“What’s this ranch worth?” seems like a simple enough question, but in reality, valuing one-of-a-kind legacy ranches¹ can be one of the trickier propositions in real estate. Each legacy ranch is unique, there’s a low volume of comparable transactions, they rarely generate significant cash flow relative to value, and emotion plays a notoriously large role in many transactions. By any standard, it’s an inefficient, fragmented market.
The ability to accurately value a ranch property despite inherent market inefficiencies is one of the most important, yet most poorly executed, aspects of a ranch broker’s job. Truly understanding valuation allows skilled brokers to identify opportunities for their clients and also steer them away from mispriced ranches that could prove to be horrible investments.
Simply put, brokers must fully understand land values in the areas where they represent landowners or buyers. This seems like a mind-numbingly obvious statement, but in my experience, it can be surprisingly uncommon to find brokers who can back up their value claims with quantifiable data or a well-reasoned argument. Common phrases I hear are “It’s worth $X, because that’s what I think it’s worth,” or “That’s what it was worth when I bought it back in ’06.” Well, if you insist it’s currently worth $X, but I have a spreadsheet of hard data suggesting otherwise, I’ll trust my data over unfounded, emotional hunches; I have a fiduciary responsibility to my client to do so.
Ranches, like any asset, can be valued using a variety of systems and models. Is any system for valuing ranches perfect? No. Is a system based on hard data, proven and accepted valuation methods, and well-reasoned logic better than pulling numbers out of the sky? Absolutely. Whether valuing a business, a vehicle, livestock, fine art, or a legacy ranch, all legitimate valuation models are based on quantifiable data and reasonable assumptions.
In the case of ranches, quantifiable data means comparable ranch sales information. Unlike the residential and commercial real estate markets, there is no central database of ranch sales and the number of comparable sales is low, so ranch brokers must work with appraisers, bankers, county offices, and other landowners to uncover useful sales information. Because of the unique nature of legacy ranches, uncovering relevant data can be a lengthy and time-consuming process. However, it is imperative to perform this research thoroughly, because this all-important data can mean the difference of millions of dollars for buyers or landowners.
When forming reasonable assumptions about the legacy ranch market, brokers must combine all relevant data with their experience and knowledge to make a well-informed prediction of where the ranch market is going. Will prices continue to increase or are we at the market’s peak? Will livestock price trends help or hurt the value of this ranch? How will government policy or potential administration changes affect ranch prices? Are there any impending local/national/global economic issues that may impact a ranch’s value? What value does a recreational attribute, such as miles of private fishing or trophy elk, add to the property?
The reality is that no one knows the answer to these questions with 100% certainty – if someone actually did, he or she definitely would not tell anyone! However, an experienced and educated broker understands all of the moving parts, and how these parts will collectively influence the value of ranch real estate. The alternative to making data-based assumptions is to predict future market conditions based on emotion, hopes, or desires. Basing a purchase on hope may be a great strategy when buying lottery tickets, but it’s an extremely unwise approach when dealing with multi-million dollar assets such as legacy ranches.
A note on emotion as it relates to valuation: There’s no way around it, ranches evoke emotion from landowners, buyers, and all other stakeholders. Whether it’s a sixth-generation rancher whose family homesteaded the land 150 years ago or an East Coast family looking for a Western vacation retreat, it’s the emotional connection to the landscapes that attracts people to ranch real estate. As I see it, a broker’s job is to be the non-emotional counterweight to a buyer’s or landowner’s (justifiably) emotional point of view. It’s not that brokers should be robot-like bean counters who only see properties from a “dollars and cents” perspective, but they should strive to balance their clients’ emotions with the hard financial realities of the ranch market. Ultimately, a ranch is both an asset and an investment, and no one wants to invest poorly or irresponsibly because they were temporarily blinded by emotion.
In closing, a quick rule of thumb: When quoted a ranch listing price, the most revealing and straightforward question to ask is: “Why?” Again, mind-numbingly simple, but remarkably effective. If there’s no concrete answer based on quantifiable data and reasonable assumptions, take note. More times than not, the ranch will be overpriced. However, every so often a ranch is priced below market value due to the owner or broker’s ignorance of market conditions, which creates an attractive opportunity. In either case, having a thorough understanding of ranch values provides a distinct negotiating advantage and helps to ensure a solid and responsible ranch investment.
Written by (photo credit to) Ed Roberson, a Colorado-based ranch broker and land conservation consultant who has worked extensively throughout the Rocky Mountain West. To learn more, visit his blog www.mountainandprairie.com.
¹ For the purposes of this article, “legacy ranches” can be defined as unique ranch properties that have value above and beyond traditional agriculture, including fishing, hunting, general recreation, conservation, and/or development.
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