Land for Love and Money
Page 8
Everything else about this property was sterling—access, location, the home itself (despite needing mostly interior completion) and the land was a gem. The hoops she had to jump through, to no avail, and the approximate $4,000 she spent on due diligence on the property—checking the well, septic, having it surveyed, were all for naught. She even went to the expense of having an architect draw up plans for finishing the interior of the residence because the commercial bank said it couldn’t consider the financing without drawings. That was more than a year ago. The poor seller, a terrific older gentleman, still owns the property and has taken it off the market. He didn’t want to seller finance. It will be impossible to sell except to a cash buyer.
My client subsequently found a different acreage property, which she also fell in love with and purchased, and with a brick home. The same mortgage lenders that refused to loan on the log home, tripped over themselves competing for my client’s business on their second choice.
If you are a seller, investigate any aspects of your property that might be nonconforming. Talk to an appraiser and a realtor in your local area. Fix these non-conforming aspects if you can, or plan to hold the property for quite some time. Alternatively, put together a plan with your realtor and advisors to offer seller financing.
If you are a buyer, query your realtor thoroughly on conforming and nonconforming properties, which like just about everything else in this environment of increasing regulations, continues to mutate to the disadvantage of buyers, sellers and real estate markets. Understand that rural property is far more likely to have some nonconforming aspect than a typical urban or suburban residence. Whether or not these expanding definitions of nonconforming tie into the stated objectives of Agenda 21 (discussed in Chapter 12), or are just a coincidence, remains to be seen.
Just as buyers “forget the shovel” or fail to plan prior to purchase for value enhancements to their land and property, so to do sellers often fall short on thinking about the big picture and forecasting ahead.
“A Little Dab Will Do Ya” Goes a Long Way
Sellers need to clean up their property and land prior to the appraisers making their visit. This is just common sense, but it’s amazing how many sellers simply don’t get this basic principle. Everyone knows what needs be done to make a house look presentable. When you’re selling a piece of land, or acreage that includes a residential structure, at least fix the fences so that they are not falling down. Be sure the entry is clean and trimmed. Pick up trash, haul off, or at least arrange, older vehicles. Get equipment inside or lined up so that it appears you are organized. A fresh coat of paint, or oil, fixing the hole in the barn roof, spraying, or at least cutting, wild jungles of weed patches readily visible from the roads or structures, cleaning out barns and stalls, and painting that weathered sign at the entry, all add up to a significant visual and subliminal affect, not only in the minds of the appraiser, but in the eyes of potential buyers and their realtors. The nice thing about getting a property presentable for an appraisal is that the tasks are exactly the same as preparing a property for a tour by a buyer and their agent, or your realtor and potential co-brokers (who, if impressed, will greatly expand your network of potential purchasers). If you are selling a vehicle, you certainly would not leave it covered in mud and un-vacuumed before a potential buyer came to inspect, would you?
Because the appraisal will be such a key element to your buyer’s financing and therefore actually closing a purchase and sale contract, time and attention is required if you’re going to sell your property. This bit of work will contribute to both a higher price and, even if incremental, to a higher appraised value.
Land Appraisals—Certain Advantages
There are some legitimate, real-life value increase mechanisms available to you as the buyer or financer of land that a strictly residential property does not enjoy. An appraisal can be based on many things. If your land is production ground, on which there is or can be very quantifiable and specific improvements that will create a solid stream of revenue, your loan request should be heavily weighted toward valuing the property based on its income. Sometimes the income from land, when interpolated for valuation as a ratio called the capitalization rate (CAP Rate), can create a higher value than could be justified by the acreage alone.
Most appraisals of land are completed based on the “highest and best use” approach to market valuation. The smaller the acreage, the higher the per-acre price or value will be. An appraisal of a thousand-acre ranch could quite legitimately be boosted if the evaluation was made of portions of the ranch and then aggregated for final value on the whole property. Though most don’t realize it, many large tracts have what I term, “old deeds.” These are prior subdivisions, or parcels that may have been created or purchased long ago, remainders from sections, and a host of other existing tracts. Each state has different laws, but the upfront research of the title to the property going back to the very beginning, might be well worth the effort and expense. This can usually be accomplished by ordering an “abstract”, which unlike a title commitment (summary of current title condition of the property), is a compendium of the entire history of the property title. More times than not, a review of the abstract by a competent attorney and surveyor will unearth nuggets that will prove valuable to you on many levels during your course of ownership. It may likely reveal old deeds, i.e., tracts existing as of the date of your purchase that could be severed without any governmental review and sold separately from the whole. If you plan the grant of conservation easements, these pre-existing severable parcels can increase donative value considerably.
If you can prove the existence of the old deeds via the abstract examination, then it may well be that the value of the property in parts may be greater than the value of the property as a whole. So long as the backup is concrete, references made to that approach in the loan request package you furnish the lender, will then be conveyed to the appraiser, and the appraisal value may rise.
Different portions of your land may have quite dissimilar characteristics. Parts may be flat, treeless and dry. Other areas may have a creek or pond. There may be areas with another spectacular feature or view. Portions may be irrigated.
In these cases, the appraisal can be based on the various types of land. The land is separated into zones, then the values of the zones are aggregated into one overall appraisal. I have seen lands in different zones on the same ranch very properly differ in value by as much as $5,000 per acre using this methodology which generally results in a higher valuation than for a single value derived from a blanket appraisal.
Back in 1999–2000, I got together with a number of folks and formed an LLC. We purchased a two-thousand-acre ranch. Extensive agricultural and resource improvements were planned for the ranch, and the group wished to preserve critical portions of it in perpetuity through the grants of conservation easements. Extensive research was done, including an abstract examination that was reviewed by both legal counsel and a qualified local surveyor. We found, much to our surprise, that there existed more than thirty “old deeds” on this two-thousand-acre ranch, ranging from five to sixty acres. To make doubly sure these existing tracts, which existed from long before, could be sold by us or anyone else owning the ranch to individual purchasers, (and therefore had value) we requested and received an opinion from the state Attorney General, that stated in synopsis: “Yes, indeed these old tracts exist, they were pre-existing, and they are salable.” With that blessing in hand, the donative value of the conservation easements, and overall real value of the ranch increased significantly.
There are exceptions to every rule but it is unusual to find a piece of land larger than twenty to forty acres that does not have some type of similar “value realization opportunity” hidden either somewhere in the fascinating story of title since its first ownership, or in its varying physical features.
Under the new regulations you don’t get to choose the appraiser for your property. That selection is made by the ban
k. The bank must submit a written request for appraisal to the appraiser of their choice. In rural areas, you may be dealing with a small or midsize bank hundreds of miles away. They may ask for suggestions, generally requesting two, three or four names who they will then investigate before deciding who to hire. With the recent rules, I’ve personally seen deals where the more local bank is mandated to use certain appraisers by a far removed regional or national office. Their appraisers may live and perform most of their work hundreds of miles from your land. They know very little about the local market in which your parcel is located, and they don’t have the network of realtors, buyers and sellers. These can be difficult situations. On the other hand, with the current surreal extreme limitations on land-related finance, “He who has the gold, writes the rules.”
The screws began to tighten on the appraisal industry with sweeping financial regulation known as FIRREA.4 The guidelines, edicts and constraints have multiplied exponentially in the last three years, and will most likely continue to mutate. You can rest assured appraisals will become more important and more difficult in the future.
The moral of this chapter? If you are a buyer, don’t purchase machinery to do all those value adding improvements you have planned for your land, or schedule a moving van, prior to the appraisal being completed. If you are a seller, it is recommended you not sell your furniture, or rent or purchase the place where you plan to move—unless you are able to extricate yourself from the deal—until the appraisal on the property you are selling is complete.
1For detailed information on appraiser designations and changing appraisal requirements, see url links in the Resources section.
2You might possibly raise the LTV, but your interest rate will increase, and you may be saddled with additional monthly mortgage insurance premiums charged for higher LTV rations.
3A survey that is for mortgage purposes only, may not be sold separately, and under the laws of most states is not a subdivision.
4See Resources section for url link to further information.
Now let’s discuss the reality of being a seller in today’s environment. By this point in Land for Love and Money, we have reached four conclusions together:
1) There are macro forces beyond our control—economic, market, and regulatory;
2) Land and real estate are affairs of both the heart and the wallet;
3) The math is the math; and
4) Land is a long term asset—planning should occur before the closing.
As a seller, you must consider what the cost of carrying your land asset is. All the costs. There are administrative and maintenance expenses related to your land. There may be other operating costs. There are taxes and insurance. If you have debt, you’re paying interest. These costs and cash outflows add up quickly. I have been told many times by realtors that the best offer you’ll ever receive on your property is the very first one. I’m not sure I subscribe to that theory, but I’m a big believer in unemotional cost-benefit analysis when you do get an offer on a property that you wish to, need to or must sell.
Let’s say you have had a property listed for one or two years—not all that uncommon in the current economic climate. You, or you and your realtor, have tried different marketing ploys. Perhaps you have reduced the price once, or more.
Finally, a buyer tours the property, and instead of the objections and excuses that you’ve heard from all the other folks who’ve been on the land and kicked the tires, you are delighted to hear the words, “I like it. I’m going to make an offer.” Let’s assume you’re not locked into a sales price because anything less means an underwater closing, i.e., having to bring money to the table to divest yourself of the asset. The eagerly anticipated offer comes in lower than you contemplated and certainly lower than you wished—another common occurrence in today’s economy. As you ponder and think about the offer within the timeframe permitted by the contract, you begin to convince yourself you can get more, the property is worth more, the market is turning, neighbor Joe got “XYZ” for his property, and yours is better and so on. Sound familiar?
There’s almost always some wiggle room in offers, both ways. In today’s climate, there are other properties this buyer can purchase, though in your egocentric view these properties are not as nice, nothing quite like yours. In some cases, that’s true. In most cases, it is not.
You wrestle with reality and then tell your realtor, “The offer pisses me off. It’s insulting. Tell them it’s rejected. I’m not going to counter.” Take a deep breath. Again there’s always exceptions, but I will tell you that only in the rarest of occasions in my forty year career, have I ever further pursued a deal where an offer was rejected, rather than countered. It tells me something about the seller, and it’s annoying when I took my time, and invested energy and effort to investigate the property, construct the offer in good faith, and submit it. Many people think like I do.
A very wise, eighty-eight-year old superstar realtor told me about another broker to whom she had presented an offer. The listing agent glanced quickly at the price, looked up and snapped, “This is a very disappointing offer.”
My friend replied, “Think about how disappointing no offer would have been.”
It’s always better to counter. When you counter, take a deep breath and think. Sure the offer may make you clench your jaw, but you can probably sneak out a few more bucks per acre. It is rare—though not unheard of—that the first offer from a sincere buyer does not have some upside wiggle room, albeit perhaps small.
Get out your pen and paper. What is the absolute bottom dollar you’ll take for this piece of real estate? Does accepting the offer adversely affect any land you are retaining? What about appraisals on the rest of your land? This sale could become a comp. If you accept the offer, what is the cost of moving? Are there any other costs associated with selling the property that will not be on the closing settlement statement?
Now perform the exercise in reverse. If you don’t take the offer, or make a greedy counteroffer and the buyer walks, what if the next buyer doesn’t walk in the door for another year or two? (You may think this unlikely, but it is always a possibility.) What will it cost you to hold the property if the market doesn’t move much over that time period and the property rises only minimally in value? How much will you leave on the table by not getting a deal done now? There’s a time value to money. There is greater value to your time. If you have greener pastures to move to, financial, spiritual, or personal, what’s the price your heart will pay if you are delayed?
If the deal is strictly financial or mostly financial, then it’s simple. Let’s do an example with easy numbers. You have a property you want to sell for $100,000. There is a $50,000 loan on the property. You are paying 6% interest. Taxes, insurance, and other annual property costs are $5,000. You get an offer for $80,000—the best the buyer will do. If you don’t take the offer and the property sells two years from now at your asking price ($20,000 more than the current offer), you will have spent $16,000 (2 x $3,000 + 2 x $5,000) to get to that final sale—”netting” only $4,000 more. If inflation is 2.5% a year the $80,000 is decreasing in real money terms by $2,000 each annum. Two years out that $80,000 now will purchase only $76,000 of today’s goods and services. If you take the current $80,000 offer, you move on toward the life direction you have chosen for yourself, and you pick up two years on your plans, for a cost of $4,000 before inflation. If the inflation rate was zero, (it’s not) is a year of your life worth $2,000?
Here’s a real life example. One of the rare clients for whom I act as buyer’s agent is a wealthy, high income individual. He’s been looking at ranch properties for several years. More than two years ago, we looked at a terrific ranch in excess of ten thousand unimproved acres in a western state. We will refer to the property as Ranch “A.” We spent a full day on the property, got a preliminary handle on what types of improvements could be done and where, put together a rough game plan on partial conservation easement grants that he needs to
shelter his income, and which he believes in his heart is the right thing to do. We met with the seller, got along well, and several days later I submitted an offer on the buyer’s behalf. At that time, the seller wanted about $14 million for the property. He had turned down a $12 million offer several months prior. The proverbial caca was beginning to hit the economic fan, and the Great Recession was gathering a full head of steam.
After some back and forth, my client offered $10.5 million. The seller countered at slightly under $14 million. My client had decided he would not pay more than $11 million based on comparable sales, the amount he would have to expend to create the types of resource improvements that he wanted for recreation purposes, and other factors. The two minds never met and the deal never got done.
Flash forward to 2012. After several years of looking at more places, my client decided he wanted to take another run at the place that had always intrigued him the most, Ranch “A.” I had several discussions with the listing broker. There were other terms and conditions—some of them critical to my client—that the seller refused to budge on. Mostly stubborn I presumed, because as a seller I would have not had a problem with them at all, although perhaps I might have massaged the details just a bit. My client offered some clever terms, which in essence was a $7 million base price but $8.5 million give or take in the end to the seller. The seller countered at $10.2 million, ironically about the amount my client had offered three years prior.
In the end it was a repeat of the prior experience. The seller wouldn’t budge or give. I had done the research for my client as to value, and comparable sales. He felt his offer was fair and was not pleased that the seller continued to refuse a few of the nonfinancial aspects of the deal. The seller still owns that ranch.