An agricultural real estate bubble might still be growing, even in our current, slow economy. In a recent Time Magazine article, the president of the Kansas City Federal Reserve, Thomas Hoenig, raised concerns about an agricultural land bubble in rural America.
For many rural attorneys, the fact that some agricultural real estate might be overvalued, may not be news. The question for attorneys is not necessarily whether investment in agricultural land is a good idea, but how a burst could affect our practice. So, how should we deal with the possiblity of a agricultural real estate bubble?
Although the ecomony remains sluggish, investors are still looking to for a place to put their money. With low interest rates, come a low incentive to save and many are looking to invest. In the current economy, investors are scared off of residential and commercial real estate and think agricultural real estate a good bet. However, as we’ve learned from the residential bubble, sometimes investment can lead to the overvaluation and some agricultural real estate may be overvalued. The jury of economists is still out as to whether the increase in agricutural land values is a sustainable, natural increase or a function of overspeculation. After all, the need for food is unquestionable and increasing and, therefore, the need for land to grow it on should increase as well. In any case, whether or not a bust of the bubble occurs, attorneys whose practice is connected to land values should consider how a bust would affect their business and their clients.
How it could affect our business.
First of all, attorneys should consider how a bust of an agricultural real estate bubble would affect our own businesses. If you’re a rural attorney, you may be in a good position. Luckily, most solos and small firms in rural areas naturally have more diversified business than specialized offices that took a hit during the recent residential and commercial real estate downturn. Practicing in multiple, but perhaps related, areas allows for flexibility and a continued stream of business if other business slows down. If you practice real estate, you probably also help those same clients incorporate their family farm or probate their parent’s estate. They may refer others to you for help with a bankruptcy. This work will help you weather the bust of a real estate bubble. However, even if you have diversitified business, any good business owner should keep an eye out for changing economic conditions, consider how it could affect them and keep a plan in mind to remain profitable.
If you specialize in real estate, consider how much of that business would be impacted by a reduction in closings connected to agricultural real estate investment. You might see a reduction in closings related to investments, but may also see an increase in closings relating to gifting. If you specialize in an area that depends on agricultural real estate investment, you might consider evaluting what related areas you could add to your practice and becoming proficient in those areas. This could mean taking CLEs in related areas like bankrupcy or estate planning to be able to meet the changing needs of your community and client base.
How it could affect our clients.
At least as important as how our business might be affected, is how our clients might be affected. For example, if you’re working on a settlement in a divorce matter, the value of the farmland or acrage might not be as high down the road as it is now. That might not be a huge concern to a client who wants to continue farming on the land, but might be a major concern to someone planning on selling as soon as they get the deed. You should caution your client accordingly. If you have local banks as clients, you should caution them about increasing land prices. The value of the property securing their loans might be artificially high. This could result in upside-down secured loans. As your client’s counselor, you need to discuss the possiblity and help them plan accordingly.
The real question for attorneys is not whether investment in agricultural land is a good idea, but how a bust of the bubble could affect us and our clients. We need to plan, and help our clients plan, for the possiblity. Even if we see a agricultural real estate bubble burst, we can position ourselves and our clients to deal with the changes it could have to the rural economy.