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Valuing Cash Flows For Land Contract

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Rob Lentz

Junior Member
Joined
Nov 8, 2005
Professional Status
Certified General Appraiser
State
Michigan
I have a parcel of farm land (crop) that was sold 3 yrs ago on a 9 yr land contract, fully amortizing.
The land contract vendors are father (deceased) and daughter (living). Need to value the father's interest in the land contract for estate purposes. Basically a present value of a cashflow problem. I know there are companies/investors out there that "buy paper" - i just don't have any data on the range in discount rates. An appraisal colleague says he is typically offered a 10-20% discount on his contracts depending on his note rate and the duration. Anyone else have some experience with similar problems?

Risk Considerations:
--Note rate is 2.5%
--Vendee put down 18% at purchase
--Vendee has improved the land with tile since purchase
--Crop prices are down since purchase, as are cropland $/ac values

Feel free to PM me if you'd rather not post publicly.

Thanks in advance!
 

Michael S

Senior Member
Joined
Mar 18, 2009
Professional Status
Certified General Appraiser
State
New Mexico
Here’s a website where people can list notes for sale http://www.notemarketplace.com/ no information on sold notes unless you were to contact a seller directly, but still you can get some information based on asking prices/terms.

I can’t imagine a huge interest in a note paying just 2.5% unless it was discounted enough to drive the yield up. You can go buy a liquid corporate bond or treasury bond paying more than that. Also, how many people will be interested in owning farm land if the buyer defaults on the contract?
 

Gobears81

Senior Member
Joined
Nov 7, 2013
Professional Status
Certified General Appraiser
State
Illinois
I can’t imagine a huge interest in a note paying just 2.5% unless it was discounted enough to drive the yield up. You can go buy a liquid corporate bond or treasury bond paying more than that.

Cap rates for farmland are, perhaps not coincidentally, 2%-3% for farmland, at least around here.
 

Rob Lentz

Junior Member
Joined
Nov 8, 2005
Professional Status
Certified General Appraiser
State
Michigan
Thanks - I'll check it out.
 

Rob Lentz

Junior Member
Joined
Nov 8, 2005
Professional Status
Certified General Appraiser
State
Michigan
Cap rates for farmland are, perhaps not coincidentally, 2%-3% for farmland, at least around here.

Right. We typically see cap rates on vacant land in the same range 1.5-2.5%. They're probably not buying for cashflow - maybe a DCF with a reversion would help?
 
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