When someone decides to buy a rural property, frequently the first inclination is to get out and “go shopping”.  Viewing properties is usually fun, especially when they are located in the country and the sun is shining.  But making that your very first step could lead to disappointment along the way.  Unfortunately, I often meet folks that have only a vague idea of the steps involved in the real estate shopping process and as a result quickly get frustrated with the endeavor. To avoid such frustration, there are four distinct steps that buyers should consider to prepare for serious shopping.

1. Choose Your Price Range

Step one is so important yet many buyers procrastinate because it’s just not fun to get pre-approved for a mortgage. Yes, it’s certainly more exciting to look at properties and dream than to have your mortgage banker or accountant tell you the cold hard facts, but skipping this essential step will only lead to disappointment later. There are few things as disheartening as having your heart set on a property only to find that you just can’t swing it financially. Knowing what you can afford will help you shop with confidence. You’ll also save time by only concentrating on the properties that are within your budget.

2. Choose Your Area

This second step will require you to spend some time online and in your car researching the area where you want your property to be. Too often people short cut this step and as a result they spend days looking at properties in a certain location only to find that they like a different area better.  One example is the Driftless area of Southwest Wisconsin. I frequently meet people that are completely unaware of the rugged beauty and reasonable prices just a few hours from their front door. A little time spent exploring different areas would have revealed this hidden jewel to them before they spent days looking elsewhere.

Some things to consider when doing your research are:

A)   How far are you willing to drive from your principal residence? A property is of little good to you if you don’t use it.

B)   What are your preferred recreational activities? Is there opportunity to enjoy the activities in the area?

C)   Will your friends or family be willing to join you there? Too often I see buyers hoping to use a property to reconnect a family only to find that the family members seldom make the trip.

D)  Do you like the communities in the area? Second homes often turn into primary residences at retirement so will you enjoy spending more time there?

A little time spent researching various location options will help you feel confident that there isn’t something better for you just over the horizon.

3. Choose Your Agent

Once you have an area selected for your recreational property or second home, it’s time to choose an agent to work with. While some people just call the agent that is on each for sale sign, most buyers find that working with a single agent is to their advantage. When you work with several agents, each one may pressure you to buy their listing instead of considering the best property for you.

When a buyer is committed to working with a single agent, it allows that agent to focus on the buyer’s needs and provide service without the pressure to buy any certain property. Most agents have access to the listing info for all of the available properties in the area so your agent can work with you on virtually any property you are interested in.  Enlisting your agent in writing as your buyer’s agent allows him/her to represent you (not the seller) in the transaction and allows them more freedom when advising you.

Choose an agent that can provide the proper tools (i.e. GPS, mapping, ATV) to help you get a really good feel for each property you view. You’ll also want an agent that is experienced in rural property transactions. You wouldn’t expect a medical malpractice attorney to be as familiar with divorce proceedings as a family law attorney. Similarly, an agent that specializes in urban properties won’t be as familiar with the intricacies of rural properties as an agent that does it on a daily basis. Even as I write this, a fellow agent commented to me in exasperation “Is there ever a transaction that is easy any more?” The fact is that rural real estate has changed a lot in the last few years and “perfect” transactions are a lot less common. Having an experienced agent representing you can mean the difference between obtaining your dream property and a lot of disappointment.

4. Choose Your Priorities for a Property

Once you have an agent that you’re comfortable working with, it’s time to have a good heart-to-heart talk. To help you find the perfect property, your agent will need to know how much you can spend and as many details about your ideal property as you can provide.

A list of priorities is also helpful when you start visiting properties. In some cases you just won’t find everything on your “Perfect Property List”, so decide which features are absolute requirements, and which ones you could live without or add after the purchase. Look into the future especially if you intend to keep the property long term. Will it still work when you retire and could it be modified to meet your needs as you age? Finding the perfect property is often a process and your wants and needs may fluctuate slightly as you shop. Be sure to keep your agent abreast of those changes so the properties he/she suggests are relevant to your current desires.

With these simple preliminaries out of the way, you will be able to enjoy the property buying adventure. Before long your agent will introduce you to a property that you fall in love with and want to pursue.  He/she will be there to guide you through the negotiation process, inspections, permits, surveys, title commitment, etc.  With the proper preparation, you’ll look back at it and say, “That went well.”

Well, it could mean one of several things.

The first might be that the seller had held the property for many years before selling. Inflation and appreciation had combined to produce a sales price that was greater than the original purchase price.

While the selling price after, say, 30 years might be double or triple the original price, the calculation changes once the interest charges on a 30-year mortgage and property taxes are tossed into the mix. And things get a bit more complicated when you discount those costs by the tax benefits of the deductions for mortgage interest and property taxes.

All in all, one should assume that the sales price after 30 years will be higher than the purchase price. But that’s not exactly paying for itself.

The second idea is that the seller flipped a property within a couple of years of purchasing it for more than the purchase price.

The shorter the ownership period the better for a flipper, generally speaking.

Once again, the details of the purchase and the sale reveal just how good or not so good a deal like this might be.

If the original purchase was for, say, $100,000 and the flip went for $200,000, a cash buyer certainly grossed $100,000, but it’s fair to subtract from that number the investor’s costs of getting in and getting out, property tax, income tax on gain and the interest that might have been earned safely on a CD. Flippers always need to calculate whether it’s more in their interest to flip a property within a year of acquisition and pay tax at their ordinary-income rate or hold for at least a year and pay tax on their gain at their capital-gains rate, which is likely to be lower.

If the investor borrowed most of the $100,000 and then flipped for $200,000, then the gain on his cash outlay in this deal will be much higher. In the first case, the flipper might have put in $125,000 altogether to earn $75,000. He gets back his $100,000 in capital and $75,000 in net profit, after taxes and expenses. In the second case, the flipper gets back, say, $20,000 in down payment and $60,000 in net-after-costs profit.

The flipper does better risking $20,000 of his own money for a $60,000 net profit rather than $100,000 for a $75,000 net profit. Both examples are often described as paying for themselves.

A third idea was often played with timberland when it could be bought relatively cheaply. If the property’s merchantable timber – the trees with immediate commercial value – was substantial, say 60 percent of the purchase price or more, the timber could be sold soon after purchase and the net used to pay down the mortgage. If the timber sold for its cruise value at the time of purchase, no taxable gain would occur at the time the timber sale happened.

An investor working with a consulting forester who knew the stumpage-price cycle in a local market could also time a sale of sawtimber to catch the next top. He might even sell the stumpage for more than he paid for the property. That left the investor with the property paid for, free and clear. This gets pretty close to a property paying for itself, depending on the particulars.

The investor was left with a cutover tract that, depending on the extent of the timbering, would be ready for its next harvest within 20 to 40 years. It could at that point be sold immediately as cutover land or held and then sold.

It’s very hard to find timberland that you can do this with these days.

First, most timberland sellers are selling land that they’ve cut within the last ten years, often within the last two. That means that the next harvest is two or three decades off. If timberland purchased lacks immediately merchantable stumpage, then you have to project the approximate time of the next harvest, likely prices and your ability to carry the property until the payoff. Cutover properties can be excellent real-estate IRA investments for individuals in their 20s, 30s and early 40s. They will pay for themselves over an extended period of time, but not immediately.

And second, the price of timberland has been inflated by sellers pricing their tracts toward the second-home market.

An investor looking to work the old timberland magic needs to follow these guidelines:

• Buy the timberland at a timberland price, not a second-home price.
• Work with a consulting forester who knows the local cycles for stumpage prices. Look to buy when timberland prices are in a dip, which usually lags the price drop in the stumpage cycle.
• Bring realistic expectations. You may not be able to have a timber sale pay the entire cost of acquisition. Fifty to 75 percent is still pretty good.
• Have enough cash flow to be able to wait for the upturn in the stumpage-price cycle.
• Have enough cash flow to be able to carry the cutover land until the market and price of woodland (without substantial merchantable timber but good long-term future prospects) rises.