Wednesday, April 24, 2024

Doing due diligence: things to consider before buying a farm

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An expert in rural real estate shares his top tips for first-time farm buyers.
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Reading Time: 4 minutes

Brian Peacocke, who has worked in the rural real estate industry for more than 30 years, including 11 years as rural spokesperson for the Real Estate Institute of New Zealand, stresses that due dilligence is key when considering a farm to buy.

This must include assessing the property’s suitability for day-to-day farm operations, writing up effective budgets for every aspect of the operation, weighing the risks and predicting opportunities. 

These key steps will save any headaches down the track and give bank managers the confidence to back you throughout your agri journey. They include: 

The overall operation 

Livestock numbers and production: Verify current and historical livestock numbers on the farm as well as livestock production. Once authorisation is given by the vendor, official documentation can be obtained from companies to verify production coming from that farm in terms of volumes and weights. This gives potential buyers a solid grasp on production coming off the farm against livestock numbers. Buyers should be aware that they have the opportunity to obtain information that is accurate and credible, which gives them the ability to budget much more accurately. 

Provision for existing feed: It is important to verify the accuracy of the agreed feed on the property (the correct quantity and quality of feed). If a specified amount of silage or baleage has been agreed on in the pre-purchase agreement, ensure the vendor is sticking to the agreement.

Dwellings and titles on the property: Builders’ reports, healthy homes certifications and a solid overview of the various dwellings on the property will save any headaches down the line. 

Review titles to the property, which should be done through a legal professional, who will carefully review the land titles and what the various items on the title mean. 

If needed, get an LIM (Land Information Memorandum), which is a legally-binding document that states everything local councils know about the history of a property, and any issues that may affect it. Purchasers who want to make an offer on a property can enter into a purchase contract subject to a LIM report. This provides information including rates, consents, permits and code compliance for work done on the property. 

Equipment and stock: If there is an agreement between the parties to sell certain stock and equipment, ensure both parties are satisfied – for example, if it is stated in the agreement that maintenance is to be undertaken on machinery, ensure this is done prior to settlement. 

Rural connectivity: Local schooling, rural delivery and availability of services are important when considering a property. Something often overlooked by people purchasing rural property is the availability of a strong internet connection. Rural internet can be expensive in some areas, although products like Starlink have lowered costs significantly. 

Fertiliser history: Soil tests using an agronomist as well as assessing historical fertiliser application records will determine this. Once authorisation is obtained by the vendor, agents can access official documentation from fertiliser companies about historical fertiliser records. 

Water supply: Ensure a solid understanding of water sources for the farm, as well as any water rights (rivers, dams, irrigation, springs), and check over rainfall records in the area. 

Overhead costs: Rates for the property, insurance and power costs. 

Securing finance 

Budgets: Consider having a property valuation done first via a reputable source. Then check the affordability of the property, which involves using various budgets and looking at debt servicing, interest rates and cashflow. A cashflow budget is critical at this stage. 

Come prepared: An important factor when trying to obtain finance is proving that you have done your research in regard to valuations, interest rates, production outflow on the property and how that will affect debt servicing. Financers will back the people who do their due diligence and present a solid business case. 

Opportunities 

Land use options: Understand which land use options are suitable given the property’s topography, climate, soils and location. This ties into financial sustainability as it determines the potential to diversify the operation into different products/markets. For example, some parts of a sheep and beef operation could be diversified into arable or vice versa. 

Given the current price of carbon, it is important to check whether there is scope for forestry, riparian plantings or other native plantings, and therefore the potential for carbon credits.

In many cases there are also opportunities for sand, minerals, metal deposits and other resources to be mined and extracted. An example of this is properties throughout Waikato that had sand deposits; they benefited hugely from the recent construction of the express motorway. 

Tourism is also allowing many New Zealand farms to diversify their operations, making it important to understand whether agritourism would be a viable option in the future. 

Risks 

Animal health: Buyers need to know if the area is prone to facial eczema, internal parasites or any other minor health issues that may affect stock, as well as a history of any serious health issues in the area, such as M bovis or TB. A good place to start is by talking to a local vet about what to expect in the area. 

Environmental: Look for improvements that have been made to improve biodiversity or preserve the environment on the property. It is important to look into current environmental regulations affecting the property, and if there are any potential liabilities surrounding this. 

Emissions: Ask about current on-farm emissions for the property, given the potential for He Waka Eke Noa-type emissions pricing in the future, and gain an understanding of whether on-farm emissions can be offset by forestry on the property. 

Climate and susceptibility to climate events: Get a clear handle on the climate history in the area, and potential risks based on climate changes. Look at rainfall averages for the area and whether it’s prone to flooding, strong winds or extreme temperatures. It is also important to understand the topography of the area, along with the soil’s ability to handle different extremes of weather. 

These guidelines for first-time farm purchasers should not replace liaising directly with  professionals such as lawyers, farm consultants and accountants when making these decisions, as they will ultimately provide the best hands-on advice. 

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