Sunday, December 30, 2012

How to spend $315,000

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. 

What's next? 
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.

manure lagoon


Hostetter said...

With that introduction you should get the commission when you sell the property for the bank. (If you don't buy it). Property here like that within 2 hours of the city gets bought and split into 5 acre mini farms for those people from Florida who want to get out of the heat. What I find so amazing is thinking about water rights. In the east we don't worry about all that and I don't know how you would put a price on that but it would seem to me to be a deal maker or breaker, especially if you have 20 head of cattle drinking 30 - 40 gallons each a day.

Rich said...

That manure lagoon would spook the hell out of me. I would want to do a whole lot of research into what sort of liabilities and regulations I would be exposed to before I bought something like that.

And, if the neighbor is paying enough rent for the hay field to actually buy the entire place, I would be wondering why he hadn't bought it himself.

Bruce King said...

Yes, i should get a commission... Lots of folks think about making a transition from city to county. Buying a farm like this one would be a huge step... but as far as farm ventures go, it would make a great incubator for any venture, animal or vegetable, that you chose to make.

Speakng from the animal side of the house, it's pretty attractive.

With respect to the manure lagoon there are defunct ones all over the county; thousands of them. They usually just become a weird earthwork. You can hire out the pumping for $3k or so -- a guy with a pump and a sprayer comes and distributes the water over your fields as fertilizer. If you're not putting new into it, pretty soon it becomes a rainwater pond. You have to watch out that it doesn't become a wetland, so I'd do the trackhoe thing and breach it once its drained so that water doesn't collect, or completely eradicate it. I'm pretty sure that you could do that with a grading permit.

Anonymous said...

The location is suboptimal if you're farming for-profit even if you 'go big' and really utilize the existing infrastructure for a large (for this region) operation.

Bruce King said...

Paleo: I'd be interested in an expansion of your comment. What would an optimal location look like to you?

Anonymous said...

If the farm were a 5-10 minute drive outside Centralia, it would be better positioned for the Olympia market.

Two hours to Oly and nothing much on the way there is a difficult position, as Oly is not that big itself. That said, having a road effectively built right to your doorstep (SR 6) is worth something. But Raymond is shedding population, and Centralia/Chehalis are depressed regions too, so finding labor to go sell up in Oly and Tacoma would be hard.

You don't want to be in a dying town if you can avoid it and you definitely want to be no more than an hour or so from 100k folks. Roughly speaking, people who are in stable or growing towns an hour or less from 100k+ people seem to have operations that stay in business long enough for their kids to be interested and take over.

Conversely, I see plenty of successful operations schlepping across the mountains to sell in Seattle, but the kids are not interested in continuing to live 2-3 hours from any real metro area and so that's not really viable long-term.

That Raymond farm is a gamble, and if you win, you get the prize of revitalizing a region and attracting people to live there. But it is a big gamble.

Bruce King said...

Paleo: I agree that being close to a population center is a big plus, but as you point out, folks are driving hundreds of miles to sell at farmers markets.

This sort of farm isn't really a retail play, in my mind. I wouldn't expect the customers to come to it very often, or maybe even at all. You'd do your production there and sell your product elsewhere, or do something that can be picked up right there. Some sort of dairy-related venture might work, for instance. Either wholesale fluid milk or a value-added like cheese. Cheese actually ships pretty well,and the dairy cooperatives pick your mik up in a bulk truck.
I can't make grass-type hay pencil out as a viable venture for me; alfalfa brings more per acre, but it's hard to get the weather to cooperate on this side of the mountains to get it dry and baled. But planting and maintaining good pastures and feeding something there seems to pencil out. Irrigated acres are interesting though... Irrigated pastures are more productive than those that aren't.
Speaking to regional health, I looked at the area around that farm; it's surrounded by similar sized farms, some bigger, that are all currently producing something.

So what this sort of property is is a blank page.

I can't speak to what children might want to do. Sure, it's a nice thought to make something that they'd like to continue, but even folks who have successful farms have succession problems. I understand the issue, I just don't have any solution; my children will pick their own path.