As we pointed out in our article The 3 Main Types of Land Investors, there are ultimately two types of buyers. There are Land Investors, whose primary goal is to create wealth and turn a profit. Then there are the people who buy with the primary goal of personal enjoyment. That is not to say they do not consider their purchase an investment into a safe asset…it is just to say that they choose their property based on what they will personally enjoy the most. It is the latter buyers that more commonly add material improvements to a property. This is common and makes complete sense…they want to add improvements that will increase their enjoyment. Improvements like cabins, lakes, roads, wetlands, barns, etc… are all commonplace for these buyers. At some point in the future, these properties will be for sale again and this article is meant for those people…the land owners who have made several improvements to their property. It will cover how we have seen buyers view material improvements over the last decade or so.
One of the hardest parts of our job as land brokers is telling land owners that their property is not worth what they have invested in it. Nearly every instance of this involves material improvements. The bottom line is that material improvements rarely improve the value of the property the total amount they cost to complete. There are exceptions but this is a good rule of thumb to live by. I am in no way telling you not to make physical improvements to your property. If fact, I am personally in the process of building a cabin on my property. This article is just to make you aware of how buyers see these improvements.
The most common cause of having more invested in your property that it is worth are cabins/lodges. Additionally, the more expensive the cabin, the bigger that gap can be. There are several reasons for this. The first is that you built that cabin for you and your family. The chances of it fitting 100% perfectly for another buyer are very slim. Think of it in reverse. When you buy a house or look at other cabins, there is always – ALWAYS – things that you immediately change, or would have done differently if you built it yourself. This hold true with cabins as well. What is typically different about farms with cabins is that often times buyers fall in love with the actual land itself. The result is often that they are willing to make an offer but it is less than the seller wants because A) the buyer is budgeting for changes/modifications to the cabin or B) the buyer just doesn’t see the value of the cabin the way the seller does.
Another reason that sellers don’t realize full value for cabins/lodges is that these properties appeal to a much smaller market. And as a general rule of thumb, the smaller the market for a property, the more buyers feel the right for a discount. Simply put, there is no competition for the property so buyers are not motivated to offer higher amounts. There are more land buyers looking for land without cabins that there are with cabins. In our experience, even the market of buyers who want a cabin is divided about 50/50….half would like to build their own cabin to suite their personal needs and the other half are looking for existing cabins to start enjoying the property immediately. And in general, the more expensive the cabin, the more likely a buyer is to prefer to build his own. If a buyer is looking to spend $500,000+ on a cabin, the chances grow exponentially that he/she would prefer to build their own cabin that suites their needs perfectly. Even when looking at the market is are willing to purchase an existing cabin, the land must also be a perfect fit. As you can see, the market for these properties starts to shrink exponentially.
The last major reason we see similarly applies to a shrinking market…but stems from the geographic location. It applies mostly to cabins that cost $300,000+. Typically, cabins and lodges are built in remote areas…and for a good reason. The owners are looking for some privacy away from the hustle of big cities. They are built in remote areas with lower average incomes. They are built in small farm towns where the average home may very well be south of $100,000. The result is that the owners price the property out of the local market. Consequently, the market shrinks down sizably to major market nearby cities…and the further the property is from these major markets, the more the market drops. Distance from home is generally among the list of demands for major market buyers.
As you can see, cabins and lodges typically lead to a smaller market. And as the value of the cabin increases, so too does the size of the market for that property.
Water on a property is among the highest demands of buyers. However, the cost of lake construction and wetland construction is on the rise. Lake construction cost more today than ever in the past. It is extremely common for lakes to cost around $10,000 per surface acre. So a ten acre lake could cost $100,000. Similarly, wetlands construction costs have risen. In turn, these projects can result in a growing investment that exceed that market value. Although this number floats a bit depending on location and type of project, we generally put a value of $6000/per surface acre of water for valuations. If the project costs $10,000/surface acre and we value the project at around $6000/surface acre, you can see how the investment to value ratio can get out of wack. The reason for this is buyers are comparing these properties against properties with similar attributes. And commonly, buyers are looking at other properties whose lakes were built over five decades ago. Consequently, those competing properties are often for sell for a lower price per acre value. Strip mine properties are a great example of this. Most buyers of strip mines properties in the nineties and early 2000s paid very little for their strip mine properties…most of which included lakes. So for example…
Bill buys 40 acres for $160,000 and puts in a 10 acre lake for $100,000. He now has $260,000 invested in 40 acres with a 10 acre lake…or $6500/acre.
Steve buys a 40 acres of strip mine land with a 10 acre lake for $5000/acre and has $200,000 invested in his property.
If both properties hit the market at the same time, Bill is going to have a difficult time competing with the strip mine property unless he asks for less money that he has invested in the property.
As you can see, lakes and/or wetlands can drive the invested amount in a property to more than the property is worth as a whole.
Roads on recreational properties very greatly…from rutted up dirt trails to shaped asphalt roads with drainage ditches. Similar to cabins/lodges, buyers need for interior roads is pretty minimal. Most land buyers just want some way to access the entire property. Consequently, many land owners who put in whiterock or asphalt roads never see that money back. In fact, some buyers not only disregard these improvements, they actually dislike them. Many believe that asphalt or even whiterock roads subtract from the tranquility and beauty of a farm. I have sold some of my personal property before with a whiterock road, only to see the new buyer doze and bury the road…true story.
Nearly every land buyer has toys (or is planning on buying some). Therefor equipment buildings can be a great addition that does not necessarily shrink the future market for that property. However, most buyers don’t want to pay a ton for this…all they are looking for is a roof to protect their toys from the weather. In turn, many upgrades do not carry any financial weight with buyers. Things like concrete, power, insulation, lighting, and even the size of the building can all be great to own, but not all buyers value those improvements. Similarly to cabins, the more expensive these buildings get, the more rare it becomes for owners to receive full value for them.
The first and easy solution is to be OK with not getting your full invested amount back. I personally am in the process of building a cabin. I know that there are things that will not increase the value of the property…at least not as much as I am investing in them. And I am 100% ok with that. I plan on enjoying the property for a long time and have accepted that what my cabin costs me… I will not recoup 100% of that when the time comes for me to sell.
If you just cant stomach the idea of not getting all your investment back when the time comes, your improvements should be very minimalistic.
The following improvements are at greater risk of not receiving full cost of completion…
A) Unique / Exotic Improvements
For example, Steve buys a property and wants to make his own honey and syrup. He plants a ton of maple trees and buys a bunch of bee houses (I have no idea what those things are called). He invested $20,000 in trees and bee houses. In four years, he decides to sell. To get full value of his improvements, we must find someone looking for property that wants to make honey and syrup. Gooood luck. This is not to say that we cant sell this property. Its just important to realize that unless a buyer has the same goals and desires, they are not going to pay a premium for these improvements. In some cases they actually hurt the property. If the Maple trees were planted in an area that was previously being farmed, many buyers will factor in what it would cost to remove the trees before making an offer. Regardless, you can see how unique and/or exotic improvements are hard to receive full value for.
B) “Non Cost Appropriate”
When we say cost appropriate, we are referring to the relationship between the property as a whole, and the cost of the improvement. In general, the greater the discrepancy between the cost of the project and the value of the property, the greater chances you have at recouping capital improvements.
For example, Bill builds a $40,000 equipment shed on his 250 acre farm valued at $1,000,000. That building is a 4% cost to property value ration. There is a good chance that Bill could recoup that investment entirely.
On the other hand, Steve builds the same building on his 10 acre farm valued at $50,000. That means nearly half of Steves value is from the building. When the ratio is high like this, the potential market for the property drops incredibly. The property is now suited only for someone who is looking for storage or someone who would be willing to convert the barn into a cabin….which is an extremely small market.
This same theory holds true to almost everything. Planting a $5000 apple orchard on a $600,000 property makes sense. Planting that same orchard on a $40,000 property does not. Simply put, projects that represent a greater percentage of the overall value of the farm, have a significantly less chance of recouping their investment.
C) Improvements that do not “Fit the Property”
When we brokers ask if the improvements “Fit the Property”, what we are really asking is… do the improvements fit the potential buyer that the land itself would initially attract? For example, a walk in deer cooler makes sense on 300 acres of timber land under strict trophy management. That same walk in cooler on 80 acres with only 20 acres of timber doesn’t. There is a great chance that the buyer of the 80 acres is not a deer hunter. Another example: A fish cleaning building makes sense on a property with three big lakes. That same fish cleaning building on a 50 acre property with a ¼ acre lake doesn’t. That property is most likely not going to appeal to fisherman…so the likelihood of someone paying full value for that improvement is slim.
Ultimately, improvements that match the land that they sit on are more likely to receive full value from a buyer. A grain bin on a 1000 acre tillable farm: 100% yes. That same grain bin on a 40 acre timber tract. No. I know that is an extreme example but you get the point.
3) ECONOMICAL FIT
Our last fit for increasing your chances of receiving full value for capital improvements is make sure the improvement fits the land from an economical point of view. Sure you can build a lake anywhere. You could build one in a flat cornfield…dig a hole, line it with a liner system, and dig a well to keep it full. That one acre pond could cost you $100,000. Our recommendations are always not to force anything. Take what the land offers. If you can create a 10 acre lake with an 18 foot dam…do it. Don’t think twice. If it takes a 30 foot dam at 700 feet wide to get you two acres of water…move along to another project. Same goes for wetlands. We never advise dams over 6’ for wetlands. So if you can get 6 acres of flooded food with a 6’ dam…start immediately. If you can only get ½ acre for that same 6’ dam…move along to another project. Take what the land offers and don’t force anything. House flippers face this same scenario…sure open floor plans are great…but it you have to knock down load bearing walls and reengineer the structure, the costs often outweighs the value. The same holds true for land…take what it offers.
Those three tips should help you receive a greater percentage of your capital improvements. Ultimately, it is rare that buyers value improvements as highly as the owner who completed the projects. This is especially true as the price of the improvements grows or when the project represents a higher percentage value of the entire property. If you are considering some improvements and it is important to you that you are not wasting money, contact your local land broker. We work with land buyers every day and have a great grasp on what land buyers value and how improvements will effect the potential sale of the property.