In order to get the best deal when investing in rural land, you need to be able to act quickly when an opportunity presents itself. Being able to decide on the spot whether a property is the right investment can mean the difference between making tens of thousands of dollars and missing out completely.

In the last week I dealt with an investor that missed out on a prime opportunity and also spoke with another one that hit a home run and doubled his money in a few weeks.

A few weeks ago an agent informed me about a new listing on some hunting land in Perry County, Alabama. It was priced as a wholesale buy, so I went the next day to preview the tract. On the way I called a buyer I had been working with for a year to let him know he should be ready to move if this tract was good. As I walked the land, I was impressed with the mature timber and potential the tract offered. This was a no-brainer as an investment. My buyer looked at the tract and 2 days later made an offer. He tried a low-ball offer to “just see” what they would say. The sellers finally countered back 2 days later at full price. My buyer waited a day and agreed to their terms. Over the next 36 hours it all fell apart. The sellers decided they needed $40,000 more than they were offering the property for originally. Due to some behind-the-scenes advice from a relative the sellers decided they were pricing their land too low. I firmly believe that if we had made a full-price offer on the spot, we would have been able to close the deal. Had we not taken a week to come to terms, I believe we would have been able to flip that property quickly and make a tidy profit.

The investor that made money previewed a relatively small timber tract that happened to be loaded with mature timber. He negotiated a price of $1000 per acre for the tract. The timber value alone on the tract was worth more than double what he paid for the land, and he sold the land to an adjoining owner after he cleared the timber. They only held the property long enough to harvest the trees and then sold the tract. After all was tallied they got a 100% return on their initial investment. He was able to do so well because he saw an opportunity and acted quickly to secure the deal.

The moral of this story is: Prepare yourself so that when an investment opportunity arises you can quickly evaluate and act on it. Here are a few things you can do to help you be ready when the right deal comes along.

1. Educate yourself about the Rural Land Market. Browse land listing websites, talk with a land agent, get comparable sales information from lenders. The key is finding out what people are currently willing to pay for land in your area.

2. Clearly outline your investment objectives. Is your desire to turn a profit quickly or achieve a maximum return? My personal philosophy in this market is: “Buy low, sell low.” If an investor is seeking to make gains in the short-term, the tract needs to be priced lower than competing properties. If the objective is to maximize profits, then an investor needs to be able to buy and sit on the asset until it appreciates.

3. Identify your target market. Who would be interested in a property of this type? What do potential buyers expect when looking at rural land? Is a tract set up for hunting, timber, horseback riding? Does the property offer power, utilities, trails, road frontage, easements, surveyed boundaries, a water feature, or food plots? The presence or absence of these features affects pricing, and should be factored into your decision to invest. Assess the features and who would be interested in purchasing land like that.

There are many other components to making good investment decisions and many ways to make money buying and selling rural land. If you look long enough and know what to search for, the right opportunity will eventually present itself. By doing your homework on the front end and staying current on the rural land market you can increase your chances of being ready to pull the trigger when the right ones come along.

How should a timberland buyer use his own forester’s accurate cruise information with a seller who has provided inflated volumes and values?

The answer depends on how interested the buyer is in buying the seller’s property. A buyer can get huffy about the seller-supplied misinformation. This usually leads to a confrontation with the seller in which the words “liar” and “fraud” appear. When that occurs, negotiations end. It’s unlikely that a seller who has been called a liar will end up reaching terms with his accuser.

In some cases, the seller’s overstatement of timber volumes and values is so great that no timberland buyer will want to continue the pursuit of that property. Rather than belittle a seller, it’s usually better just to say “No thanks.” But the buyer should remember the name of the forester who prepared the bogus cruise.

Let’s consider the case of a timberland tract where the merchantable timber value has been inflated by a factor of two. The property’s asking price is $100,000 and the bogus timber value is $50,000. The buyer’s consultant forester puts the actual merchantable value at $25,000.

The buyer could write a direct — but polite — letter to the seller that explains where the two cruises differ and why the buyer’s appears to be more accurate (don’t use the word, truthful). A copy should be sent to the seller’s forester.

Individual states and professional forestry associations may have procedures for handling complaints of fraudulent work. If the inflation is clearly egregious and flagrant, I might file a complaint. The buyer should consult with his own forester on this sensitive matter.

The buyer, in this example, has one market “fact” in hand: the current merchantable value of a selective hardwood cut 16” DBH and larger in a marked, sealed-bid sale conducted by his consulting forester is likely to bring in $25,000 gross.

The buyer might suggest to the seller that since the seller’s cruise shows twice the value of the buyer’s cruise that they jointly fund a third cruise to establish value. A variation on this arrangement can provide that the losing party — that is, the party whose value is farthest from the third cruise’s value — pay the full cost of the third cruise. But the buyer in my opinion is likely to be advantaged in these circumstances by sticking with a straight 50-50 cost split. My guess is that most sellers don’t want to see the results of a third cruise and will decline the buyer’s suggestion.

The buyer might also suggest as one option that his price for the tract will be that number where the third cruise value represents, say, 60 percent of the gross sales price. If the third cruise estimates $30,000 in timber value, that would put the proposed sales price at $50,000. A buyer should develop a percentage formula of this type to reflect the value of the bare land, other property assets and his own financial circumstances and objectives.

The seller has priced the property with his own formula: asking price is twice the inflated cruise value and three times the actual cruise value of $25,000. The buyer can propose to the seller: I’ll pay twice the cruise value of $25,000, which is the accurate value of the merchantable timber. If the land is timberland, not second-home land, this formula is usually more than fair to the seller.

Formulas of this sort also gain negotiating traction when a buyer can find out what the merchantable value was at the time the seller bought the property in light of its then selling price. If the seller’s formula was 50 percent of sales price in merchantable timber, the buyer can argue that the same formula should be applied to the current sale when the former buyer is now the current seller.

To the extent possible, a buyer should try to move the discussion away from personalizing the conflicting dollar values — “My number is right; yours is baloney.” — to a timber value that both sides understand (even if the seller does not want to concede its accuracy).

The buyer should ignore the seller’s bogus cruise in negotiations, because its numbers are cooked and nothing is to be gained by debating them. The seller will lose credibility within the negotiations by protracted blustering about how his numbers are right and the buyer’s are wrong.

Even the most diplomatic buyer may not be able to work a deal with a seller who has only marginal interest in selling at a realistic price. Sellers who are able to wait for their price, will. Buyers are well-advised to move on to the next property when they find a seller stuck on an inflated price based on a bogus cruise.

A buyer’s first line of defense is to become broadly familiar with the tools and concepts that consulting foresters use to estimate the merchantable value of a property’s timber.

The second — and stoutest — line of defense is for a timberland buyer to hire a full-time consulting forester who has long and broad experience with private-sector timber sales in the area where the target timberland is located. Your forester should have a four-year degree in forestry, at least ten years experience in the area and work primarily in private-sector sales. Retired state and federal career foresters are not as likely to be as knowledgeable and experienced in private-sector sales as those consultants who have been working the private side of the business.

Names and contact information of foresters who work in a particular geographic area are available from the Association of Consulting Foresters, Society of American Foresters and state rosters. A buyer should ask the forester about his experience and credentials. Ask the forester to disclose any conflicts with particular sellers or properties. Ask for current references, and fees for consulting, walk-throughs and timber sales of different types. The timberland buyer needs a forester who is both competent and loyal. Your forester must be riding first for your brand, not any other, including his own.

Timberland buyers should pay for conversational advice from a forester who works in their target county or area before they start looking at properties. This counseling should cover local market conditions and idiosyncrasies, trends in stumpage prices and product demand, sales methods, timber-health issues (blight and/or infestation), timberland prices and related matters. This information is priceless…and buyers should not expect to tap into for free.

If a property seller has provided a cruise, a buyer should ask his consulting forester to review it, to verify the methods used and determine whether the information is timely and credible. Experienced consulting foresters are familiar with many of the timber properties in their counties of operation. This boots-on-the-ground knowledge will provide benchmarks against which any seller-supplied cruise can be measured.

Ask your forester to recalculate an inflated seller-supplied cruise. From that inexpensive effort, you can decide whether there’s enough likely merchantable value to justify the expense of a walk-through or a cruise.

A very broad rule of thumb that I use with many timberland investors is that merchantable timber value in current market conditions (based on an honest cruise) should represent at least 60 to 70 percent of purchase price. The 60-70 rule can be adjusted depending on the specific characteristics of the property, its immediate and longer-term timber potential, the investor’s time-frame and whether the property has other assets that can generate sale revenue and annual income. The rule, of course, does not apply to recent clear cuts or pine plantations that have just been planted back. The rule should not apply to all investor and all properties. Investors who, for example, are looking for a 25-year timberland investment to hold in an IRA could use other formulas.

Experienced foresters have peer networks. They can check out a forester they don’t know through those they do. They can scope another’s reputation within the profession.

My experience has been that a straight-up forester can look at a cruise for mixed hardwoods and determine within 30 minutes (or less) whether it’s inflated or not. If there’s a question, get the forester on the ground with the seller-supplied cruise. A quick walk-around may be all that is needed to judge the cruise’s integrity. On large tracts, a buyer-paid for cruise, or a mini-version, may be warranted.

For the most part, I like consulting foresters as a group. They’re sensible, practical folks who will be your best friend in a timberland purchase and beyond. The ones I don’t like are the information spinners, and buyers need to understand they are out there.

The problem with investing in timberland right now is that precious little of it is priced as timberland, that is, land whose basic use is to produce and sell timber.

Timberland is priced higher than its timberland value because sellers have reclassified it for an economically “higher and better use (HBU),” namely as second homes. Where $500/acre might be the market price for timberland that’s used for producing timber, $2,000 an acre might be right for the same woods marketed to an urban second-home buyer.

Part of the price difference has to do with pitching to different buyers, but the rest involves rebranding it and using the unchanged asset differently.

The price inflation that arises from a two-level market is more evident in smaller tracts of, say, 1,000 acres or less than larger one involving, say 10,000 acres or more. The timberland as timberland prices have edged up too, but not like the HBU conversions.

The large tracts are still for the most part being bought and sold by people who value this real estate mostly for its timber production and understand its pricing in those terms. HBU is, however, in the backs of their minds…and moving forward.

I’ve seen recently timbered tracts (with the next timber cutting 25 to 35 years in the future) priced at double or triple their bare land value. New England cutover is going for $800 an acre and up; one Michigan parcel of 80 acres of managed timberland was priced at $6,000 an acre; small tracts of southern pine land are priced at $2,500 an acre and up, with the emphasis on the up; West Virginia woods with limited timber value are $2,000 to $5,000 an acre depending how close they are to Baltimore, Washington or Pittsburgh.

Timberland that contains a lot of merchantable timber that can be sold immediately is worth more than timberland where the next harvest is 20 years out. But dirt-cheap cutover on a selective harvest may prove to be a better long-term investment than a parcel with 75 percent of its purchase price covered by the sale of merchantable timber. It depends on the price paid for each.

So my first bit of advice to timberland investors is don’t pay an HBU price for timberland if you want to keep it and use it primarily as timberland. The numbers will not work. The comps you will be shown are for HBU tracts, not timberland for timber production.

This market might eventually reset itself by dividing into its components as buyers refuse to pay an HBU price for timberland.

Timberland that’s bought at timberland prices has been an excellent investment, outperforming stocks since the 1960s. But that will end if buyers buy at HBU prices.

Small investors can still make money with properly bought timberland.

Timberland appreciation is driven by the following combination of factors:

• Background appreciation in land prices from population growth and continuing demand for wood products;
• Annual gain in tree height and diameter, which increases timber volume in all diameter classes (sizes); gain in volume is compounding;
• In-growth, which is the immediate increase in value as trees grow and move from a lower-value product category into a higher-value category. In a simplified example, hardwood trees have no timber value from, say, one to six inches in diameter; pulpwood value from six to, say, 12 inches; sawtimber value above 12; and possible veneer value above 18 or 20. At each change point, the value per unit (board feet, cords or tonnage) goes up several times over.
• Multiple-use timberland is likely to appreciate more than single-use timberland;
• Timberland usually has some environmental value that can be protected through the donation or sale of a conservation easement. A typical easement will preserve timberland as open space and for continued timber production, but prohibit or substantially limit division potential and improvements, such as residences. Sellers usually do not price CE value into their asking price, but buyers should calculate its possible monetary value, as well as its pros and cons, if the encumbrance of a CE is something that interests them;
• Certain types of timber and timberland will lend themselves to producing wood as an energy feedstock, such as the current market for pellets or a possible future market for cellulosic ethanol; product diversity can increase value of the timber resource;
• Timberland can be managed in a way to receive payment for CO2 retention;
• Some states extend land-use tax status to “managed timberland” that’s enrolled in a state program. This substantially reduces annual property tax, but may involve “strings” on the land’s sale and use.
• Rental/lease income from hunting and other recreational uses (cross-country skiing, horseback riding, mountain biking, ATVs, camping, etc.);
• Sale income from products, e.g., firewood, maple taps, ginseng, nuts, etc.;
• As federal policy backs out timber sales from public land, private timberland should increase in value owing to a shrinking national timber base;
• And…finally…HBU value at the time the landowner sells.

Timberland, of course, is subject to risk of loss from disease, pests, natural calamities (ice, wind, fire and drought), timber theft and troubles with natural regeneration post-timbering.

But the biggest problem from an investor’s perspective in my opinion, is the tendency to pay too much.

Many timberland sellers provide different types of documents that “show” the value of their property’s timber. Sellers have given me “timber valuations” that go from oral statements, to handwritten notes on the back of an envelope (Red Oak = $50,000; White Oak = $75,000) to numerical cruises ranging from two pages to more than 100.

I’ve found that many of these documents overestimate the volume of timber that a timber buyer will ever pay for, which, of course, inflates the dollar value of the timber the timberland seller is selling and the timberland buyer is purchasing.

Lots of ways exist for timber volume and value to be inflated. I’ll email LandThink.com visitors a chapter from my book, How To Be a DIRT SMART Buyer of Country Property, that discusses the tricks I’ve seen over the years. Ask for “Beware the Seller’s Cruise” at curtisseltzer@htcnet.org.

Here’s my most recent adventure in this Disneyesque world.

A broker provided excerpts from what he described as a “timber cruise” on several hundred acres in the upper MidWest last week. Missing are the first page and perhaps other pages. The timber inventory was laid out in two tables, with one table showing results by acre and the other by the property total. It was presented in this format:

Product (by acre)
Volumes

Pole Timber      Smallsaw       MediumSaw      LargeSaw      Total

Number of trees

Basal area

Quadratic dbh

Arithmetic dbh

Pulpwood (cord)

Scribner

Total (CVib)

Pulpwood…$$$

Solidwood…$$$

Total…$$$

The total tract value of pulpwood and solidwood (whatever that might mean) came to almost $600,000.

No definitions were provided of which tree diameters were grouped into each sawtimber category. No species were provided; the tables were classified as “combined species group.” No cruise parameters were given—number of plots used to make the estimate, number of acres cruised, methods, etc. Nothing was said as to how the forester arrived at a “combined species” dollar value for either pulpwood or solidwood.

It’s possible that the forester provided this information in parts of his cruise that were not sent.

It’s also possible that these cruise numbers provided are absolutely accurate. But neither I nor a consulting forester I showed them to could make heads or tails out of them.

When I contacted the seller’s forester directly, he added details that helped some. But he did not reveal which species were included in “solidwood” or how he calculated a single, aggregated price for “combined species.”

In the form presented, this information is nearly worthless. The buyer can’t determine what tree species are on the tract and what species are concentrated in the larger, more valuable diameter classes. Are the volume numbers in each column based on one plot per 100 acres or one plot per five acres? Was volume counted on inoperable acreage or not? Loggers won’t buy volume on inoperable acreage.

A buyer’s eye will be drawn first to the total dollar values ($$$) for pulpwood and solidwood. They’re easy to understand, though understanding what they actually represent is much harder.

Those dollar values will anchor the seller-buyer discussion in the absence of other information. These values are unverifiable, at best. At next best, they’re unreliable to one degree or another. At worst, they’re inflated to advantage the seller.

Buyers looking at planted, even-age tracts of one species have a much easier time in valuing merchantable timber than buyers looking at natural forests of many species and various ages. Buyers of the second type are usually helped if they obtain a timber evaluation that’s organized more or less like this:

Timber Cruise Inventory

100 acres/150 acres, Jones Farm in ABC County

30 plots, Doyle Scale, FC 78

Top break: first crotch or 10” diameter

September, 5, 2008

———————————————————————————————————

SAWLOG DIAMETER CLASS (inches, DBH)

(volume in 1,000 board feet)

————————————————————–

Less than Total $/1000 Total

12 14-16 16-18 18-20 20-22 22+ Volume bd. ft $ value

Species

A

B

C Sawlog

Veneer

D

This format shows how much timber volume the forester estimates will be found in each diameter class. Different areas and sometimes different mills within a single locale will define a sawlog diameter differently. A timberland buyer needs to know whether sawlogs are defined by the local market as 14” and up or 18” and up; a smaller diameter definition of sawlog means more volume will qualify, which means more sale money.

The forester using this format indicates that in this market all logs larger than 14 inches diameter at breast height (dbh) are considered sawlogs and all such diameters will be priced accordingly. Logs smaller than 14, will be price-discounted as either poletimber or pulp. Veneer is valued separately, because it is priced higher than sawlogs of the same species.

The format also reveals the parameters used – number of plots, number of acres cruised of total, mill-based species prices, among others – which gives a sense of the forester’s methodological integrity and a way of judging the reliability of his numbers.

The subject of cruise integrity deserves far more discussion than I can provide here.

The rules for buyers who are handed a seller’s cruise of timber value are:

1. Ask your consulting forester to review the information before relying on it;
2. If your forester thinks the seller’s tract has significant immediately saleable (merchantable) timber value, pay him to do either a walk-through (informed impression of volumes and values) or a cruise (reasonably accurate sampling and projection of volumes and values).

I routinely find that seller-supplied timber “cruises” inflate the actual timber value a landowner would realize in a sale immediately following purchase by ten to 50 percent.

My favorite example is the seller who estimated timber value on his land at between $100 and $300 million when, it fact, it was $0, because the state would not issue a logging permit for his environmentally sensitive property.

Most research on a target property should take place before you submit a written offer that includes your offer price.

Why research before making an offer when you can put a 30-day, results-acceptable-to-the-buyer study contingency in your contract?

If you don’t research before submitting your offer, how will you know the value of the seller’s assets, the right money to propose and what defects the property might contain?

Sellers are always more likely to accept a contingency-free offer than one that gives a buyer a free look.

Begin your search for country property by working up a written list of objectives that will guide your effort.

Use this list as a screening tool. Screening property takes place in your home, using the Internet, phone, fax and mail.

If you have a business objective, a target property must lend itself to that use. Don’t count on planting an orange grove in Maine no matter how much the old shingle-sided farmhouse sings to you.

Screen out properties that don’t more or less fit all of your objectives.

A target property that gets through your screening is then scoped.

Scoping is more intensive researching, deeper digging.

It has several purposes.

• Confirm the basic facts—acreage the seller can convey; condition of land, buildings and systems; legal and physical access; marketable title.
• Probe for defects. What’s wrong with the land and improvements that make them unsuitable for your intended purpose? What will it cost to remedy these defects?
• Value the property’s individual assets. Using consultants where needed, determine the current values of the property’s assets—merchantable timber, minerals, improvements, water rights, conservation-easement potential, depreciable assets, etc.
• Determine fair market value (FMV) of the property as an entirety. Look up the tax-assessed value. See how much above tax-assessed values recent comparable sales have been. Apply that rate to your target to get an FMV. If you’re working with a local real-estate agent, ask for a competitive market analysis, which will show recent sales prices of comparable properties. An appraiser can be hired to provide the same.
• Calculate how much you will have to put into the place to get it to where you need it.
• Run the numbers. Can you sell an asset to help pay for the property?  How can the purchase improve your tax situation? Can you buy your place in the country without jeopardizing your financial security? What’s your best deal on borrowed money?
• Deep looking. Spend time on the target when it’s cold, wet and ugly.

Screening and scoping prevent buyers from paying more than they should for rural real estate and expose hidden problems.

Research before making an offer is the path to safety and success.