16 Aug Buying a Farm in a Partnership: The Complete Guide to Farm Partnership
Buying land with a group of friends/family/coworkers can have many great advantages. However, if not planned correctly, partnerships can result in many headaches and financial burdens. This article will briefly highlight some of the highlights and potential downfalls of partnerships and more importantly, lay out some options for avoiding any potential drawbacks.
Benefits of Farm Partnership
The benefits of a partnership are pretty easy to identify. As a group, buyers have more financial power to buy larger properties. Ultimately, they get to enjoy more property than they would if they were buying on their own. Simply put, partnerships mean enjoying more property without the financial strain of buying the entire property by yourself.
Another great benefit is using the property with your friends and family. Without question, land owners enjoy a pride of ownership. Sure, guests enjoy spending time at others farms. But it is hard to match the pride and passion that comes with land ownership. In partnerships with friends and family, all parties feel that pride. You get to experience those feelings with those closest to you. You get to create lasting memories.
Possible Downfalls of Partnerships
Financial Loss from percentage ownership.
The downfall that we here at LandCo deal with the most is the financial downfall. At some point, every property moves hands…without exceptions. Divorce, death, financial change, failed partnerships, etc… there are thousands of reasons why people have to sell/transfer farms. The financial downfall occurs because a percentage ownership of a farm is never as valuable as owning a farm outright. Let me say that again…a percentage ownership of a farm is never as valuable as sole ownership of a farm. There are many reasons for this but mainly, most land buyers don’t want the headaches of partners…especially partners that they do not know. When not planned properly and we are asked to sell a percentage ownership of a farm, it is very common to see discount in price of 20-40%!
For example, lets say Bill and Steve buy 100 acres of farmland and lakes for $500,000. They each throw in $250,000. One year down the road, Bill gets laid off from work and feels that it is in his best interest to sell his portion of the farm. Instead of owning 50 acres outright, Bill owns 50% of 100 acres. So any potential buyer must be willing to take on a partnership with Steve, who they most likely don’t know. Ask yourself this…would you buy 50% of a property with someone you don’t know? You don’t know if they have the same goals, ideas, or even life values? For me, the answer is NO. For most, the answer is NO. So we go to sell 50% of the property and no one is willing to pay $250,000. Over the next several months we lower the price to entice buyers. What we have seen in the past few years is that buyers are willing to take on the risks of a partner who they do not know when the price falls to 60-75% of market value. So if the farm is worth $5000/acre…or $250,000 (50% of $500,000), buyers are willing to take that risk when the price is in the $150,000-$187,500 range. That is a huge financial hit. Don’t worry, there are ways to protect yourself from this! We will address this in the next section.
It is very common for each partner to be looking for something different in a property. This is especially the case when it comes to deer hunting but also applies to any partnership. For example, one partner may be looking to harvest only mature pope and young whitetails…while the other wants to shotgun hunt with his three brothers. There are several conflicting goals when it comes to recreational property. Another example would be one partner wanting to grow the state record bass while the other wants to have a great panfish lake. The result of these differences often result in emotional hardships. Lets use the Bill and Steve example again. Bill and Steve buy 100 acres of recreational land with 50 acres tillable and one 10 acre lake. Bill wants to trophy hunt for record book whitetails and raise state record largemouth bass. He has seen and passed the same 3.5 year old deer with great genetics. Later that year, Steve’s brother drops the same deer in late shotgun season. Later that spring Steve come ashore with a livewell of fish to filet…including two five lb bass. Steve isn’t necessarily doning anything wrong, so Bill keeps quiet…but experiences anger and bitterness. These may be extreme examples but ask anyone who has been in a partnership and they will tell you they have experience something of this sort. Again, there is a solution!
I hope I haven’t scared you off of land partnerships by now. Successful land partnerships only take a little foresight and planning. These steps are for the benefit of everyone involved in a partnership.
1) Plan an Emergency Escape Route.
Someone loses their job, gets a divorce, has to relocate, etc… No one hopes to have to sell their share of the property but it happens! Plan for it just in case it happens. No one should absorb a 20-40% loss in value because they opted to buy land in a partnership. The following two options are what we typically recommend.
Remaining partner gets 30 days to enter into contract to buy the partner out at 95% of appraised value. This gives the remaining partner an option to control the entire property at a slight discount. Their will be no real estate broker commission so a 5% discount should be fair to the seller as well.
In the event that the remaining partner does not or can not purchase the remaining interest, he receives 90 days to find another approved buyer at that same price. He also has the option during this time to submit an approve alternative solution (alternative solutions may include dividing the property up, owner financing, etc…).
If the remaining partner is unable to find another buyer and can not come up with an approved alternative solution, the entire property must be put up for sale.
This method works for a few reasons. It give the remaining partner the option to purchase the remaining interest or find a new buyer that would be comfortable with him as a partner. Ultimately, it gives the remaining partner 120 days to come up with a solution before the entire property must be sold. Either way the partner that is selling his interest, will receive nearly full value for the property.
Divide the property before you purchase it. This does not have to be a formal survey. It can just be an imaginary line drawn in. The separate tracts should have roughly the same value. Your Land Broker can help you come up with these tracts. Print the tracts out and include in the partnership agreement. In the event that one partner has to sell, the remaining partner gets the same 30 days to buy the remaining interest at 95% appraised value, then an additional 90 days to find an alternative buyer. If none of those are exercised, then the remaining partner gets his choice of tracts. The remaining tract, then becomes sole possession of the partner wanting to sell.
This method works nicely as well, and doesn’t put the remaining partner completely out if he cant come up with a buyer. He gets the option to keep part of the property. And the selling partner gets sole ownership of a tract, so he ends up market value. Important note, this does not work well with every tract. The tract must divide well. At a minimum, the typically means decent road frontage. This is an issue that we will cover in a future article.
2) Create a property rules and usage agreement
To prevent the emotional stress that often results from different goals, it takes no more than some open communication that ends in a formal agreement. Simply put, get your goals out in the open. If partners have the same goals, great. Get them down on paper. If the goal is to shoot trophy whitetails, make it rule that only mature whitetails are harvested. Limit the guests. Etc… Whatever you want the rules to be, just get them down on paper and have all the partners sign.
If you have different goals, make rules that accommodate all the goals. If one partner wants to raise trophy whitetails and the other wants to invite his buddies to shotgun season, make a rule that guests can only shoot does. Or limit guest to one part of the farm. Or make a rule that the trophy hunter gets half of the farm to himself during the whitetail season. If one owner wants to raise record largemouth and the other wants to create a crappie lake, then find a property with two lakes and put management plans in place for both lakes that accommodate both goals.
I am not saying that there is a concrete solution that satisfies all partnerships. It is also true that some personalities just don’t mix. That is a personal decision. However, it does prevent much stress and headaches to get some rules down on paper that everyone is cool with. If nothing else, getting these goals and rules down on paper will tell you a lot about the future partnership. If you are struggling to get on the same page with the rules and cant seem to see eye to eye, then maybe a partnership with this person is not in your best interest. Sometimes, avoiding a problem easier than solving it.
The property rules agreement is there to protect the interests of both parties as well. It is there to make sure that both parties are on the same page. It is there to prevent problems. These agreements are not set in stone. If both parties want to alter them and can come up with a new agreement, that can be done very easily.
Ultimately, by doing a little planning and drawing up a few agreements, you can eliminate most of the problems associated with a land partnership. If you would like to discuss buying some land in a partnership, we would love to talk to you. Partnerships are a great way of increasing the amount of property you can use and can be great way to create lasting memories with your friends and family.