For Investors

December 2016

SO WHERE ARE THE OPPORTUNITIES?

 I think there are several areas that warrant close scrutiny and offer the opportunity for generating income, adding value and appreciation.

Opportunity #1 – Water: This is the real gold today. The federal government is increasing its grasp and staking claims for new surface water regulation under the argument that they are “waters of the U.S.” They’ve even begun claiming that certain seasonal runoffs are now such waters. At the state level there is talk of monitoring and regulating private wells. Generally speaking, and until very recently, land owners could extract water running under their lands, without any permits, for “reasonable use.” That may well change in the next decade if things keep going as they are.

I would say that nine out of every ten potential buyers who contact me for country property want year round ponds, streams or river frontage. It is in our nature to want to be near water. At the same time, such properties are rare. Those properties that have such water features command a premium. It is to a landowner’s advantage to develop, improve or rehabilitate such features. Developing new ponds can be difficult, costly and time consuming from a regulatory standpoint. However, those properties that have existing water features will continue to command a premium price. When I do a market analysis of land, I will routinely add $50,000 to $100,000 to the property value for the presence of a usable one half to one acre year-round pond. Larger ponds command a higher evaluation. My appraiser friends use similar figures when appraising land. Please bear in mind that I’m talking about properties in the foothills and mountains where flooding is not typically an issue.

 

In addition to the obvious benefits of water features, the aspect I most enjoy is sitting back and watching the wildlife that is drawn to that special body of water. Many of my most memorable experiences involved my family and I swimming, floating, fishing and simply enjoying the croaking of bullfrogs late at night under a full moon.

Opportunity #2 – Farmstays

I know many of you have heard me harp on this point before. “Farmstays” are rental cottages, cabins or homes on a farm or ranch that are rented to people who want to escape the hassle of the big city. They allow families to experience, if only for a weekend or a week, what life in the country is all about. Children can play on a rope swing, pick garden vegetables, fish in a pond, pet a goat, milk a cow, take a nature hike, ride a horse, ride on a tractor, gather eggs and sit with their parents and look at the stars at night. Some farmstays offer more activities than others, but all offer the opportunity to “get back to nature” and enjoy true quality of life in the country.

Farmstays have been popular in Europe for quite some time and are only now beginning to draw attention here in the U.S. Farmstay rental units command a premium because of the experience that is being offered. The rental unit itself doesn’t need to be posh. They are frequently rustic and earthy, offer cooking facilities, towels, dishes and the like. The idea is to allow families to move in and live for a few days as if they lived in the country. It is about the experience. When they leave after their stay, there is typically a caretaker living on the farm who will come in, clean up and prepare the cabin for the next family. Over the last decade, more and more farmers are offering this opportunity to supplement their other farm income and offset expenses.

There are a number of properties in our rural areas that may have two or three houses on them. Some people like to keep one home vacant for visiting relatives and rent it out as a farmstay when the relatives won’t be in town.

In its purest sense, this is income property. But it offers the flexibility of changing your direction at any time without having to give long term tenants a written notice of eviction, notice of rent increase, or having to deal with the day to day issues of managing apartments.

Opportunity #3 – Adding value with your surveyor

Smaller units of land are typically valued at more per acre than larger units of land. A 400-acre parcel of land might be worth $3,000 per acre, or $1,200,000 for the whole ranch. At the same time, an 80-acre parcel in the same area could well be worth up to $6,000 per acre.

There are larger properties out there that may have multiple legal parcels contained within the exterior boundaries of the larger ranch property. They may have been created by patents, earlier surveys, subdivisions or gift deeds between family members. Some of these may have been illegally created and others were created “by the book.” In either case, it is easy to determine if the smaller parcels within the larger parcel are legal or not. A good real estate broker or title company person can help you make that determination which can then be verified with the County Planning Department or County Surveyor’s Office.

If the parcels have been legally created, there is an option available that can greatly increase the value of the overall acreage. It is a process called “Lot Line Adjustment” or “Boundary Line Adjustment.” Basically, an owner can reconfigure the boundary lines among the various internal parcels provided that such action is not in violation of any zoning ordinances. This can be done in such a way as to add value to each of the resulting parcels by taking into consideration such features as hilltops with views, streams or other aesthetic amenities. The beauty of this procedure is that it is an administrative process with the County authorities and does not involve public hearings. It is relative inexpensive to do and doesn’t require a lot of time.

Here is an example: A 400 acre ranch has four legal parcels within its boundaries: One parcel of 160 acres and three 80-acre parcels. The ranch is valued at $1,200,000 or $3,000 per acre. The ranch has several hilltops and a year round creek through the 160-acre portion. The owner meets with his licensed surveyor or civil engineer and they look at the layout on a topographical map. The owner decides to reconfigure the parcels so that each resulting parcel will front the year round creek and each parcel will have a private hilltop building site with a view. By doing so, value can be added as follows:

 

Item # of acres Market Value/Acre Sub-Total TOTAL
Value after Boundary Line Adjustment:
160 acre portion 160 4,000 640,000
80 acre portion 80 5,000 400,000
80 acre portion 80 5,500 440,000
80 acre portion 80 6,000 480,000
GROSS VALUE AFTER BLA 1,960,000
Less Survey Costs 20,000
ADJUSTED GROSS VALUE AFTER BLA 1,940,000 1,940,000
Original Ranch Value 400 3,000 1,200,000 1,200,000
INCREASE IN VALUE       $740,000

The sad part of this is that many real estate agents don’t know whether the property they have listed contains legal parcels within the exterior boundary of the ranch and aren’t even aware that they can and should determine the status of the “internal parcels” at the time that they list the property. This can be to the benefit of the buyer who has an agent who is knowledgeable about such matters. At the other extreme, I’ve often seen agents represent that there are, for example, “four legal parcels” within the boundaries when, in fact, such parcels were mapped by the County Tax Assessor for assessment purposes only and are not legal parcels. This is to the detriment of the seller and can open up both the sellers and their real estate agents to serious liability.

I recently spoke to a veteran agent who had a very large ranch listed in Northern California that supposedly had “73 legal parcels” within the ranch boundaries. On first blush, it appeared that there was great potential to add value through the BLA process. My buyer was very interested and upon closer inspection we learned that there were 45 parcels. When I drilled down even more into the details, many of the parcels were under one Williamson Act Ag Preserve contract which effectively meant that there were only 12 parcels that could be reconfigured using a boundary line adjustment process.

The moral of the story is that there is an opportunity here. It takes some digging, but such properties are out there. I know several people who have been doing this for decades and make a very good income.

Opportunity #4 – Rural property “fix and flips”

Nearly everyone is aware of the “flipping” phenomenon. With HGTV and other such shows, we’re shown people who acquire distressed properties in the cities, fix them up and make a quick buck.

A market that is not usually shown are those properties in rural areas with homes on parcels that are 5-acres and larger. The price tag on these homes is higher because of the underlying land value, but this market segment has barely been addressed. Suffice to say that there is a demand for such homes after they’ve been fixed up because of their rural locations. An investor who has cash, or represents a partnership group with cash, can find some bargains out there. Great care needs to be taken to make sure that wells and septic systems are functional and that you are familiar with challenges of buying rural properties. I’ve written a consumer protection booklet called “Before You Buy Land” and would be happy to e-mail it to you without any obligation. Many of the principles involved in buying raw land would also apply to this market segment.

WHERE IS THE MARKET HEADED?

Economists in the field of residential real estate are predicting a continued increase in prices over the next 12 months with continued strong demand. New housing isn’t being built at a fast enough clip and that scarcity lends strength to continued price increases, at least in the short term.

However, caution is urged because there are fewer families that can afford to buy a median priced home in our state. I’ve watched this single indicator of demand drop in the past prior to the three recessions I’ve experienced during my career in real estate and construction. It is a pretty reliable gauge of what is to come. When fewer than 50% of the families can afford a median priced home, that is a strong indicator of clouds on the horizon.

Regionally, the commercial and industrial market in our area has strengthened and vacancies are down. My commercial broker friends tell me that this market segment is strong. The owners and tenants of such properties are smaller companies that are moving “to the hills” out of congested metropolitan areas in and around California so that their employees can find affordable housing and a higher quality of life.

And isn’t it quality of life that we all dream about?