Atlas 1031′s Andy Gustafson attended a farmland auction held by Schrader Auction and shares his insights into the bidding process. He learned there are two types of bidders simultaneously accessing the value or price points. The individual bidder considers one or a combination of tracts while the whole bidder is analyzing price points for the whole or entire farm. Each has their value point they will not exceed. It is a fair and expedient process pitting the sum of the individual bids against bids for the whole.

In a large banquet facility located on the Boone and Hamilton County line, a couple hundred registered bidders and interested bystanders listened to veteran auctioneer Rex Schrader, CEO of Schrader Auction, cover auction procedures. For the next two hours, a 681-acre farm parceled into thirteen tracts representing high quality cropland, fenced pastures, woodland and streams, recreation areas and ½ mile rows with good frontage and updated drainage would be the focal point of competitive bids for the whole and individual tracts.

The room was laid out with a large screen showing a map of the farm in parcels numbered 1 – 13. Next to the map was a spreadsheet, continually updated with the parcel number, bid, bidder’s number, and price per acre. To the left and right of the screen, large whiteboards were used to show the bids by parcel number, combination of parcel bids, bids for the whole and current sum of parcel bids. The auction team began their orchestrated movements starting with updating the whiteboard when Mr. Schrader opened the auction for a bid on tract number one.

“$300,000 …, now $325,000,”rang the call of the auctioneer. “Now $350,000 for a 75 acre tract with 60 acres high quality cropland and 15 acres nice woodland.” The tract has county drainage tile and new drainage improvements. Indiana farmland has been sold for $7,000 and higher per acre. The current $4,666 per acre bid would later be replaced with a winning bid of $480,000 or $6,400 per acre.

Schrader Auction agents walked the bidders’ tables, talking specifics with bidders and notifying  Mr. Schrader that they had a new offer. The spreadsheet and whiteboards were updated with the bid and the bidder’s number. The process would repeat itself over and over with individual bids, updates, combination parcel bids and ultimately, bids for the whole. It was a well coordinated event run by professionals that clearly understand the auction process. Mr. Schrader was helpful highlighting those undervalued parcels encouraging additional bidder consideration. When the whole parcel bid exceeded the sum of the individual bids, Mr. Schrader would suggest to the individual bidders to consider increasing their bids by $10,000, not to meet but rather exceed the whole bid.

I sat next to one of the eventual winning individual bidders. He came to the auction with financing and down payment in place to bid and not exceed his value point. When his combination parcel bid was exceeded, he would counsel with a Schrader agent to confirm his new bid would be sufficient to exceed the current bid. In the end, his bid was increased beyond his value point and he quickly placed another bid for a combination of two tracks he had walked the day before as a contingency tract. His intent is to build a home and possibly sell a portion of the land for residential lots. His tracts represented 38 acres with 14 acres cropland for hay and 24 acres woodland on both sides of a creek. What he bought for $4,800 per acre contrasts with the $25,000 per acre zoned R1 or residential asking price within eye site in Boone County, a northern suburb of Indianapolis.

The LandThink Summit 2010 — September 30 at the Gwinnett Center in Duluth, Georgia — will address the good, the bad and the ugly in today’s land business.

Consider three recent items:

Jim Rinehart, president of R&A Investment Forestry which concentrates on managing and advising institutional investments in timberland, wrote in “U.S. Timberland post-recession: Is it the same asset?” (April, 2010) that timberland will continue to be a steady asset, but one that is likely to produce lower returns with higher risk than seen during the last 15 years or so. He thinks timberland as measured by the NCREIF Timberland Index has actually declined 15-20 percent in value, but the bulk of that decline has been masked by low transaction volume and the valuation process.

Conor Dougherty and Sara Murray report in the September 17, 2010 Wall Street Journal (“Lost Decade for Family Income”) that inflation-adjusted income of the median U.S. household fell 4.8 percent between 2000 and 2009. In the 2007 to 2009 period alone, median household income fell 4.2 percent. Recent declines follow a “long period in which incomes stagnated even through the recovery of 2003-2007.” Second-home sales, land purchases and residential real estate have been clobbered by middle-class income stagnation coupled with unemployment, underemployment and tightened lending standards.

P.J. Huffstutter in the September 19, 2010 Los Angeles Times (“Investors seeing farmland as safer bet than stocks”) reports that institutional investors and wealthy individuals are putting money into farm operations of all types because returns have outperformed stocks and the risks inherent in farming seem safer than those in equities.

But Michael Swanson of Wells Fargo’s Agricultural Industries Group warns that the combination of super-low interest rates and high crop prices have inflated land values, and a 1980s-type farm crash might reoccur as a result.

Is land a buy-now opportunity, a long-term neither-here-nor-there investment or a place to make respectable, though not, spectacular returns?

Find out this Thursday at the LandThink Summit.

Here are two samples of what conference participants will hear.

Barry Gittleman, vice-president for land and strategy at John Wieland Homes and Neighborhoods, believes that distressed land presents a “huge opportunity” for investors.

He says: “In reality, 2009 and 2010 will probably be the best years during our lifetime to purchase a home of any type, if you take the time to do your homework and make sure you get a great deal.”

He would put his own money in bank-owned developed lots in Atlanta, “the closer to in-town, the better. There are lots being sold for less than the cost of development in some places, so the raw land is essentially free in those deals….  Other opportunities include raw land or developed lots in any city where I expect a strong economy in 5-10 years in locations or submarkets where I think they will be building new homes in 5-10 years. I would include parts of Raleigh and Charlotte on that list. And I would stay away from non-residential land, which I don’t think has bottomed yet.”

Brooks Mendell, founder of Forisk, advises small timberland investors to analyze a purchase in the following way:

“The recipe for analyzing timberland investments is straightforward, though it requires discipline and patience.  First, understand the local wood market.  Timber markets are uniquely local.  The same timberland property in two different baskets will have two different values.  In understanding the local basket, this goes beyond knowing all of the wood outlets into which you might sell trees.  It includes knowing in advance how you will access these markets.  Will you work through a forestry consultant?  If so, who?  Will you work directly with loggers?  If so, who?

Second, question your forest data.  In forestry, we have a somewhat bizarre relationship to data as compared to data for other assets such as bonds, equities or even commercial real estate.  In forestry, everything is a sample.  A forest cruise, which estimates the volume and value of the standing forest on a given property, is a sample of what’s out there.  If we use data from the US Forest Service, it’s based on samples.  If we use a timber pricing service, whether public or private, all reported prices are based on samples, not all transactions.  So ask questions about the data.

Third, …know what’s knowable.  In evaluating the value to you, the investor, you want to nail down, to the extent possible, what’s left over each year after revenues are generated and bills paid. That means being specific about what exactly will the property taxes be for THIS property, what are the annual management costs for THIS property, and what are the fees paid to consultants, accountants and lawyers to acquire and manage THIS property.  Plus, fully explore the revenue potential for the timberland property, above and beyond forestry.  Cell towers?  Mineral rights?  Kaolin?  Hunting?  Spiritual retreats?

We recommend to investors that they become familiar with their local markets first, and then patiently seek and evaluate timberland investment opportunities.  This approach leads to building solid models with tested assumptions for buying properties.  Then, when the numbers look good, move fast.”

Dan Hatfield, national president of the Realtors Land Institute, will discuss current and future legislation that will impact the land market. Craig King, president and CEO of  J.P. King Auction Company, will describe how auctions have changed the land market. Jason Denton, vice-president of corporate lending at AgSouth Farm Credit, will talk about financing of timber and land investments. And Harry Mehre, of Jones Lang LaSalle, Tom Margo of AFM Land Sales and Brooks Mendell will form a timberland-investment panel.

Curtis Seltzer will face the question: Land Investing: Now or Later? He refuses to disclose his answer in advance of the Summit. I know because I asked.

For more information including the agenda, speakers, program and attending, visit the LandThink Summit website at GetLandSmart.com.

J. Craig King, president and CEO of J.P. King Auction Company in Gadsden, Ala., believes that property auctions can help get rural real estate moving. His company reported that 2009 was its highest grossing year since 2006, with more than $50 million in sales in the fourth quarter alone.

King is a scheduled speaker at the first LandThink Summit to be held at the Gwinnett Center in Duluth, Ga., on September 30, 2010. He is a fourth-generation president of the company and has 33 years of experience in the auction business. His company handles land, ranches, premier homes, developments and bank sales.

His unedited answers to my questions appear below:

1. If you were investing your personal money in land for a 10-15 year horizon, what type of would you buy? Do you prefer some locations to others? Why would you choose this type of land and location over alternatives?

I love recreational properties in transitional areas. A 10-15 year horizon allows for many lower-cost buying options in outlying locations. Southeastern timber/hunting properties are a great investment. With Alabama leading the way in outstanding deer and turkey populations, long hunting seasons and generous bag limits, Alabama properties are attractive to out-of-state hunters from adjoining states such as Florida, Tennessee, Georgia and Mississippi. I also like ranches in the Rocky Mountain areas with scenic views and hunting. In my opinion, these properties are currently beat down in prices, but they will recover and be an excellent long-term investment.

2. Do you think farmland and timberland are currently priced above, at or below market in terms of their intrinsic values (defined however you want), and why? What’s driving current valuations? Do you see a change in valuation drivers in the future?

In many areas of the country, farm and timber asking prices seem to be above current market values. Because many owners have not reduced asking prices, the number of transactions are off substantially, especially for the higher-value properties. This indicates to me the underlying values have gone down. In my home state of Alabama, we saw owners selling condominiums along the Gulf Coast in 2005-2006 and doing 1031 tax deferred exchanges into farm and timber properties in the Alabama Black Belt. This drove up prices that have since decreased. This was a valuation-driver I would not have anticipated. Now, I wish had a crystal ball so I could see what the next one will be and take advantage of it!

3. Do you use or recommend a general valuation formula for determining which investments to make, such as x% of farmland price in current or projected net cash annual income, or x% of acquisition cost in merchantable timber, or projected 10-year pay off of acquisition cost? Do you have non-revenue hurdles against which you measure land investment performance?

Most of the properties we handle at J. P. King are what I would describe as an asset purchase. We sell many one-of-a-kind properties. The owners expend substantial amounts on the property on an annual basis and make their money when they sell the property. We sell more emotional benefits to people who are interested in amenities such as hunting potential, scenic views, historical aspects, etc. While buyers want an underlying sound investment, they are making more emotional and less analytical purchases.

4. What nominal prices would you project for timberland currently fairly valued at $2,000/A and cropland at $2,500/A in 2025?

I have really not studied historic appreciation of the properties we sold 15 years ago. I would expect a 6-8% return would be a conservative estimate.

5. Do you anticipate any significant shifts in the market (either positive or negative) for agricultural products and timber fiber/logs during the next 15 years? Do you anticipate any technology change, shift in end uses, environmental issues, trade restrictions/expansion etc. that would positively or negatively affect current production trends and markets for agricultural and timber products?

I am really not familiar enough to venture an opinion on what future trends may be affecting these markets.

6. What trends do you see in land auction prices during the last 10 years? What are your expectations for auction prices for the next 10?

We saw much of the same run up in prices that followed the more general real estate markets. We saw strong demand for land — most all in the past decade through 2006 — with softness for the past 2-3 years. We expect this to continue in most areas, especially in transitional areas that, in the past, were absorbing some of the land for development. The recreational buyer is also on the side lines to a large degree for higher valued properties.

7. Taken as a whole, do you think buyers do better at land auctions than they would working through non-auction approaches? Do you think sellers do better at land auctions than they would through non-auction approaches?

As a 35-year real estate auction veteran, I feel there are strong benefits for both buyers and sellers with the auction process, especially in an uncertain real estate market as we are seeing today. Both buyers and sellers get an immediate reading on the market with the transparency of the auction process. For the buyer he knows he is not over paying for the property. He also can often purchase parcels of a property that best suits his needs that would not be available to him through ordinary sale processes. The seller can offer the property in parcels and often obtain a higher value for the property while selling all of the property in one day like a single transaction. He gets the best price for all of the parcels because typically the prices obtained for the parcels is greater than the total. As an example, imagine a 500 acre parcel with 350 acres of crop land and 150 acres of timber parceled up for sale by auction. The farmer only wants the crop land and would not put as high of value on the timber land as the timber investor or hunter. By parceling the property you get the farmers best price for the crop land and the best price for the timber land from the timber investor or hunter. Adjoining land owners can also compete for the parcels adjoining them. In the end, the property can also be offered as an entirety selling in the manner realizing the best overall price for the seller. With an auction, the real estate agent can stay involved in the transaction by referring the seller to an auctioneer or referring buyers to the auction so the sellers, buyers, real estate agents and auctioneers all benefit.

LandThink.com is proud to host the first ever LandThink Summit! This groundbreaking event will cover a variety of topics impacting the land industry, including market conditions and trends, recent legislation, conservation, creative financing, land market from a broker’s perspective, the timberland market and more. The Summit brings together industry experts, potential investors, and individuals and companies who own, sell, and invest in land. Summit attendees will gain access to some of the greatest and most valuable resources and thought leaders.

Join us September 30th at the Gwinnett Center in Atlanta, Georgia for a full day of industry education, information and networking with land industry experts and keynote speaker Coach Bobby Bowden. More information on the LandThink Summit can be found at GetLandSmart.com.

Earlier this month I attended my first absolute auction of rural land which was held in Perry County, Alabama. Target Auction Company, of Birmingham, auctioned over 240 acres of hunting land that had 1/4 mile of frontage on the pristine Cahaba River.

Target Auctions did a great job advertising this property: posting signs, distributing fliers, running ads in the paper, and marketing it online. I had seen this property advertised for weeks before the big day. When the day did arrive, it was rainy and dreary; it was the type of day when you wonder if you will be the only person to show up at an auction.

When I arrived at the auction tent, some of the nice people from Target introduced themselves. The time came for the bidding to begin. Bids started slowly, and the auctioneers worked hard to drum up movement from the bidders. Within a few minutes the whole thing was over, and the land was sold to the highest bidder. The tract sold for within $50/acre of where I expected it to, so I was pleasantly surprised.

Dewey Jacobs, Executive Vice President at Target Auctions, and I agreed that they garnered a fair price for the property. We chatted a little more about auctions and how they benefit landowners who want to sell their land.

I asked Dewey to share with us a little about Target Auction Company, and how auctions offer a landowner a good alternative to a traditional marketing campaign.

1. What are you seeing in the realm of land auctions in 2010?

We are seeing more landowners going to auction this year than in 2009, because the land market is more stable. Recreational land is the most highly demanded property we can offer because there are buyers out in the marketplace that want to invest in a tract of land and play on it for a while and then sell it in a few years.

2. What types of landowners would benefit from working with Target Auction Company as opposed to a traditional listing company?

We know that every property or owner is not going to be a good candidate for an auction, but an auction is a good alternative to traditional sales because it forces buyers to a point of action. Sellers take control and tell buyers how, when, and where they will buy. The terms of the sale are set by the seller. Our method puts the seller in control and has a definite end date associated with it.

3. Who is buying at auctions right now: investors, end users, adjoining owners?

We are attracting several different types of buyers right now. Our program will bring buyers back to the table that have seen these tracts in the past. It will also make buyers that are considering the property act now, and buyers that are just thinking about getting into the market will get involved as well.

4. What are some misconceptions the public has about buying rural land at an auction?

One big misconception about our actions is that the landowners are in distress. Our sellers just want something to happen on their property, get a fair market price for it, and close this chapter in their lives.

5. As an auctioneer, how would you advise a landowner to decide between an auction with a reserve and an absolute auction?

Some auctions are “absolute” which means they sell regardless of price. Some auctions will sell at a minimum price or with a “reserve” in which the seller has the right to accept or reject the final price.

Every auction is designed around our seller’s plans and goals for their property. Typically absolute auctions generate more buyers and therefor a higher selling price. Some sellers need to set a reserve because their are certain restrictions on a property, such as a mortgage. We try to educate the seller on the advantages of each method, and the decision ultimately rests with the seller.

These fruits of foreclosures hang heavy in the back pages.

Distressed properties — the growth sector of a troubled economy — are often sold at auction.

Almost $60 billion of property was auctioned last year, and the National

Association of Realtors predicts about 30 percent of all real estate will be auctioned in 2010.

Individual states regulate auctions and auctioneers, but standards vary.  About half have enacted auction and auctioneer licensing statutes, according to Steven L. Good, author and Chairman and CEO of Sheldon Good & Company.

The National Auctioneers Association has posted its Code of Ethics at www.auctioneers.org.

Auctioneers are generally considered to be agents for sellers. Auctions are set up to produce what a friend calls, “the toppest price in that market at that moment.”

Buyers need to do all of their property research before bidding. Here are a few basics to keep in mind.

Three types: Absolute, with reserve and minimum bid. An absolute auction sells property to the highest bidder, no matter how little is bid. A seller cannot bid for his own property at an absolute auction.

An auction with reserve (or reserve auction) lets an owner decline the high bid without explanation. Unless an auction is advertised as absolute, assume it is an auction with reserve.

A minimum-bid auction is one where the seller has established a minimum sale price: If the top bid falls short, the property does not sell.

The auction’s advertising will state the type of auction. Announcements just before bidding begins, however, are the final rules.

A class-action lawsuit was filed on June 12th in California against auctions where sales are subject to lender confirmation.  The suit alleges, among other things, that “many modern real estate auctions are nothing more than a bait-and-switch scheme to lure hopeful buyers to submit offers that can later be accepted or rejected by the lenders/sellers….”  Several auction companies were named as defendants, including Real Estate Disposition Corp. (US HomeAuction.com), which projects $3 billion in 2008 sales. Countrywide Home Loans Inc. and GMAC Mortgage LLC are also defendants.

Absolute sales, auctioneers believe, coax out the best price, because buyers are motivated by the knowledge that the property will be sold, regardless of the amount. These auctions pose the highest risk to the seller.

Auctioneers in my experience prefer absolute auctions because they always produce a sale and a commission, even if both are disappointing. I’ve seen auctioneers refuse to handle a property unless the seller agreed to sell absolute.

“As is.” Property auctioned “as is” means the seller offers no warranty as to condition, and the seller will do nothing to fix any problem. It can mean in practice that all known defects are not disclosed, though it shouldn’t.

Bidders should understand the risk involved in property auctioned with language something like this:  “The Collateral [property] will be offered and sold by the Trustee without recourse, representations, or covenants, express or implied, being made by the Trustee with respect to the Collateral (except as to title to the Collateral) or with respect to any other information then in the Trustee’s possession, including without limitation any Offering Circular or other financial information.” Sentences like this are intended to get the seller off the disclosure hook. The buyer gets whatever is there, good and bad, and whatever isn’t there. Talk this over with your lawyer.

No contingencies. Winning bidders are not allowed to insert contingencies or change the terms of the purchase contract they sign at auction’s end. Financing must be in place, and be available within the 15 to 30 days typically set aside for closing. Some auctions have lenders available on site to finance the purchase.

This means a bidder must know everything there is to know about a property before bidding. Backing out of a signed contract will cost a bidder his deposit — typically ten percent or more of the sales price — and maybe more.

Buyer’s premium. A buyer’s premium inflates a winning bid. It typically adds from three to ten percent onto the bid amount.

Understand the rules. Just before the auctioneer begins, the auction’s rules will be announced. These statements trump information given previously in any form. Auctions are usually videotaped to create a legal record.

Bidders are allowed to ask questions before the bidding begins. You can ask whether the auctioneer, his associates or the owner will be bidding. If so, ask the auctioneer to identify such persons. Ask whether the seller knows of any defects in the property that would negatively affect a buyer’s use, possession or enjoyment. Ask if the seller guarantees the title is free of defect.

If you don’t want to draw attention to yourself, have a friend do the asking.

Combination bidding. Auctioneers often encourage sellers to market a large property as a division. First, they auction each parcel, then bidders are allowed to combine parcels however they want, and finally the property is bid as an entirety. Whichever formula nets the most wins.

The auctioneer hopes to boost the final price by encouraging bidders to keep fighting it out over different arrangements, each time charging an ante to do so.

Combination bidding can be both confusing and cutthroat. I’ve seen it work to the seller’s advantage; I’ve also seen bidders sit on their hands after the parcels were sold individually.

Prepare a bid sheet in advance. Bidders should write out a bid sheet showing the final cost — including buyer’s premium, if any — of escalating bids.

This is necessary when land is bid by the acre, not as “one money” for the entirety.

With by-the-acre bidding, the sheet must multiply the fixed acreage number by various per-acre prices, onto which the buyer’s premium is added to get the total cost of likely bid prices.

The bidder should circle in blood-red ink his top price. That number reflects what the property is worth to you, given its assets and liabilities in light of your resources and plans. Your red price is arrived at coolly and rationally, not in the heat of the auction’s furnace.

Bring a friend. Bidders need to concentrate on the price action as it is cried out while maintaining eye contact with an auction associate. A friend can observe other bidders and gauge the intensity of their interest.

Etiquette. Auctioneers should play by the rules. They should not recognize bids from phantom bidders, use shills in absolute auctions or play favorites. Buyers should play straight too—don’t collude with other bidders to rig a low price and don’t interfere with another’s right to bid. Breaches of etiquette and law are not unknown.

Sometimes auctions produce a win for the buyer and a win for the seller too. But my experience is that one or the other wins more often than both.

Inexperienced bidders need to be careful. Auctions are intended to excite the crowd, to focus as much on beating out the competition as the object being sold. Speed creates momentum. An auctioneer’s gibberish chant can confuse first-time bidders…or make them think they’ve wandered into the Town of Babel where the mayor is speaking in tongues. And then there are the hyperactive ring persons who manufacture competitive frenzy by yipping up each bid.

An auction’s outcome is never predictable. I’ve seen different properties fetch prices that were way too high, ruinously low and about right.

Auctions are run to benefit sellers, not buyers—though buyers may get a good deal. The keys to buyer survival are the 3 Rs: Research, red price and rationality.