Ask Money

Sell the Farm?

Chris Farrell Aug 29, 2008

Question: My mother, (who is in a nursing home in ND with dementia) and I own as a life estate/remainder, approx 150 tillable acres of North Dakota Red River valley farmland–The farm building site, which includes a house in severe disrepair, is an additional 9+ acres. I had the tillable land appraised and it came back at $367,000 which is just over $2400 per acre. Mother will soon exhaust assets and be eligible for medicaid (In ND, owning farmland is not a disqualifying asset). She has no long term care insurance. I am wondering if it would be the right time to sell–prices at an alltime high. Some friends say I should play it for a year and then sell. Another factor, our tenants have farmed it for over 25 years and I would give them right of first refusal. They are interested in buying, but they are my age (50+) with no children to pass farm onto–right now they are interested, they may not be in a year due to being older. Of course, it is as much an investment for them also. I looked at IRS tables a couple of years ago and mother’s share would be approx. 41%. She is now 82 years old. I came late to my current position and don’t have a lot allocated for retirement. I rent an apartment and am single. I have not paid to have the building site appraised yet. The tenants would be interested in buying it also, but only for the grain storage bins and storage shed. The advantage of selling it as part of the farm is that I lower risk of inadvertantly missing something in disclosing about condition of house–I can think of at least 9 things, four of which are severe basement water leakage, needs new roof, and needs new windows and furnace.

The alternative would be to continue to rent it to tenants, but when mother goes on medicaid, no land income can be used to pay taxes and utilities. Approximate tax and utilities Tax: $1600, utilities about $50 per month. I either find a way to come up with that amount or I enter into a “net lease” with renters who would at least pay taxes. I could find the money to probably keep utility payments up. The big question, take the chance that grain commodities go up and land prices go up for another year and put it up for bids–or sell to tenants this year? Remember tenants are interested buyers. I grew up on farm and it is very hard to think about selling it because, I feel I am letting my late father and mother down, by not holding onto it. When they built house and married in 1948, I am sure they did not forsee the change in agriculture that would see family farms get bigger and fewer. K, St. Paul, MN

Answer: I can imagine how hard it is for you to sell. But I’m glad for you and your Mom that farm prices have soared in recent years. My own sense is that farmland has made a step up in value with the growing wealth and better food consumption in China, India and the rest of the emerging markets. That doesn’t mean there won’t be violent changes in prices

To be clear, you need more expertise on the farm value side than I can offer. It reads as if you are up on the Medicaid rules, but if not that’s another complicated area to invest in getting some expert help.

However, since you’re in the market for gathering information I had a couple of reactions.

When it comes to investing, buying and selling, we can’t pierce the fog of the future. As Peter Bernstein, the dean of finance economists likes to put it, it’s in the nature of the beast. Still, one way to grapple with a question like this involves regret. Let’s say you sell now to the tenants, and a year later prices are up another 10% to 20%. You’ll regret selling to early. Now imagine you don’t sell but hold on. Prices for farmland fall by 10% to 20%. You’ll regret not selling. Question is, which regret would you–and your Mom– rather live with?

Even more important is your aging mother and her dementia. You have a very specific reason for contemplating a sale now: To help her out financially. If you sell today, you essentially know what you’ll get. Will this money make a difference for her once you’ve taken taxes and Medicaid into account? Assuming the answer is yes, if it were me her condition would push me toward cashing in my known chips rather than gamble on an unknown future.

I lean on the conservative side with financial matters, and I’d rather sell early at a profit and into a strong market (missing the market’s peak) than wait and take the chance of selling into a weak or falling market even if I still end up with a profit. One reason is that the seller has negotiating power in a strong market, while its the buyer that wields more influence in a weak market.

The condition of the house makes me nervous.

By the way, in 1948 your Mom got married and your parents built a home. Now, 60 years later, what they built and nurtured will go toward making sure she gets the kind of care she needs in old age. That’s a moving arc to a life story.

After gathering more information and thinking it through, let us know what you decide.

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