REAE 5311 Blog post
My Family's Experience
About five years ago when the stock market continued to be a risky place for investments, and interest-earning investments offered fairly poor returns, my dad decided rural land was the place to invest. After all, he believed, as many other investors, that land is the one thing they’ll never make any more of.
He and my mother began a search to find a great land deal in the area around Fort Worth. They scoured the farm and land sections in the local newspaper, and searched the internet for acreage in the surrounding counties. They spent time every day in their search. After hundreds of phone calls and many dry runs looking at land, they began to develop a set of questions and some guidelines regarding their potential purchase.
They never went to look at a piece of land unless they had answers to certain questions, since certain answers to these questions could totally eliminate the possibility of purchasing a particular piece of land. The questions included such things as:
- How many acres?
- What is the price?
- Where, exactly, is the property? (Google Earth can usually locate land)
- What exactly is on the property? Tanks, creeks, trees, barns, pumping jacks,etc.
- If there are trees, what kind? (Hardwoods are most desirable)
- Is there well water? Are there pumping wells? Is there city or coop water?
- Is there paved road frontage? How much?
- Does it include mineral rights, executive rights? Is there drilling?
- What is the geometric shape of property? (consider the future divisibility of the land)
- How large are neighboring tracts, and what kind of neighbors are there?
- Are there any easements?
- How big are the tanks, how deep? How well do they hold water? Do they have fish? Are creeks seasonal or year round?
- What is the land being used for? If grazing, has it been overgrazed?
- Is there electric? If so where?
- Is it fenced, and if so what kind, and is it in good shape?
- What kind of soil?
- Is any part of it in a flood zone?
After about two years of searching, my parents found their first piece of land. When they opened the Star-Telegram one Thursday in February of 2005, they saw an ad for 154 acres in Palo Pinto county, $1800 an acre with minerals (a previous owner had a life estate in the minerals, and after their death all mineral rights and royalties would revert to my parents). My parents went that same evening to look at the land, and told the owner they’d take it. By that point in their land looking career, they knew a good deal when they saw it. About 18 months later, they turned around and sold their property for $2,700 an acre. (They retained half the future mineral interest)
Sun setting at first land purchase in Palo Pinto County
If you included all the time, effort, and gas it took to finally settle on a piece of land, I am not sure how good a deal my parents first land purchase actually was. I do think, however, they had fun on their search.
Recent Market Trends
Texas land has become an increasingly popular investment, not just for my dad, but also for many other investors over the past few years. Accordingly, the price of this land has seen substantial gains. In Texas, baby boomers reaching retirement age, (such as my dad) are shopping for small tracts of land.[i]
One of the most comprehensive sources for trends in the Texas land market are reports produced by the Real Estate Center at Texas A&M. The June 2008 A&M report on the 2007 land market indicates that land prices rose 20 percent per acre from 2006 to 2007, from $1,825 to $2,190. Texas land prices in 2007 were 224 percent of the prices in 2002, which equals a compound growth rate of more than 17% annually.
The A&M report, “Sizzling Land”, summarizes the reasons for the 2007 land price acceleration as follows: “As 2007 closed, rising uncertainty in financial markets coupled with soaring commodity prices and lack of alternative investments drove market acceleration as investment buyer’s targeted cropland.”[ii]At the Land Market Conference held in San Antonio in April realtors echoed some of the same reasons for rising land prices. They also included the fact the oil and gas executives are buying ranches, as well as the idea that there is “uncertainty in the 2008 presidential election, upheaval in the stock market and the Federal Reserve’s actions to rescue the banking system.”[i]
This land price increase for 2007 was most evident in sales of small sized properties. Small properties (less than 100 acres) averaged $4, 000 an acre in 2007, whereas larger properties averaged $1,800 per acre. In 2007 large property prices rose only 4% over 2006, as opposed to small property prices which rose 15%.
Another notable trend in land prices has to do with the size of property being sold. The average tract of land being sold has seen a decrease in size for several years. In 2007 the average tract size was 80 acres compared to 98 acres in 2006. [iii]
Price increases vary depending on which area of Texas being considered. The largest 2007 price jump occurred along the Coastal Prairie. (Calhoun, Jackson, Matagorda, Victoria and Wharton counties). Land prices in these areas increased 46 percent in 2007. Another large price increase took place in the Hill country of Texas, north of San Antonio. The average per acre price rose 19 percent in 2007 to more than $8,400. The only area of Texas not to experience a price increase for 2007 was the Rio Grade Valley. This decrease was attributed to the mortgage crisis and slowing community development. [i]
What the Future looks like for Texas Land
Several realtors who deal in rural Texas land were called the first week of October 2008 to get a feel for the today’s actual market. Almost all these realtors believed that despite the current economic crisis, over the next five years, land prices would continue to rise. Their reasoning had to do with past trends, and the fact that they had never seen land prices decline in all their years in the Texas real estate market. These realtors indicated that the most important factors affecting the price of rural land is distance from town, road frontage, views, and water availability.
A realtor I spoke to in the Fredericksburg area said that selling plots of land in rural subdivisions is becoming very popular. These plots are for home sites and range from four to six acres with an agricultural exemption. The realtor said this type of rural property is popular for people living in San Antonio and Austin as a weekend country getaway. (If you look at the Fort Worth Star Telegram weekend edition you will also see many similar rural tracks of land for sale such as 7-R Ranch and Robson Ranch.)
One realtor I spoke with summed up the Texas land investment best when she said: “As the Texas population continues to soar there will be less land per person and the value of this limited land will have no where to go but up.” As we struggle through the dismal economic news and talks of recession, researching the effects of the 1929 depression on land prices may provide investors with some insight.
Tax Breaks for Owning Rural Land
Another realtor I spoke with focused on the tax breaks of owning rural land versus owning real estate in the city. Generally when real estate is purchased in the city for investment purposes the owner must pay value based property taxes. Rural land, however, can generally be held as an investment with minimal property tax.
Tax breaks are available in either the form the Agricultural-Use Appraisal method or the Open-Space Appraisal method. The most common method to get an agricultural exemption for investment real estate would be from using the Open-Space Appraisal method. The Agricultural-Use Appraisal method is used for individuals whose primary occupation and source of income is farming.
Obtaining an agricultural exemption using the Open-Space Appraisal method requires only the land, not the landowner, meet the following criteria:
- The land must be currently devoted principally to agricultural use to the degree of intensity generally accepted in the area.
- The land has been devoted principally to agricultural use or production of timber or forest products for five of the preceding seven years.
- The owner files a prescribed form provided by the appraisal office with the chief appraiser before May 1 with all the necessary information to determine the validity of the claim. For good cause, the chief appraiser may extend the filing deadline 60 days.
Agricultural uses include planting and harvesting crops, raising livestock, vineyards, producing logs, or wildlife management.[iv]
Another type of tax break can be gained through the use of a wildlife exemption. A wildlife exemption is actually just a special form of an agricultural exemption using the Open-Space Appraisal method. To receive the wildlife exemption you must implement at least three of seven specific wildlife management practices set by the Texas Parks and Wildlife Department. These practices include habitat control, erosion control, predator control, providing supplemental supplies of water, providing supplemental supplies of food, providing shelters, or making census counts to determine wildlife population.[v]
In addition to receiving tax breaks on the investment land, the owner also does not have to pay sales tax on equipment, animals, seeds, machines, and fuel used in the agricultural production.[vi]
Conclusion
Finding a good investment generally takes a great deal of time, research, and effort. An advantage of rural land is that you can get out to the country and enjoy the scenery and fresh air. Will land prices continue to rise at the same recent rates, even with the current financial crisis? I am a bit skeptical, but realtors seem to be fairly optimistic.
References:
[i] http://www.mysanantonio.com/business/MYSA042508_01C_TexasLand042508_130f98c_html.html
[ii] http://recenter.tamu.edu/pdf/1868.pdf
[iii] http://recenter.tamu.edu/pdf/1861.pdf
[iv] http://recenter.tamu.edu/pdf/1361.pdf
[v] http://www.noble.org/Ag/Wildlife/TaxClassification/index.html
[vi] http://www.window.state.tx.us/taxinfo/taxpubs/tx94_101.html
[vii] http://twri.tamu.edu/reports/2002/e143.pdf
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