Deals in Southwest ranch real estate

Dec 30, 2011

If you’ve got money and are looking to expand, the Southwest real estate market is worth a look, and fortunately, sellers in most Southwest areas also have some great opportunities; some areas are seeing record prices per acre.

The 2011 Southwest real estate market has seen stable to active growth, depending on the region, with larger, mixed-use properties drawing the most attention. Despite obstacles for some due to cautious lenders, for-cash buyers have lots of prime property choices and sellers are getting good returns in the Southwest farm and ranch real estate market.

Real estate sales in some areas have ranged from active and vigorously up from last year to steady. Realtor Sherman Shanklin of Nowata, OK, said the market in his area is in high gear, and even called 2011 “one of our best in 10 years.” Another Oklahoma realtor, Eddie Haynes of Yukon, described the situation as normal with only slight growth from last year.

Despite the generally encouraging situation, there have been obstacles to increased growth and movement in the real estate market. The largest roadblocks are wary lenders. The difficult process of gaining loan approval has made it extremely hard for anyone other than for-cash buyers to buy agricultural real estate lately.

Loans problematic

When it comes to getting loans for farmland, borrowers have two general options, local banks and specific government farm lending agencies. But there are difficulties for borrowers in either situation.

Local banks are generally unwilling to offer fixed-rate loans for more than 12 months. Fixed-rate loans—particularly low-interest fixed-rate loans—are especially valuable for ranchers. “Fixed-rate is the best way to go when dealing with Mother Nature,” Shanklin commented, regarding the importance of low-interest fixed rate loans.

“That way you know your overhead beforehand.”

If borrowers can’t find local banks to finance their land purchase, they must turn to government lending programs such as the Farm Service Agency or the Farm Credit Association. However, government lending opportunities have their own downfalls.

Borrowers can secure fixed-rate loans for their land, but only with high premiums. Approval regulations and bureaucratic hoops abound—some are even down right exclusionary depending on the nature of the land being financed. In some cases, even when loans have been approved, states have lacked the funds to give the borrower. High down payments and restrictions on what can be financed with government loans also are factors.

But the old adage of “banks will only loan to those who don’t need it” has always applied, right? And agricultural loans have always been a higher risk venture for lenders—nothing new there. But Shanklin says this past year has been different. “Getting a loan for ag land is very difficult. Much more than five years ago.”

Reasons for the recent difference are varied, and subject to opinion and speculation. However, a frequently cited possible culprit for lenders’ increased choosiness has been the uncertainty in the current national politics and international economies.

On the national side, there are the oft-heard political concerns. There is the natural instability that comes with a run-up to a presidential election year. What may or may not happen on the federal level with economic matters has lenders less willing to stick their necks out now with known risky borrowers. What the 2012 election will bring to the economic landscape has yet to be seen and lenders prefer to see it before risking funds.

Internationally, uncertainty over the global economy and recent events might have some lenders scared. Economic collapses in eurozones like Greece and Ireland are possibly making potential lenders question where the U.S. will be in the global market. Given similar economic behaviors between those countries and our own—debt problems, high unemployment, social unrest and excessive printing of money— there is cause for concern.

Buyer opportunities

All is not lost however.

With fewer potential buyers being approved for loans, for-cash buyers have had a lot less competition. This means greater opportunities for those who have been sitting on “mattress cash” and waiting for the right time.

Both Haynes and Shanklin said they’d seen a lot more for-cash buyer interest this year over last. Mostly, the buyers have been established farmers with capital to spend looking to expand or non-farming investors looking to hedge against inflation. Haynes said he had not seen many beginning farmers or ranchers this past year. This is likely due to the financing difficulties.

In the world of real estate auctions, Haynes noted more bidders than last year, particularly for-cash buyers. “We’ve had a lot of lookers,” he said of bidder turnout. This is a hopeful turn for future movement of the market. Shanklin also commented on real estate auctions, saying he had noticed more interest in multiparcel auctions in the past year.

Mixed-use land with varied cash flow possibilities caught the eyes of both expansion and investment buyers. Large properties capable of running cattle, growing cash crops, and offering hunting or other outdoor recreational activities

were snapped up. Interest in mineral rights as well as surface rights was also strong. Smaller acreage properties didn’t move as quickly with investor or expansion buyers.

The motivations to buy differed between expansion and investment buyers. Expansion buyers in Oklahoma were largely driven by regional or personal factors.

Things like the Texas drought or avoiding capital gains taxes on their own sales in other states played a role. For investors, hedging against inflation and diversifying portfolios were big motivators to buy land.

Ranchers in droughtstricken areas like Texas who saw their grass literally dry up were looking for more grass for their cattle last year. This resulted in ranchers looking to expand to nearby states such as Oklahoma. Even for those who don’t run cattle on range, additional land for crops is on the minds of buyers hit by the drought.

Ten thirty-one exchanges—also known as tax deferral exchanges—also increased demand for ranch property in the Southwest. For those who took advantage of good land prices and sold elsewhere, the ability to sidestep the capital gains tax by buying another property was an attractive strategy.

The simple desire to expand, coupled with ability, also played a part. When asked to explain this motivation further, Haynes chuckled, saying, “I never knew a farmer who didn’t want to expand a bit.” Economy of size is always a consideration, but the emotional gut urge cannot be ignored.

Investment buyers were motivated in 2011 to buy land for the same reason they were motivated to buy gold—a tangible value to stave off inflation. The limited options of solid, physical investments, and the extreme run-up in the price of gold over 2011, has driven investors to look at other options such as land.

Running with the wisdom of “they aren’t making any more land,” investors have long seen land as a sound long-term investment. Investment buyers of 2011 were no different. Both Shanklin and Haynes noted that investment buyers voiced concern in the growing population and an understanding that land is always the key to keeping populations fed.

A lot of investment buyers showed interest specifically in cropland. In these situations, the land is then leased to area farmers or turned over to a farming management firm. In either case, absentee owners can expect higher returns than with the stock market or other mainstream investment strategy.

Volatility and uncertain returns in the stock market were also motivators to invest in land among buyers.

“Since 1945 you can pick any stock; land will have made more money,” said

Haynes of the value of land as an investment.

A good outlook

Sellers have also been in a good position in the past year. According to USDA figures, both average prices for all U.S. farm products and average prices for land per acre are on a steady rise. Though national average figures don’t account for the extremely regional nature of real estate values, the data is encouraging to anyone looking to sell.

The clear winners in this year’s real estate market, however, have been the forcash buyers. The economic atmosphere which forces or encourages some to sell allows people with liquid assets to make good buys.

There is a lot of opportunity for savvy buyers to find excellent deals. — Kerry Halladay, WLJ Editor