Buying Land is All About Knowing the Market

June 23, 2009

moneyEver wonder how the government buys land? I can tell you it’s not easy. The criteria or purpose for buying land must be thought through and well established for an acquisition to move forward. Funding for land purchases can be lined up years in advance and comes from as many sources as there are public agencies.  The due diligence checklist is extensive and the approval process seems to never end.

I’ve worked for various state and tribal governments and I’ve purchased a lot of land. The land acquisition process for public agencies is filled with its own kind of bureaucratic hell to be sure. But the way I see it, life’s lessons aren’t born from things that go smoothly. I’m going to share with you some of  the lessons I’ve learned which I think are applicable to anyone interested in buying land or recreational property.

Lesson 1: Know Your Market

Over the years, I’ve made a game of guessing a property’s market value before contracting the full narrative appraisal report. I’ve always come within 5-8% of the final value conclusion. The only way I can come that close on a consistent basis is by knowing my market. I know what properties are on the market, how long they’ve been on the market,  and how much they sold for. I’m also familiar with the land use of those properties that are similar to the parcel being appraised.

Knowing my market gives me a distinct advantage in winning gentleman’s bets! But seriously, and more importantly, if I know the market and am familiar with the sales data, I am better prepared to review the final appraisal report. If the appraiser doesn’t have good data, it’s my job to enlighten him. Why?  Simple. In order to play ball, you have to be in the same ball park. As an interested buyer, the best way to approach a willing seller with any hope of the purchase negotiation getting any traction is to do your homework and know the market.

If the seller tells you in the initial conversation that she thinks her property is worth $1 million, but you know the market and think it’s only worth $600,000 then you can ask her to supply market data to back up her claim. If, as a buyer, you’re dealing with a Realtor, ask the Realtor to substantiate the list price by providing the sales comps. Provide your appraiser with any sales data you find.

I had contracted a complete, self-contained appraisal report for a 620-acre property that was completed surrounded by U.S. Forest Service land.

Big Meadows 2

The property was comprised of extensive meadows that were being used for either grazing cattle or growing hay. The meadow had poor drainage and the soils were not conducive to building or septic installations. Surrounding the meadow were timbered hillsides, providing building sites with panoramic views of the valley. This particular property had important wetland and wildlife value as it had been frequented by grizzly bears, wolves and countless other wildlife species.

In this case, the appraiser concluded that the soil types rendered the meadow as unbuildable. This was true enough. But the appraiser went on to conclude that the market value of the property was lower than I had seen in my entire land acquisition career.  I had purchased properties where the majority of the parcel was under water and they were valued more than this one. The resulting value conclusion was so low, it put me in the position of not being able to sit at the same table  with the seller. The appraiser didn’t have the experience to look at the property more creatively and see that there was a strong market for 100-acre  ranchettes or hobby farms. The highest and best use easily supported that kind of land use. Needless to say, I threw that appraisal out and got another from a different appraiser with more experience.  The second appraisal came in as anticipated and put us in a better position to negotiatie with the seller.

So, get familiar with your market. Your job as a land buyer is not to undercut or otherwise insult the seller, but to get the most land for your investment. The way to do that is to know what the property is worth by knowing the market and having the property appraised.  Question the appraisal. If you think the appraiser missed some important market data in his analysis, discuss that with him. The way to do that is to ask to see a draft of the appraisal report so that you can ask questions prior to it being finalized. It’s also fair to say that you need to know what property rights have been severed from the parcel and which ones you’re getting with the purchase.

But that’s another lesson…

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