by Jim Copeland
It has be a while since I’ve sent out a newsletter and wanted to bring you all up to speed on what is happening with ranch, rural and recreational properties here in the Sierra Nevada Mountains and foothills. We’ll talk a little bit about the market, suggest some real estate investment opportunities and I’ll share some of my own opinions along the way.
CURRENT MARKET SITUATION:
El Dorado County is an active rural market. Over the last two years, the following changes have taken place:
Homes on lots:
In recent months, the inventory of available homes has climbed, yet the inventory today versus two years ago is down by 12.5%. Over the last two years, average list prices are up by 10.4% and average sales prices have increased by 11.75%. Homes typically sell and close escrow within 47 days, reflecting a strong market.
Homes on 10 acre parcels and larger:
The overall inventory of homes has declined by an average of 10%, while the average list price has increased by 25%. Homes are remaining on the market an average of 135 days compared to 49 days two years ago. The median sales price on such homes in the county has increased by an average of 20.5% per year during this two year period.
Raw land acreage, 10 acre parcels and larger:
The inventory of available raw land has increased 6% over the last two years. Average list prices have increased by 23% and the time that such parcels remain on the market has plunged from 311 days to 96 days. At the same time, the median sales price of these parcels has increased by 45% during that period, which I believe is due to an emerging scarcity factor. List prices land appreciation continue to climb. (NOTE: The increase in agricultural property values in areas of the Sacramento and San Joaquin Valley has been significant in the last decade.) It is important to note that some larger ranch sales may not be reflected in these statistics, since the source of the above numbers is the Metrolist Multiple Listing Service and not all large ranches are listed through this service. Larger properties still take longer to sell and need to be priced right to attract attention. With today’s internet capability, buyers are well aware of property trends and pricing. Properties that sell more quickly are those that allow for easy access, offer privacy, are priced reasonably, convey a sense of vision for what can be done on the property and have amenities such as water frontage, long distance views and “usability” for gardens, grazing and building.
WHO IS BUYING AND WHERE?
I’ve talked about this in previous newsletters but the demand for rural foothill and mountain property is being driven by families from the San Francisco Bay area who are fed up with astronomical home prices and rental costs, severe traffic congestion and a pace of life that is simply too much to handle. Four out of every five buyers who call me are from the Bay Area. Some are expressing fear that there is a new housing “bubble” in play and feel that “the time is now.” Most simply want to get out of the congestion and crime of the big city. Teachers, firefighters and other public servants are being priced out of the market and incomes don’t justify their housing expenses. Many of those who own homes want to cash in their inflated equities and seek out a “kinder, gentler” sort of lifestyle. Many are seeking larger acreages with more than one home that can become a family compound for decades to come. Many can telecommute because of technological advances and the internet. Probably the biggest factor is the realization that for the same price as a suburban home in San Jose or San Francisco, families can move to the foothills, buy a small ranch and enjoy a much slower lifestyle for the same price. Ultimately, it boils down to the quality of life.
The San Jose Business Journal recently reported that one out of every three families wants to leave that environment and relocate to a more rural area.
Most people that I meet from the Bay Area are well educated, well paid and, at the same time, burned out. When I meet them for the first time to look at properties they’re amazed at what SF dollars will buy up here in the hills. I think those of us who have lived up here for a long time sometimes take our surroundings for granted and forget how appealing it is to those in the city who fight traffic and hustle and bustle to keep up with the pace of life that they have chosen. I recall having read a book years ago called “Your Money or Your Life” by Joe Dominguez and Vicki Robin. It spoke of “life units” and what we spend our time doing versus the real cost of such endeavors. It was an eye opener for me and was one of the reasons I chose a rural lifestyle over four decades ago.
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. That figure is currently at 32%.
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?
Jim Copeland, Broker