How Do Farmland Auctions Work?
How a Farm Auction Works
It may surprise you that this is actually a fairly common question. Most of the time it’s for one of the following reasons:
- If you are removed, or not from a farm background, you likely don’t frequent farmland auctions in your free time
- You have inherited the farm from either your parents, grandparents, or other family member with no desire to own it or,
- You are in a situation that requires selling the farm.
Far too often, we speak with folks who don’t fully understand the process leaving them stressed and confused from the various opinions they receive. For example, some people will tell you that selling by auction is a sign you are desperate. Others will tell you the farm is worth double what it really is. As if this doesn’t complicate things enough, when you decide to contact a sales professional, you’ll start to hear an array of pitches about who’s auction is best and why you should choose them. Truthfully, I sympathize with those in this setting. Selling a farm can be difficult enough as is and the last thing you need is peers coming at you from all different directions. It takes a lot of concentration to cut through all of that noise and find the right path forward.
Now, before we really dive deeper into how farm auctions work, it’s important to know that I am referring to how DreamDirt farmland auctions work. Our competitors most likely conduct theirs in a different way that is unique to them.
Multi-Parcel Farmland Auction with Combination Bidding
A “Multi-Parcel Auction” is an actual auction type. Consumers often believe this phrase describes a simple auction format for multiple parcels of land. When we use “Multi-Parcel Auction”, we are referring to an actual prescribed process of taking bids for land where combination bidding is used to achieve the highest price for the seller.
“Buyers Choice” is a form of a Multi-Parcel Auction; parcels are selected by the buyer after bidding rather than being identified by the auctioneer prior to bidding. In this format, nobody knows what the other bidders are bidding on and occasionally a seller can get ‘lucky’ and sell a farm for considerably more than expected. This tends to work best where assets are not equal in terms of quality.
DreamDirt has handled intricate Multi-Parcel Auctions as large as nineteen tracts and as complex as triple combination bidding. We have successfully sold each Multi-Parcel Auction we’ve been hired for, however, after years of experience, we find them to not always be the best method of auction for our sellers. Auctions of this nature require considerable thought into every possible buyer strategy and reaction, but they also have the potential to confuse and estrange bidders. It is generally our recommendation to avoid the Multi-Parcel Auction format when selling land in order to fully control the process and avoid the confusion it creates for bidders.
Typically, when the potential client comes to us with larger tracts of land, we have found that their farms will be most valuable sold in individual tracts. Our team will then carefully survey and analyze in order to determine how to reconfigure the larger farms into smaller tracts. For example, if you have a farm consisting of 220 acres, it is most advisable to keep tracts around 80 acres where possible to achieve the highest value. Access, drainage, and terraces must be considered for each and every reconfiguration. In our opinion, this 220 acre farm should be sold using straight bidding on each tract without combination bidding. Many believe that combination bidding will result in more money – it simply is not true.
Our method of doing this creates the most intense competition. Additionally, our soft-close auction process can really help farms express their maximum value. We believe the seller is best served using our method because it does not confuse bidders with combination bidding – an aspect of Multi-Parcel Auctions. Breaking all farms into smaller parcels leverages a larger buying pool for smaller tracts while also attempting to create as few sales as possible. By this, we mean that one buyer could buy all three tracts of the aforementioned 220 acres. But, to do this he will have to compete with the entire buying pool to achieve the highest bid on all three tracts.
High Bidders Choice Farmland Auction
DreamDirt, on certain multi parcel auctions, prefers to use a method that accomplishes the same results, potentially even better results! However, its rather backwards of the combination bidding called the high bidders choice method. Each type of auction can be conducted in a myriad of different ways, but typically we would do is offer the entire farm to the crowd and begin taking bids.
For instance, if the farm consists of eight tracts of land the first high bidder will have the choice to take one tract at that price with the option to take all eight tracts at that price. Now, I’m sure you may be thinking, “Isn’t this the same as the multi-parcel auction with combination bidding?” Truthfully, yes but it moves along much faster than its counterpart with the possibility that bids will only be called for just once.
In a sense, this type of auction levels the playing field in terms of giving everybody the same opportunity to bid on what they want to bid on to their highest price. If the first high bidder took just one tract and seven were left the auctioneer would begin taking bids again and the second high bidder would then choose. This would then continue until all the tracts of farm land were sold.
We have used high bidders choice with as few as two tracts in the past and there is no limit for a maximum amount. This method also allows you to leave certain parcels out of the bidding choice and they can be sold off to the side as an individual tract. Suppose that you have six tracts where five of them are farmland but one of them is a house and acreage. It’s our advice to leave that out of the choice if the value will be significantly different, or will be sold in whole dollars versus a per acre figure like farmland is sold.
Competitive Bidding Style Farmland Auctions
DreamDirt employs many different auction methods and strategies for our clients. The aforementioned types are just one of many different options our clients can choose from. Another type of farmland auction we conduct is a simple, competitive bidding style. This style is typically used for a single tract farmland auction, tract by tract approach, or can be used for multiple tract auctions as well. In the Midwest, this type of farmland auction is easily the most common method of selling reserved farmland auctions.
An auction with competitive bidding style would start with calling for bids on the first tract, then the second and so on until a high bid has been set on each tract of land. At this point, the auction would typically go into a break to give the auctioneers an opportunity to present the current high bids to the seller for confirmation of the sale. From this, the seller has the option to remove the reserve if it has not been met yet, keep the reserve or lower the reserve to a new point assuming the reserve had not been met prior to the break. This pause also gives buyers an opportunity to think without the pressure, reconsider and make phone calls without being distracted by the bidding at the same time. Ultimately, the break period is extremely significant in a farmland auction as this is the first time buyers have an idea who would be bidding or how much. Bidders can take this time to develop a strategy for round two or potentially process new information they did not have to prepare for the auction. This is also the buyers first best opportunity to gauge the seller’s commitment to selling the farm at the auction.
Once the break is over, the auctioneers will come back to the auction block and make the announcement that the seller has either confirmed or denied the sale at this point. In out experience, I would say about 92% to 95% of the time the seller does indeed confirm the auction. Nonetheless, confirmation of the sale does not indicate the sale is remotely over. Rather, the seller is now saying they will accept the highest bid at the end of the auction, but for now bidding will continue. In cases where the sale is confirmed the auctioneer would do one last round of bidding and announce each tract sold once he has achieved the highest bid.
If the seller did not confirm the sale after the first break, it’s likely another round of bidding will occur picking up at the highest point achieved in round one to try to increase offers before taking a second break. At the second break, the sellers are again given the opportunity to take the reserve off, lower it or leave it the same if it has not been reached. This can continue on and on until the seller is satisfied or declares a no-sale. No sales are actually rare at live farmland auctions. Sure, they do occur occasionally but it is not a frequent occurrence.
Sealed Bid Farmland Auctions
Last, but certainly not least, is the sealed bid farmland auctions. Note above that I specifically said that “no sales” are rare at “LIVE” auctions. Sealed auctions are a little bit more shrouded in mystery and really lack the ability to create that end of auction excitement that live auctions create. People have tried everything to get sealed bid auctions to have the same momentum as a live auction but mostly with ineffective results. Most sealed bid auctions are conducted by non-auctioneers that do not have the ability to bid call.
For us at DreamDirt, sealed bid auctions are a rarity and would only be used in very special circumstances or particular markets where the value of land is unknown. We believe that the sealed bid process that can be more easily controlled by the buyer than the seller and it lacks the competition and excitement created in a live auction to push a farm to the top of market prices.
As an example, many sealed bid farmland auctions I see will often have an initial round of bidding where a buyer is required to submit a written bid. From those written bids, the top three bidders are then invited back for the final round of bidding. The problem with this method, is that everybody in the first round is trying hard to get their bid high enough to make the final round while trying to keep their position below their perceived market value of the farm. The initial round of sealed bidding will produce offers and has been seen before it can turn out that the top three bidders are a father, son, and son because they bid $7000, $7001 and $7002 making them the top three bidders.
Now, imagine for a moment that the farm would actually achieve $8500 at a live auction. But in this scenario, the final round that you limited to just three bidders has been hijacked by three people who can easily agree not to compete against each other. The seller is now powerless and can feel backed into a corner, the opposite of what we want to happen! There is always the option of not selling the property, but if you are up against a deadline such as a 1031 exchange, a divorce proceeding or closing an estate the seller may well be trapped in a bad situation. Should they have the ability to declare a no sale the path forward already has some potholes in it.
In the past, I’ve followed a previously failed sealed bid auction that was now going to be conducted by a new company. This auction company planned to implement a live auction after putting 18 – 24 months in between the last attempt. Let me tell you, farmland buyers don’t forget things easily. Bringing new competition to the live sale is the only way to attempt to overcome the “no sale” stigma that is now tattooed on the farm. Unfortunately, you will never hide a farm that was a no-sale in the past. By the time the second auction comes everybody in the room will know about it. You’ll be depending on the skill of your auction team ability to overcome that obstacle.
Curious What Will Work for Your Farm Auction?
At DreamDirt, we want to be a resource you can depend on. Whether you’re ready to start the selling process, or even remotely curious, we will gladly provide resources to get you started in the right direction toward a successful sale! The proper evaluation of your assets by an appraiser is the first step, and often the foundation of your decision making when selling farm land real estate. We’ll help you assess what type of options you have that will best suit your farm!
Auctioneer, Land Broker, Founder
Jason is an Auctioneer and Land Broker in Iowa and the surrounding states. The DreamDirt team of auctioneers, land brokers, and realtors specialize in farmland sales primarily serving the heirs to family farms all across Iowa and some surrounding states. Today's report details Iowa's current land market for land sold at auctions.
Email: Jason@dreamdirt.com | Phone: (515) 537-6633
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