Photo by Joseph Fontaine

Technology is awesome. For example, the pinpoint accuracy of storm data can save a family in Kansas because they watched the radar and saw that a F-4 tornado was bearing right down on top of them so they fled and a good thing because their home was destroyed. However, technology is also an overwhelming amount of data. Apparently a news reporter that a lot of time on their hands searched the entire tax database of Johnson County, Kansas to figure out how much taxes developers were paying on vacant lots. Apparently paying low property taxes is now evil. Enter the big bad developer.

Here is the news article link: Developers get huge tax breaks for property label agricultural

Here is the editorial post link: Cul-de sac “farms” are a mockery of fairness, good sense

I had a hard time knowing which one was news and which one was editorial. I also may have missed something in the last three years of the news cycle but I thought developers and the construction industry were hurting badly. They are struggling to stay open and keep their employees busy with jobs. One family owned construction company kept on employees that were part of their “family” while their owners didn’t take a salary at all for two years but then still had to let them go as the business totally dried up. They are not building or developing anything but yet they still own the land. Some consider this land to be the most expensive best land available and think the big bad developer is just sitting there watching their money grow on the idle land. However, in reality they are on the verge of bankruptcy or tax liens.

The Kansas City Star has attacked developers and basically accused them of fraud. I do not know the tax issues in other states but in Kansas we are an agricultural based economy and the legislature setup the tax structure so that agricultural land would be taxed less. Taxes on most land across Kansas are less than $1000 per year and $50 or $100 is not uncommon on 40 acre parcels. I would guess nearly all of the land is agricultural but there are also tracts of land scattered across the state that have no apparent current use. They are not suitable for large scale farming but they are classified as such and pay a low property tax rate. So paying a lower property tax rate on agricultural classified land is entirely legal. It is not a loophole it is the law.

A while back I wrote an article for LandThink called a Tale of Two Parcels and this is a prime example of this very issue. One parcel stayed in agricultural use and one tried to convert and was hoping for big development. Neither happened. Probably never will in my lifetime as growth shrinks and moves back inward to the suburban cores. One parcel is farmed and one is grass that is mowed for hay. Are they both agricultural? Should they both pay the same in taxes? They are adjacent properties and there are no plans in the future for development to occur anywhere near the properties. There is no new construction and there is no big bad developer lurking around waiting. So we wait. Maybe 5 years, maybe 20 years but maybe never. In the meantime the county is receiving a reasonable property tax payment for the current value and the owner is able to make the payment. I attend several tax deed foreclosure sales a year in Kansas. There are no big bad developers there because more often than not their properties are in the foreclosure auction sale. They were unable to make the tax payments for several years and the county took the property back and is now trying to sell it for anything at all to get it off the books. I watched a bidder that was an adjacent property owner to a vacant lot that was previously taxed at residential rates in the real estate boom buy the lot for $50 at a tax sale. They now have a bigger yard and will gladly pay the $25 per year property tax rate and mow it. All because of the re-classification to agricultural tax rate. The county will now receive $25 per year instead of zero. The county was trying to tax the property at a residential rate even though there was no residence there and now likely ever will be because the growth has screeched to halt and no new homes have been built in the subdivision since 2007. The developer of the property and the builder both went out of business. The county never received the $1500 per year they were trying to get. Plus, the county has spent thousands on attorney fees to foreclose on the property. Where is the Big Bad Developer now? I think someone should cry Wolf.

Photo courtesy of AlaLandCo - AlaLandCo.com

While trees continue to grow, timberland values and a trickle of wood bioenergy projects continue to fall. In the market, timberland investors struggle with current valuations and wood bioenergy projects work to gain traction or have fallen to the sidelines as investors shake the sector like a sack of Scrabble tiles. As an analyst reviewing the data and observing events in the field, I hear Earl Weaver, the former Baltimore Orioles’ manager, screaming in my ear, “Everything changes everything!”

Wood Bioenergy Update

The New York Times, in citing Forisk’s wood bioenergy research (“Wood Makes Comeback as a Fuel”, May 2, 2012), emphasized the growth opportunities related to European pellet markets. In total, however, the wood-using energy sector has started highlighting winners and losers. Financing continues to prove a major hurdle for independent power producers.

While the number of projects that pass Forisk’s screening methodology fell from 297 to 295, the estimated volume of wood consumed by viable projects edged up 2.4%. As of April 29, 2012, Wood Bioenergy US reports that projected wood demand for all 452 announced projects in the U.S. totaled 123.7 million tons, while the 295 projects that passed Forisk’s screen could consume up to 72.1 million tons of wood annually by 2022.

Timberland Investment Purgatory

Recent returns from the NCREIF Timberland Index affirm that turmoil reigns in timber. For four consecutive quarters, NCREIF has reported negative appreciation returns for private US timberlands (Table 1). And for three consecutive years, NCREIF reported negative appreciation returns for private US timberlands (Table 2). Meanwhile, these timberlands continue to generate on the order of 1.5 – 2.5% annual cash returns.

Turmoil reflects uncertainty and confusion, and timberland returns, even in the face of positive signs from housing markets, incur disquiet. While cash returns improve with increased harvest volumes and stronger stumpage (timber) prices, timberland appreciation builds on prices paid – and received – by institutional investors.

The reality remains that investors choose timberlands for reasons in addition to returns. These include the diversification and capital preservation benefits of being in a hard asset, directly owned and managed.

So Where Are We?

In the US, forestry investment professionals understand the market, which remains undersupplied with timberland relative to demand from institutions and available capital. The purgatory – this (temporary) period of miserable waiting and scratching at Excel valuation models – resolves itself when the market decides whether or not timberland is a “6% business.” If investors expect or demand 6% real returns from new acquisitions, then math dictates additional depreciation in timberland values.

Ultimately, timber markets are uniquely local, and those trading in small parcels, outside of the institutional investment spotlight, retain niche and higher potential opportunities. The pressure on timberland markets and investors are forcing a return to forestry fundamentals that are today reshaping the timberland investment sector.

When it comes to owning and managing recreational property one thing is certain: every property owner has an opinion (rightfully so) on what’s the best method for improving their land. Although these opinions sometimes rest at opposite ends of the spectrum, a common interest serves as a bond between all recreational landowners – the desire to improve their property. The property might be a ragged clear-cut or the highest turn-key property on the market but one thing is certain – there is a good chance the owner wants to make it better. Often times this motivation is influenced by many factors but one reason that will always make the list is the notion that making improvements to a recreational tract adds value from top to bottom.

Perhaps the best method for adding both tangible and intrinsic value to a recreational tract, implementing appropriate property upgrades can lead to big dividends for an owner at the closing table – especially with current market conditions. Today’s recreational land buyer is seeking out properties that are bargain priced and already have the improvement(s) that are in align with their intended use. These buyers recognize that many landowners made the decision to sell after enduring several years of economic struggles and the direct result is a large supply of improved recreational tracts currently available at a great price. This trend suggests that current sellers, if they haven’t yet, need to implement improvements on their property if they want to be in the game. Depending on the nature of the property and improvements this process can get costly, however, landowners have options available to them in terms of generating income to contribute towards designated improvements.

For many recreational property owners finding the funds to implement property upgrades, not to mention regular maintenance and upkeep, is an ongoing challenge. Anyone who has owned land can attest to the old saying that “there’s always something that needs to be done.” Often times planned improvements must be sacrificed in order to repair existing equipment and structures. This scenario becomes much more common when recreational land is put up for sale with a mindset of: “why waste money improving a property when the plan is to sell?” The reality of this misconception is that although an owner may save money in the short-term by sacrificing appropriate improvements, the long-term outcome is often the following:  the property remains on the market for a long period of time and when it sells the price is not what the owner originally hoped to get. In order to overcome the costly process of keeping up with a recreational tract while trying to facilitate the property reaching its full potential owners should get creative in terms of implementing cash flow on a recreational tract. Some creative strategies that could be use to generate cash flow include the following opportunities:

Harvest some timber. Clear-cuts are not the most aesthetic property feature but they serve as great buffers from neighbors and roads and they are phenomenal in terms of wildlife habitat. If you are completely against clear-cutting identify stands where thinning is appropriate. In addition to generating income a thinned timber stands adds aesthetic value and improves the health of the timber stand.

Plant a dove field or a duck impoundment and lease out the hunting rights. Wing shooters will pay to play and having a dove field or duck impoundment on your property will undoubtedly add substantial value to your property. This improvement, which is not always a feasible option, will also improve the chance of a property being sold because of the limited number of properties on the market that offer this recreational pursuit.

Lease out the deer and turkey hunting rights. Insert a clause that the tenants are required to plant and maintain food plots – it will pay off in the event circumstances call for selling the property.

Lease out your empty horse stables. Equestrians are always looking for a place to board their horse – up the ante by permitting them to trail ride on the property.

Lease agricultural fields to a farmer. This method will not only generate cash, it also adds value to your property from a hunter’s standpoint.

Research opportunities for grants at the state and federal levels for funds that might be available or place a conservation easement on your property that will offer annual payments that can be put towards maintenance, upkeep, and improvements. Landowners can negotiate the terms of a conservation easement!

Seek compensation for damages that have been done to your property. This option is a page straight out of T. Boone Pickens’ playbook. Pickens profited from selling ranchland that he had improved from a wildlife habitat standpoint in Roberts County, Texas. He successfully sued a company for $1.5 million that had damaged his property and failed to repair those damages. Pickens action serves as a great example for landowners to follow in terms of standing up for property damages incurred from companies that have a legal right to run heavy equipment on your property. Whether the damage stems from maintaining a utility easement, a logging company conducting a thinning, or a government agency that oversees wetlands, a landowner has a cause of action to ensure his property is not damaged by these activities. Pickens motivation for bringing the lawsuit, which was to repair costly improvements he had implemented on the ranch, reinforces the idea that making wildlife habitat improvements to a recreational property adds value – “Today, I am driven by a desire to conserve and reclaim organized land for quail habitat, and to develop long-term wildlife management plans that can be used to improve land values through an expansion of recreational opportunities.” (T. Boone Pickens, Mesa Vista Ranch, page 3). It’s a safe bet that the $1.5 million awarded to Pickens was spent on additional ranch improvements.

This list is just a few of the more common methods for generating income on recreational land – additional opportunities are endless if you take the time to get creative. Whether your objective is to make the improvements to your recreational property that you’ve always dreamed of or attracting a prospective buyer, there’s no reason to come out of pocket until you’ve looked closely at the assets on your land and the potential income they can produce.

Listing and marketing your land for sale is challenging, especially in a difficult market. If you’ve made the decision to list your land with an experienced land agent, I’ve created a list of tips for sellers to utilize in an effort to assist their agent in securing a buyer and showing their property in the best possible light. It’s no daunting task to simply “tidy up” your property and it’s well worth the effort to get the best offers and ensure a successful sale.

Here are fourteen tips for sellers of a farm or rural property:

1. Keep the grass in yards, pastures, food plots, and other open areas clipped and presentable.
2. If there is landscaping and beds on the property, clean them out, freshen up the ground cover with new pine straw or bark.
3. Trim up trees and shrubs around the home and the barns.
4. Trim up any limbs that block views, hinder travel down a road, or may be endangering structures.
5. Trim fence lines and keep them looking neat. This is very important around homes, barns, and road frontages. Spray fence lines to control the overgrowth of vegetation.
6. Clear off porches and the areas around a home. Any items that do not belong in that area should be placed somewhere else.
7. Any farm equipment on the property should be neatly arranged and the grass maintained in that area. If there is farm equipment around barns or shed, keep it from distracting from the view of a barn or pasture if possible.
8. If the property has ponds, creeks or streams: make sure that some of the water can be seen from a distance. Also make sure that the potential buyers can walk to the water. If you have ponds it is best to keep them clipped and possibly “weedeat” around them.
9. If you have animals that can be dangerous or a nuisance during a showing, make plans for them prior to showings. A large barking dog or a horse that likes to bite can make a property difficult to show.
10. Inside the home should be presentable at the showing. We understand that you may reside on a property we are marketing, just make it’s as neat as possible prior to a showing. Pay close attention to the area around the doors that lead into the house, kitchens, and bathrooms.
11. If any of the property has trash or debris laying around, remove it as soon as possible. This includes junk and trash in barns and sheds on the property.
12. If any brush piles exist, they should be burned and removed. Remember to obtain the proper permits before burning.
13. If there are areas that are overgrown with brush, briars, privet, or kudzu, make arrangements to clean it up and then plant grass back in the cleared areas.
14. Any areas of open dirt or fresh ground needs to have something planted on it.

These are tips and not mandated, but they will make your property marketable. Some, if not all, of the above recommendations should be considered. Keep in mind any investment into your property may or may not add actual value, but in most cases it justifies the asking price for a property. Remember, buyers are looking at many properties and the one that stands out above all others will be the one they purchase!

If you’ve ever used real estate as collateral for a loan, you were likely required to have the property appraised. Understanding how a land lender uses an appraisal is important for you since it will influence the loan terms you ultimately receive. You’ve probably heard a lender use terms such as “advance rate” or “loan-to-value”, which are simply the loan amount divided by the appraised value (or if you are purchasing land, usually the lower of the appraised value or purchase price). The loan amount your lender is willing to extend will be based primarily on your financial condition, credit history, repayment ability, and loan structure. But, in addition to these factors, the type and value of collateral you offer to secure the loan can also play a significant role in determining your maximum loan amount. This article focuses on how a property’s characteristics affect the loan advance rate, and highlights five key areas of a land appraisal that lenders consider in making this decision. Many times the lender will be familiar enough with the property and market to make this decision before the actual appraisal is received, but the same logic discussed in this article will be used either way to determine the loan-to-value the lender is comfortable with.

Keep in mind as you read further that the reason a lender requires collateral is to repay the loan in case the borrower is not able to pay according to the loan terms. As you would imagine, the time when a lender acquires a collateral property and has to sell it is usually the absolute worst time to own that particular type of property. Because of this, a lender’s view of the current and potential future value of collateral securing a loan is typically very conservative. Lenders run a low-margin, highly-leveraged operation and if we’re wrong very often we won’t stay in business too long.

Comparable Sales

The sales comparison approach is a primary driver of the value estimate in many real estate appraisals. But in a number of land markets today, comparable sales can be difficult to obtain due to limited recent transactions. Lenders spend a good deal of time reviewing the comparable sales used by the appraiser, and the lack of recent comparable sales is a sign that either the market is slow or the property is very unique. Either cause generally leads to a lower advance rate for the loan. A lack of sales driven by a depressed market could mean that values are still falling, and when sales transactions do return they will be at lower levels than the old comparable sales used by the appraiser. The appraiser will attempt to adjust values down on the comparable sales to account for this (and may use current property listings as a guide), but this is a very difficult task with lots of uncertainty. Concerning unique or high-dollar properties, the loan-to-value offered is usually lower than a “standard” property because only a limited pool of buyers would be interested in or financially able to buy this tract. This is certainly not always the case as some very unique properties hold value in down markets because similar tracts are in short supply. But, as stated before, your lender will take a conservative view and will probably offer to finance a smaller portion of a property perceived to have a limited market.

Another focus of lenders in the comparable sales portion of the appraisal is the variability in values. If the adjusted values determined by the appraiser are in a wide range, the lender will consider where in this range the appraiser’s final value estimate for your property ends up.  If it’s at the high end, expect a larger discount from the appraised value to the loan amount offered. Again, lenders almost exclusively acquire collateral properties when the market for the tract is poor, so the lower end of an estimated value range is the most appropriate for use in determining advance rates.

Sales History

Before the appraisal is even finished, your lender has likely (or should have) investigated the sales history of the property offered as collateral. In general, multiple sales of the property in the last several years or significant price increases not justified by physical property improvements are red flags to a lender of an overheating market. This is not always the case, but if your lender believes the run-up in prices is unsustainable, expect an offer for a lower loan amount. Also, if the collateral tract is a property you already own, many lenders will take into account your original purchase price in setting a loan amount (especially if your purchase was fairly recent). Cashing out equity in land tends to be more difficult than the same practice was for homes several years ago, and we know how that one turned out. This practice was also common in the agricultural land market during the late 1970’s and early 1980’s, and at the risk of beating a dead horse, we know how that one turned out as well.

Physical Access

Lenders typically rely on title searches and surveys for a “legal” review of a property’s physical access, but an appraisal can give some valuable information for a “functional” review. To better explain the difference, consider a property’s access. The title work and plat will identify the legal access to the property, but the appraisal could identify some potentially troubling functional concerns about the means of accessing the tract. For instance, I have seen properties where the only legal access is across a low area prone to flooding. The legal documents would indicate access was available, but a review of the appraisal may show a factor that could severely reduce the marketability of the tract. This should not substitute for a site visit by the loan officer, but you would be surprised how often that doesn’t happen.

Neighborhood Description

A site visit is also the best way for a lender to get a feel for the property’s “neighborhood”, but comments from the appraiser can also help determine what is typical for the area. Similar to the comparable sales review, a more unique and/or special-purpose will oftentimes have a more limited group of potential buyers. This effect is heightened in a downturn of a particular property market. Count on a smaller pool of potential buyers influencing an offer from your lender for a lower advance rate.

Income Approach to Value

This section of a land appraisal is one of the most important for a lender to consider. In many markets, property values are greater than what the tract’s cash flows alone can support. Intangible benefits (recreation, historical significance, etc.) as well as future potential higher and better uses for the land can drive prices above what current cash flows and discount rates would suggest is an appropriate value. Experience has shown that in a depressed market (i.e. the time when collateral values are most important to a lender) property values tend to fall toward their “cash flow value” as the intangible benefits are not valued as highly by potential buyers. The long term cash flow-generating capacity of a tract will typically provide a “floor” under the price, so this base price level is a primary consideration to a lender in determining how much to loan on a particular piece of land. The greater the difference between the purchase price/appraised value and the “cash flow value” of a tract, the lower the advance rate your lender will be willing to offer. You should expect to have a larger down payment requirement for a recreational tract compared to another agricultural tract with reliable and consistent cash flows.

In summary, the dynamics of the lending business require a conservative approach to setting advance rates, and your lender will consider what could happen to a particular property’s value in the tough times before making their decision on how much to lend. Property characteristics and history that indicate lower marketability, speculative appreciation, or limited cash flow capacity will drive down the advance rate offered to you. Being aware of these factors as you have discussions with your lender should serve you well in negotiating the best financing terms for your situation.

As of April 5^th, 2012, publicly-traded timberland-owning REITs posted YTD returns of nearly 10%, according to the Forisk Timber REIT (FTR) Index. This kept the sector in line with the overall lift across equity markets – the S&P is up 11% so far in 2012- and in the conversation with timberland investors who continue to test the opportunities for direct timberland investments across the United States. Looking forward, here’s our view for timberland investors interested in both future stumpage prices and the competition for timberland assets.

Timberland Ownership

Forisk’s 18-month study of timberland owners in the U.S. indicates that the top 249 owners and managers account for nearly 82 million acres of private timberlands. By acreage, these owners are concentrated, first, in the US South, and secondarily in the Pacific Northwest, Lake States and Northeast. The top 10 alone account for 32.5 million acres.  Detailed analysis of these ownership groups highlight the continued shifting of acres to institutions, and the increased activity by private individuals and “family offices” in timberland markets. Long-term owners cite a belief that resources will continue to become scarce, and that hard assets – especially land – provide protection for value and against inflation.

Stumpage Prices Moving Forward

For the second consecutive year, Forisk’s localized pine sawtimber forecast hit within 4% of actual at the state-level. South-wide, Forisk’s regional pine sawtimber average of $26.57 per ton exceeded Timber Mart-South’s actual price of $23.97 for 2011 by 4.7%. The just-published 2012 ForiskForecast for the US South and Pacific Northwest develops three economic and forest industry scenarios. The baseline and “low growth” forecasts expect relatively flat to negative pricing in 2012 for pine sawtimber, with modest strengthening in 2014 as housing returns. Higher sawtimber prices require more than simply increased housing starts; prices require a suitable balance of forest industry capacity to lumber demand and production, with sawmills exceeding 85% utilization for six to twelve months to “reset the floor.”

Meanwhile, other market activities provide opportunities to supplement needed demand, including active export markets and the expansion of the Panama Canal. Forisk developed a high growth scenario that accounts for both strong economic and housing market growth, and potential increased log export activity from the US South by state. This scenario expects strengthening in 2012-2013, with prices in 2014 $2.86 per ton higher than the baseline forecast.

Investors Remain Interested in Timber Assets

If investor phone calls and coverage by the financial press provide sufficient clues, the market remains interested in the benefits of and outlook for timberland investments. Clay Risher, in his REIT Magazine article “Planting the Seeds for Timber REIT Growth” (March 14, 2012), cited Forisk’s research in emphasizing the range of options and diversity across public timber REITs. While Rayonier (RYN) lapped the field in 2011 thanks to its specialty fibers business, other firms, such as Weyerhaeuser (WY) have led in 2012 and, along with Potlatch and Plum Creek, expect to gain more directly from improved housing markets.

Still, investing in timber REITs differs from investing in timberland. Ellie Winninghoff, in her Financial Advisor Magazine article “Balance Sheets that Always Keep Growing” (March 28, 2012), summarized Forisk’s emphasis on the local and regional nature of timber REITs and timberland investment performance. In the end, geography matters for both publicly-traded and private-placement investment vehicles.

“If the rest of the property is like this, then I’ve seen enough. Let’s go.” These are generally not words you want to hear during the first 5 minutes of a showing on a large piece of rural property, but it happened to a co-worker of mine a few weeks ago after he drove over an hour to meet a prospective buyer. You or your agent has to work so hard to get people to come look at your property that you should do your best to make sure it makes a solid initial impression on your potential buyers.

Over the past few months I have been the recipient of some of the best cooking I have ever eaten in my life. My friend takes pride in using ingredients from her garden or that are locally grown. One of the things that has stood out to me is the careful detail she puts into “plating” this food. The presentation is almost as important as the preparation. The food on the plate grabs your attention and makes you want to eat it. All of your senses are engaged as you begin to enjoy the meal.

There is a parallel between the presentation of this food and selling a rural property. Landowners who are trying to sell their property can do themselves a huge favor by making an effort to present their land in the best possible light to potential buyers.

Think about how you feel when you are about to make a major purchase and you go look at that car, house, or piece of property. From the second you pull up, all of your senses are engaged trying to get some notion whether this is good, as advertised, and if it suits your tastes. Put yourself in your prospective buyer’s shoes. This careful examination is exactly what they are doing when they come to see your land.

Do you remember all of the lessons your mom taught you about the importance of first impressions?

• “You only get one chance to make a first impression.”
• “Put your best foot forward.”
• “The first impression is the last impression.”

All of those sayings are applicable to selling your rural land. Prospective buyers form that initial idea as to whether this is the place for them almost immediately upon visiting a property. Here are a few points to consider about rural properties that can improve that important initial vibe your land projects.

• Remove trash, debris, and junk from the entrance.
• Repair and maintain fences, gates, and entrances.
• Mow the grass or bush hog the fields.
• Smooth out ruts in the road.
• Trim trees and bushes to improve the views.
• Clear internal roads and trails for easy passage.
• Make sure water features are easily visible and accessible.
• Pressure wash or put a fresh coat of paint on barns or other structures.

This list is not comprehensive, but is meant to spark thoughts about what you can do to improve the possibility that a buyer adds your land to their short list. Sellers please notice I have not mentioned pricing of your tract once in this article. This article assumes you are getting that part right and that your agent is marketing it properly. When all of the other pieces are in place, and the buyer shows up to your tract the first impression may be what sways them toward your property and away from the competition. In this market, the little things can make the difference between a seat at the closing table and more months on the market. And these things I mentioned above are generally just a little sweat, some fuel, and time. No need to spend lots of money here, just make the small improvements that create a positive feeling with buyers.

A landowner recently related the story of how he purchased his 500 acre farm some 30 years ago. The agent that was to show him this land turned into the drive from the highway. As soon as the car pulled into the long drive, the prospect said, “I’ve seen enough. Take me back to town.” The agent showing him the land said, “Are you sure, I think you will really like this place if you see it.” The man told him, “Take me to town, and if I can get the money I want to buy it.” Granted this is one of the most beautiful farms in the Black Belt area, with vast verdant pastures and a house poised on the hill overlooking the beautiful surroundings. But the moral of the story rings true with the prospective buyer in the first paragraph.

A buyer shows up to your property with heightened senses looking for a reason to like your land or cross it off their list. They are going to look very hard at this initial visit. Do everything you can to make sure that first impression is positive and that your property stands out for all of the right reasons. Even the most logical person relies on their gut feelings. Making small improvements and repairs could be just the ticket to giving your property the edge and helping you land the sale.

There are several articles here on LandThink about how to go about buying land in general. Many are geared towards residential building lots or recreational hunting land or timberland. Great resources but what if you are looking at buying farmland and you are not necessarily a farmer. Maybe you are a family member removed from the original homestead and you want to buy land back home or maybe you are an investor looking at this hot investing tool. Whatever the reason, it’s always best to try and get as much information as possible and sometimes a list can help. For this purpose we will consider the parcel to be at least 80% farmland that is tillable land and is producing a crop. Also, most questions end up leading to other questions so really this is a grouping of seven topics to consider before making an offer on farmland.

1. Why are they selling? Is it rented or farmed by the owner? Does the farmer/tenant have a succession plan? Who farms/owns the adjoining land?
2. Can I review Form 156 or other documents with the farmer or tenant and ask specific questions about the crop yields? If the answer is no, then at least make sure you can get copies of the relevant documents for the property such as FSA maps, government program payments or cash flow statements on the parcel. Ask how yields could be improved?
3. Is mobile service available at the site? Is there any known GPS interference at the site? Where is the nearest elevator/coop and equipment service dealers? Ask questions that effect input costs.
4. Is this entrance suitable for equipment? Is it wide enough? Is it fenced? If not, could hot wire be easily run for livestock grazing?
5. Any yearly controlled burning in the area? Who? Where?
6. Does property have any recreational value in non-tillable areas? Fishing or Hunting? If so, any leases and who has permission to access the property?
7. Lucky Seven! The big question is one that will not really have an answer and basically depends on the luck of Mother Nature. However, you should try to find out as much as you can about the weather in the area. Depending on the location ask about flooding, drought or any other conditions that will affect the soil. Is it in tornado alley? Hurricanes? Mudslides? Find out averages for yearly moisture and temperatures.

These things may be seem basic but for example on Question #4 about the entrance. We had a piece of property where the farmers had to drive machinery several miles out of the way to get to the property because a bridge near the entrance to the property was not wide enough for equipment to pass over it. These issues contribute to overall profitability on individual parcels and should be considered if you are buying purely for return on investment (ROI).  In addition to your own list of questions one of the best resources to use if you are buying agricultural land is the extension office. Go to USDA.gov to find local contacts.

Section 1031 of the Internal Revenue Code (IRC) requires the knowledge of many 1031 exchange tax rules. Violation of just one can jeopardize the tax deferral. In addition to the federal requirements, each state can legislate their own requirements as have Washington, Oregon, California, Idaho, Nevada, Colorado, Virginia and Maine. The state provisions focus on the protection of their constituents and how to best filter the 1031 exchange accommodator, or qualified intermediary, by defining minimum insurance requirements and how exchange funds are protected.

Intent and Facts

1031 exchange tax rules start with intent at the time the exchange is initiated, and the facts that support the intent and exchange. The proper 1031 intent as defined by the IRC as “property held in a trade, business or investment”. Property held primarily for personal use is not eligible for 1031 consideration. In addition, the following are not eligible for 1031 consideration.

• Primary residence
• Indebtedness
• Stocks, securities and bonds
• Partnership interest
• Inventory

However, the use of a primary residence can be converted and held as a rental, making the property eligible for a 1031 exchange.

Good facts supporting proper 1031 intent include:

• Property is rented a minimum of 14 overnights per year at fair market rate
• Property is held for two years, though a minimum of one year is highly suggested
• Property is held for rental
• Property is depreciated and reflected on the appropriate federal tax form.

Like-Kind Property

The 1031 exchange tax rules for property reflect the requirement that the property must be exchanged for “like-kind” property. Real and personal tangible and intangible property are eligible for 1031 consideration. Real property can be exchanged for any real property given the duration of interests is perpetual and both the old and new properties are located in the United States. Real property located overseas is exchangeable for any real property located internationally.

The exchange of personal property requires the property to be in the same class of asset. Thirteen general asset classes and the North American Standard Industry Classification Code classify the asset’s class. The exquisite violin owned and used by a chamber musician in their trade cannot be exchanged for an oil painting or vintage motor car. Each must be exchanged for “like-kind” property within the same class.

What are the right questions for a buyer to ask when considering purchasing a rural piece of land? It all depends on the objectives the buyer has in mind when making their purchase.

A recent article on LandThink entitled, “Top 20 Questions for Land Buyers” garnered a lot of attention and created quite a bit of controversy among LandThink readers. I read many of the comments, and started thinking about what my list of questions would look like as I perform due diligence for myself or my clients when considering a property. That list would need to be tweaked a little depending on the objective for the purchase. For example, a person considering developing a tract into a subdivision on a river would have some significantly different questions to answer than a person merely buying a rural retreat for their family. So the following list would be my jumping off point for most buyers or rural tracts:

1. How is the property accessed? (Road frontage, deeded easement, etc..)
2. Are there any water features on the property? (rivers, creek, lake, springs)
3. Are utilities available to the property?Ease
4. What is the timber like? (stand types, age, planted or natural)
5. Has the property been surveyed? (Are boundaries marked?)
6. Who are the neighbors surrounding the tract?
7. Can I get a clear title to the property with title insurance?
8. Do the timber, mineral and water rights convey with the sale?
9. Are there any easements on the property? (adjoining owners, conservation, utility)
10. Are there any known environmental concerns or latent defects with the property?
11. How is this property zoned? (agricultural, residential, commercial?)
12. What are the annual property taxes?
13. Have the owners received notice from any governmental agency about possible assessments or actions in the near future that would affect this property?
14. Will the property be conveyed subject to covenant and restrictions? (If so, what are they?)
15. How does the land lay? (slopes, bottomland, elevation change, etc…)
16. Are there internal roads and trails?
17. Do all of the improvements to the property convey with the sale? (gates and fences, shooting houses, out buildings, etc…)
18. Does the land drain well or does it stay wet for much of the year?
19. If I had to sell this property again in a year, is it desirable to other potential buyers?
20. Can I pee off my porch in privacy?

Buyers that are considering purchasing land for growing crops would also be concerned about things such as:

1. What is the corn grain yield per acre?
2. Is it possible to irrigate with a center pivot?
3. Is an irrigation permit available from the Army Corps of Engineers?
4. What is the soil profile of the property?
5. Where are the nearest grain processors?

An investor purchasing timberland for their portfolio would ask questions like:

1. What is the site index of the land?
2. Is any of the timber merchantable now?
3. Is more than 70% of the property sloped suitably for growing and harvesting timber?
4. Where are the nearest wood outlets and mills?

The list could go on indefinitely for developers, hunters, farmers, investors, and survivalists. The point I am trying to make is that you need to know what your objectives for owning a rural property are before you can even know the right set of questions to ask. This is one reason a buyer should engage the help of a competent agent when purchasing a rural property. Having someone working for you that knows the right questions to ask can save you thousands of dollars and make your transaction much safer and pain-free.