Local politics and other personalities can keep people away or make them more active, ultimately influencing price. An estate situation where land needs to be sold due to death typically yields more buyer interest simply because it so plainly tells the story. Bank-owned, forced, or bankruptcy sales where the decision lies in the bankruptcy trustee’s hands can also positively and negatively influence price depending on the buying public’s perception of the situation.
Method of Sale
There are various methods of sale, including the auction method, sealed bid sales, listing sales, and offer and acceptance between two private parties. The auction method of marketing is the preferred method of sale throughout the Midwest. It allows for true price discovery where interested bidders compete for the same property towards their price. Most record prices throughout the Midwest are attained through competitive auction sales, driving the price beyond any recent comparable sales.
There is a multitude of factors that influence land values. It can be challenging even for individuals like us actively engaged in the sale and management of agricultural assets to anticipate which factors will come into play. It can be daunting for a landowner who has never navigated these waters before. If you’re on the seller side of a land transaction, my advice to you is simple - get some help. The costs associated with engaging the services of a competent land professional, be it a rural appraiser, auctioneer, or real estate broker, will be well worth it in terms of your net outcome.
Written by Max Steffes, West Fargo, ND Site Leader