Ten years ago, when residential and commercial building projects were moving at break-neck speed, it was quite common for landowners with properties “in the path of development” to be offered incredible prices for their farms – $30,000, $40,000, $75,000 per acre. Though some owners were reluctant to sell (most farmers buy land for future generations, not sell what they already own), many eventually chose to seize the opportunity and sold out… sort of. What they essentially did was use the sale proceeds to reinvest in farmland in rural areas via a 1031 tax-deferred exchange (a method of deferring capital gain taxes). Depending on the type of land they were trading into, in many cases they were buying five to ten acres for every one they were selling. The 1031 buyer was a major player driving ag land prices during the early part of the last decade and, in fact, many ag organizations were so concerned that they tried to develop strategies to limit their rights.
Fast forward to 2011. With development in most parts of the Midwest at a virtual standstill, the development premium many builders were paying for farms has disappeared (along with many of the builders themselves). Land prices in the path of progress are now back to levels supported by what the farm can produce from growing corn, not growing houses. And in an interesting twist, the 1031 buyers of 10 years ago are now selling (at record prices) what they bought previously and are reinvesting the proceeds back home where they started. As one such person recently quipped – “we’re buying land back in our home area with the idea of repeating the process in another 10 – 20 years, or when the economy has fully recovered and building is again at a frenzy”.
Everyone who invests in real estate knows that location is an important determinant of value, but many overlook how important timing can also be. When you have both of those factors working in your favor, then the resulting profits can be staggering.
