|The farm equivalent of a bad mobile home|
This post is about how I think about a new business venture, and was inspired by a comment that hostetter made a couple of days ago,
"I have read many blogs but only follow a few. My favorite posts in any blog that I happen upon are the "this is what I have read and what I am reading type posts". If I find the blog interesting it's great to know where they got their information from that allowed them to become informed on a topic. I would love a post from you that detailed what you have read in the past that got you on this journey and what you have on the list coming up. "
What I really enjoy is the startup phase of a business; for me, that usually starts when I notice something that is odd to me, or I see something where I think that there's some sort of value that's being missed, or I see someone who's doing something that I think is a good idea. What I'd like to convey here is that I watch things around me and sometimes something just leaps out at me and hits me between the eyes. So I work on developing that idea.
The uglier the better!
I love buying acreage with a mobile home on it. In fact, 5 acres with the worst 1970s mobile home is perhaps my favorite type of property to buy. They make GREAT rental properties...
What the market sees
...because everyone who looks at the land will usually get stuck on how awful the mobile home is. The mobile home will actually lower the value of the land that it sits on. It'll sell sometimes for less than the bare acreage will. Excellent!
What I see
Land that has a power connection, a water connection, and has a septic system installed. Let me paraphrase that: You have a fully prepared building lot. The mobile home costs about $1k to dispose of, and it's actually pretty fun. You rent an excavator and use it to tear the building apart. You sort it into recyclables, like aluminum and steel, and toss the rest into a 40 yard dumpster you rent. And then you get the new, better, mobile that you purchased for $10k and drop it onto the foundations. I'm ignoring some permitting stuff here, but you get the idea. with $2k worth of fence you now have a nice rural rental that is perfect for someone who wants to keep horses or whatever, and will actually rent for a bit more than a similar stick-built to the right tenant. So for an investment of around $50k you get $10k a year in rent. Yes, there are various other costs, but right now, getting a gross profit of 20% on that small an investment is a pretty good deal. How many of those can you afford to own, even in this economy? You own this property free and clear in 7 years with normal operating costs.
What I noticed is that acreage with mobiles was selling for less than bare acres, and that there was between $30 and $50k value in water sewer and power connection fees that most folks didn't notice. And with not much work at all you could turn a loser into a winner.
What am I seeing now that's farm related?
Small dairy farms are the kiss of death in real estate. I'm talking about the 50 to 80 acre farm with a nice 2000+sf or so house, freestall barn, milking parlor, manure lagoon and a couple of other outbuildings. A dairy farm is kind of like a bad mobile home. I think that some of these properties are selling for less than the equivalent property would if i was just a house and a hobby barn -- like a horse stall barn. People see the dairy fittings and walk away from the property. I see big barns I don't have to permit or buy. I see stuff that would be very difficult to permit at all, already there. And for a lot of these properties, I see why they went out of business.
You'll find the MLS listing for this property here 3 Bedroom 2.25 baths on 74 acres with big outbuildings. $450k asking price. This is the only parcel of any size for sale for miles in any direction. It's been on the market for 5 months. It has 74 irrigated acres. Irrigated acres. Water rights are worth money these days, too.
What's the real value?
For what it is, these properties are selling below replacement value. the 70 acres at $6k an acre, which is about what bare land is selling for, would price this property at $444k. a big steel barn, like the one on this farm, would cost you around $100k to build. The equipment shed another $15k. the haybarn, $10k. the house, around $100k. the milking parlor, commodity barn and the cost of permitting a new manure lagoon... $100k. Figuring all of the buildings at 1/2 their replacement value, what I figure "fair market value" for this property is something like $606k.
What could you buy it for? Well...
It's been on the market for close to 6 months. The last time I saw properties on the market this long I bought them for between 20 and 30% off their asking price. If you are the only offer, you're the only offer. Using that as a guideline, you might be able to get this property for $315k. current cost for a $315k mortgage is $1481 a month, with 10% down, assuming housing rates. Commercial loans, or farm service loans will be higher, and it'll depend on your credit rating, but lets look at what most folks miss. Banks hate dairy properties and generally just want to get rid of them.
This property has at least 60 tillable acres. You can lease that land for between $150 and $400 a year. Using $150 a year, that guy who is haying it will pay you $9k. at $400 a year, he'd be paying you $24k a year. How do I know this? I drove there, found the guy who was haying it -- a neighbor, and asked him. It's a lot easier playing poker when you can see the other guys hand.
They might even pay you to own this property - cash flow
So you'd have the house, barns, outbuildings and lagoon, and the whole thing costs you $31k in downpayment, and your payment after lease proceeds would be about $800 a month...or you'd be making $600 a month if you get $400/acre/year. They will pay you to own this land. You could probably even use the land lease as part of your "income" to qualify for the loan.
Wouldn't you like to own a farm that you get paid to live on?
This particular property is river frontage -- the conservation reserve program will pay you $400 an acre a year for the land along the rivers edge. It's a salmon stream, and they will rent 150' buffer for a 15 year lease, or would last time I checked. Most folks pay a premium for a riverside house. You get paid for it.
So I can rent as much or as little as I wish. Anything I'm not using is generating income. If I'm cash-strapped, as I often feel after I buy a property, I can just lease it all, live in the house and save for the next step. People forget about the income potential of farmland.
The manure lagoon is more valuable than most folks know.
For someone doing livestock, the permitting process to create a new manure lagoon in this state is both complicated and expensive. Lots of folks would look at a lagoon as a downer -- but I'm telling you right now that at least here in Washington, if you don't have a way to deal with your manure and you're raising animals you are going to get regulated. See this blog entry for an example.
If you really hated it you could probably just drain it and plow it away, but I think you'd be foolish to do that. Once decommissioned you will pay through the nose to get it back. So let it be for a while. Or use it, if you have animals.
This would be even better if you could find some way to make an income off the property -- or, better yet, make a good income off it. That's what I've been working on for the last couple of weeks.
|Rambler. no stairs|
|Kitchen sucks. Ok.|
|That's a lot of area under roof. No farmer I know complains their barn is too big|
|Commodity shed. Keeps your sawdust dry, or hay, or manure storage or whatever floats your boat|
|How about an big hay barn?|
|70+ acres of pasture, in grass. Hayed last year. Nice ground.|
|Ok, the cow fittings could be a pain in the rear. 2 days with a cutting torch, and a foot of sawdust. Done.|