The First Right of Refusal

About 35 years ago, my brother and I were looking for a ranch. We had little money, but lots of time and energy.

We heard about a property we might be able to buy at an affordable price. It was listed for sale with a real estate broker with whom I was acquainted. He explained the situation like this.

Two brothers, Frankie and Al, had owned a ranch for many years. They had purchased it primarily as a hunting club. One of the brothers ran the business affairs and the other had made a hobby of making physical improvements like dams and roads. Over time they purchased additional property and the ranch grew to over 1,000 acres. In addition, it was adjacent to two land-locked sections of BLM ground – giving them almost 2,000 acres on which to hunt. The had it almost to themselves.

They had also built a very nice home on the property and they invited family members to hunt. Some of their guests actually paid a fee which allowed them unaccompanied access to the ranch.

Over the years, the brothers agreed that in their old age, they would sell the ranch if they needed money for retirement. Little did they know that Albert would drop dead from a heart attack at about the age of 50. Al was married and his portion of the ranch went to his wife. Having no other means to support herself, Albert’s wife asked Frank to purchase her interest in the property, or (at least) allow her to sell her half.

Although Frank did not agree to purchase her half, he did agree to letting her subdivide and sell subject to Frank having a first right of refusal to purchase.

Their agreement included a division of half the ranch into five 120 acre parcels. The parcels were put on the market for about $100,000 each with seller financing. As offers came in, Frank had the right to either match the offer or let Albert’s wife sell to the buyer.

The price was acceptable, but nobody wanted to be the guinea pig for Frank. It became clear to us that the agent and Albert’s wife were frustrated by their inability to obtain a viable offer.

My agreement with the seller’s agent was that we would split a 10% commission, but I couldn’t see making an offer just to watch Frank take the opportunity away from us. The $100,000 price was a little too rich for Rob and I to handle on our own, so we found a partner who would become  co-owner if the deal came together.

Then I got an idea that made a lot of sense. If the seller wanted to get the property sold, she might need to pay a higher commission. If she were willing to pay 20% and the selling agent was willing to accept 5%, we could pay me 15% even if Frank purchased the property. That would fund a pay out of 5% to me and each of my partners. Once I proposed this idea, my partners were a go. If Frank acted on the first right, we would each be compensated for our efforts.

The seller’s agent and the seller were fine with idea. At this point we made our $100,000 offer and waited to hear from Frank. He acted upon the first right.

There were  four remaining parcels available and we still didn’t know exactly what to expect from Frank, so we made an offer that would repeat itself on each of the remaining parcels with a commission being paid to me (and indirectly my partners) each time Frank acted.

Frank not only exercised his first right, but he became so annoyed that he outright purchased the remainder of the ranch. I received a commission of 15% on all five parcels. My partners and I were disappointed that we couldn’t own the property, but we were compensated for our disappointment.

Some significant information can be gleaned from this story. First of all, it is clear that a first right of refusal has a negative impact on one’s ability to sell property. And, it is clear that the first right decreases the value of the property – in this case about ten percent. In my opinion the actual decrease in value was even higher than that.

Read Full Post »

What’s a Duck Club Worth?

The value of a duck club is as subjective as any real estate evaluation on earth.

You never own the ducks.

An appraiser would look at duck club sales and compare the price, annual operating costs, taxes and acreage to come up with a value.

A few days ago I got a call from a duck hunter who was evaluating a duck club offering in the delta. He’d checked out my blog and decided that it would be worth his time to give me a call.

He gave me the salient facts. 1,000 acre club, ten partners, $2,500 per acres price for land under a wetlands reserve easement. 100 acre closed area, 7 days per week shooting, $40 per acre per year reclamation fees and a club house that he didn’t intend to use.

He then asked if I thought it would be a good purchase.

This is where things get dicey. Was he a hard-care duck hunter who appreciated quality time in the marsh? Or, was he a trophy duck-club owner who mainly wanted to impress acquaintances with his duck club address?

I assumed he was the former, not the later and told him that the price sounded OK if he could afford it. He said he could and sounded as if he was ready to move on it.

For sake of discussion, my clarity and your benefit, let me review the purchase. It may be helpful down the road to take a closer look at his purchase.

The price was straight forward – $250,000 for 1/10th share of 1,000 acres.

The fixed annual fees are pretty easy to estimate. Reclamation – $4000. Taxes – $2,500. If he’s borrowing the money, he should figure an annual interest cost of about $5,000 – $7,500 per $100,000 borrowed depending upon his borrowing rate. Most duck club buyers either pay cash for this type of property, or the seller provides financing.

Let’s assume he pays cash. That means he’s out at least $6,500 per year. But that’s not the end of the story. Duck clubs have other costs associated with operations. Insurance for one and that can vary depending upon the owners and the type of ownership entity.

A duck club should have an operating entity that creates an annual budget, pays bills and takes care of business. Somebody will be in charge and that person will probably want to be paid. Usually these fees are not large, but in this case I would estimate that the individual managing this club will want at least $200 per month. The insurance will probably be $1,000 per year. That adds up to another $340 per partner. Add in electricity and we can call it $400 per partner.

Duck clubs need to be maintained. That means they must be mowed, plowed and or sprayed. To plow the club one time around may cost $10 per acre – just a guess. Therefore I would estimate that the annual cost of maintaining the ponds would be about double that or $2,000 per share – including irrigation management, water control maintenance etc.

That puts the annual cost at about $9,000 for each owner. You can add to that a few other costs personal in nature.

The good news is the only time a buyer evaluates the cost of a duck club is when he’s making the decision to purchase. Once you own a club, you will just blindly pay until you either die, go broke, quit hunting or decide to purchase a new club.

It’s easy to divide up the cost of ownership. The tricky part of a duck club purchase is dividing up the hunting. That depends upon the individual member’s allowance of time, flexibility and desire.

A scenario that includes hunting every day tends to create a problem that’s hard to resolve -  competition between owners.

Having a system to give each owner a fair chance to enjoy the benefits of ownership is as critical to the success of a duck club as the availability of water.

Read Full Post »

A Week on Vacation without a Camera or Field Glasses

One of the things I can hardly live without is my field glasses. My glasses of choice are Swarovski 7 x30′s and they’re about a dozen years old. They are by far the best optics I’ve ever owned. I own two other pairs of field glasses purchased within the last couple years – not because I was losing faith in my Swarovskis – and neither can hold a candle….

The other item I failed to bring was my camera, but that’s only figuratively speaking because the camera was in my car the entire trip – I just never bothered to pull it out. I could have at least taken a couple of landscape photos of the beautiful view from the porch of our rental house, but I didn’t. I guess I was really on vacation. Not to mention the fact that I caught some really nice trout – alone. That’s one of the big bugaboos about fishing alone, there’s nobody to take a bragging photo. You’ll just have to take my word for the 22 inch brown and 21 inch rainbow.

I did manage to get a little bit of work done. I tied a nymph with the hair of my friend’s golden retriever as dubbing and caught four nice rainbows on it.

My Model 70 WSM rifle traveled in the back seat the entire trip as I planned to take a couple test shots of my cousin’s reloads before the upcoming deer hunt. On the last day of the trip I finally got around to shooting it. After attaching the target to a log, I laid prone to take the shots. As I laid there stuffing a shell into the rifle, I noticed things swarming around me. I was laying on top of a yellow jacket nest. Holly shit was I surprised. They stung me four times before I escaped. I guess I was lucky they didn’t get me worse, but of all places to lay down. The stings burned all the way home. The rifle and bullets worked out fine, but I took the shots from a different position – not prone.

That’s about it for a week at Lake Almanor except for a couple rounds of golf and a real estate tour. The home prices in the Almanor area seemed to have risen during the current real estate crisis. Maybe it’s because they haven’t closed a sale this year yet.

Read Full Post »

How to Buy a Ranch in Today’s Real Estate Market – Part 1

The best way to buy a ranch today could be to not buy a ranch, but buy something else instead.

Sounds backwards? 

When one buys any type of investment real estate, it’s a step towards owning a “ranch”. The tax laws allow investment property owners to trade any investment property for other investment property and defer taxes on the profit of the sold property.

Some of the best opportunties for real estate ownership today are residential real estate (not ranches), but this will change some day so be patient.

In order to be successfully traded (while defering taxes) the proceeds from the sale of property (such as residential property) must be reinvested in the target property in accordance with the IRS rules for a 1031 exchange. Therefore, any good investment property can be the start of owning a ranch or duck club.

The current economic “crisis” has created a very difficult-to-understand real estate market. However there is one aspect of today’s real estate market that you can go to the bank on.

That is, for you savers out there with money to invest, real estate is currently a phenominal investment. The rate of return on a single family home is currently the best I’ve seen in the last thirty years  – by far.

The catch is that cash is in short supply and lenders are not interested in making loans. Therefore, the only buyers out there who can take advantage of the current situation are those who have access to cash in one form or another.

If you have cash now is a good time to purchase a California home for a song – especially lower-priced homes that are traditionally owned by first-time buyers. The crop of first time buyers from a couple years ago are stuck. Many owe more than $100,000 more than their home is worth.

These people are victims of the subprime mortgage era and they are  burried. Many have moved from their homes and raised the flag of surrender.

Others have toughed it out, but must find relief in one form or another.  In the meantime home values have dropped about 40%

For those fortunate few who saved their cash and have good credit ratings, this is the time for action. The rate of return on these homes (the amount of rent that can be collected relative to the cost of a home) is extremely attractive.

For example, I’ve been showing homes for sale in our area that will produce a spendable income stream for cash buyers of 5% per annum or more.

On top of that, one has the right to depreciate the improvements on the site which means that most of the rental income can be offset by depreciation expense.

Not only that, but appreciation, is now a sleeping giant and nobody is factoring any appreciation into the sales price of homes. However, appreciation is not gone forever. Will it take two, three, five or ten years for appreciation to reappear?

It really doesn’t matter because today’s buyers are getting any potential appreciation included in their purchase for free. It’s a free bonus.

The real good news is that once the market does improve and appreciation reappears, it will be time to trade up to something you can own and really enjoy – like a hunt club.

Investors must have patience to succeed. They must save cash to get a start and they must have faith that sound actions will be rewards. For those who are still in their early years, time is on you side. Take advantage of it.

Even if you have no cash, but have an income, you are in the game. Put a portion of your income aside. Invest in stocks at today’s bargain prices. Use dollar cost averaging to purchase as much quality stock as you can and don’t speculate. Mutual funds are a good way to go. You will be rewarded.

If you’re lucky enough to have opportunities to spend money, don’t buy cars, put your money into investments that generate a return. You’ll reap the rewards of your good decision making in the future.

Read Full Post »

Partition – Ending Co-tenancy

The situation

Ten parcels of ranch property owned by one partnership with about 25 members, one LLC with three members, a family trust with 20 heirs and four individuals including one who was deceased and still on title.

 

That was the status of our ranch in year 2003. We owned an undivided interest equivalent to 949 of the 2,540 acres and we owned different portions of each parcel. It was a mess.

 

Our first attorney couldn’t even get out of the box before he admitted we needed somebody else. Our second attorney got us half way there and decided to retire. Our third attorney took over and completed the job.

 

Now it’s over. All that’s left is to sign a few deeds. The judge signed a stipulated judgment (what all the parties agreed to through mediation) and  that agreement is on its way to the Alameda County Recorder’s office.

 

Why choose the partition route?

Partition is the last thing one must do to resolve untenable property ownership. All other options should be explored first. For ten years we attempted to work out an arrangement to have co-petitioners in a partition suit so we wouldn’t have to take everybody on by ourselves, but that attempt failed and in the end we were forced to go alone.

 

What’s the legal basis?

In general, every co-owner of property who owns property in co-tenancy and doesn’t have some type of partnership agreement has the right to sue for partition. If the property can be subdivided and distributed to co-owners (in kind distribution) the law says that’s the best resolution. If the property cannot be divided up into appropriate parcels, the law says you sell and divide up the money proportionate to each ownership interest.

 

We evaluated our situation. Although some said it could be done, we decided that there was no way to subdivide the ranch. The parcels ranged in size from 20 acres to 640 acres. Zoning laws did not allow parcels to be split. Ownership interests couldn’t be fit into the existing parcels without major ownership changes.

 

We held firm that the ranch would have to be sold.

 

Why didn’t we leave things the way they were?

One family group owned 5% of the ranch. They had at least five people hunting and each could kill two bucks. They showed no interest in conservation of the deer herd. If all the owners killed deer at a proportionate rate we would be taking more than 100 bucks per season. The ranch didn’t have 100 deer on it, let alone 100 bucks. Similar issues existed with at least one other owner.

 

The ranch was (and still is) suffering from disrepair. Since nobody claimed the ranch as their own, nobody took responsibility for doing the little maintenance things that are necessary to keep things working properly. Ponds dams needed work, fences were patched with temporary fixes, gates were held together with bailing wire etc. The few buildings on the property were ready to fall down.

 

Once we initiated the action, all the partners had to respond to the law suit or default on the action. If they defaulted, they would have no say in the outcome and would be forced to accept the judge’s decision.

 

Just getting the case ready for and in front of a judge took about two years. Once we got a court hearing, we then went through a year of delays as attorneys for the defendants sought extensions for any or no reason during the first few court dates.

 

Finally, mediation was scheduled for the spring of 2007. Getting meetings arranged took a few months, but the mediator was efficient and knowledgeable. He made it clear to each owner that if a mediation solution could not be reached that the ranch would be put up for sale. At least one of our co-owners was so angry with us that we thought the mediation might not be successful.

 

However, ultimately everybody realized that there was a solution to fit all. We bought out two owners of a total of 400 acres. Another co-owner bought about 250 acres. We agreed to take four parcels that approximated our ownership share and others did the same. We gave some property to another co-owner.

 

One year after completion of the mediation, the suit is over. After about four or five years of effort, the ranch will have four ownership entities. Everybody is better off. The guy who owned 94 acres and hunted on 2,540 may not have as good a hunting scenario, but he now owns 160 acres by himself and he got it without paying anything for the additional acreage.

 

Along the way we had to resolve ownership by one co-owner who was deceased and we gave another individual a five-year right to use one of the cabins on the property. Another individual received five years grazing rights on a section of ground.

 

Instead of 949 acres co-owned and unmanageable, we now have 1,300 acres we can manage as we see fit. I haven’t calculated the legal fees, but we paid attorneys two to three thousand dollars a month for several years. Whatever it cost, it was worth it.

 

Create a functional partnership agreement

The best way to prevent this problem is to enter into a partnership or co-tenant agreement whenever you become co-tenants with anybody. The partnership agreement must describe the process for selling whenever an individual wants to opt out of ownership. Keep in mind that not all partnership agreements are fair and equitable. I’ve seen some agreements that left the co-owners with fewer rights than they would have without an agreement.

 

Please keep in mind that I’m not an attorney and the purpose of this information is to give you the benefit of our experience. However, before you take action on your own, hire an attorney to tell you to resolve your issues. A good attorney may appear to be expensive, but in the long run good legal advise can be invaluable.

 

Read Full Post »

Time to Buy a Ranch or Duck Club?

Is this the time to buy a ranch? Duck club? Maybe not, but it is definitely the time to make serious progress towards buying hunting property. Here are some ideas to get you started.

 

If you want a hunting ranch, you must have the means to buy it and you probably won’t get enough money to buy a ranch by putting money in your savings account or buying stock – unless you can identify the next Microsoft and buy it early.

 

Why not? If you put money in savings or buy stock, you’ll have to use after-tax money to buy your ranch. The government will take 15-25% (or more) of the return you get on your earnings. So, unless you have a huge income, you’ll not be able to come up with enough buying power, or at least it will take longer to do so.

 

On the other hand, if you purchase investment real estate, you will likely be able to transfer your equity from real estate investments to the ranch you choose and defer the taxes indefinitely.

 

Yes you will have a tax obligation, but you won’t have to pay it until final liquidation of the ranch. If you own the ranch until you die, the tax consequences will be irrelevant in your lifetime.

 

We’re in a buyer’s market. Now is a good time to purchase some types of real estate investments. The first type is the “no-brainer.” A no-brainer is an investment that comes along very seldom, but when it does, you’ll know it. Buy it. But because you can’t count on no-brainers here’s some other ideas.

 

If I were a young aggressive investor with time on my side, I’d be looking for vacant land that has future development potential. I’d be trying to purchase with very little cash from a seller who could give me time to seek development approval before I had to come up with significant money.

 

Or, if I were flexible about where I could live, I’d be attempting to use the buying power for my personal residence to purchase a home that had surplus property attached to it. Down the road the surplus property could be subdivided off and used to generate funds for a ranch purchase or other real estate investment.

 

I’d also be looking for small residential properties that have investment bonus potential. Some properties have the potential to blossom as investments as time passes and neighboring properties come available. Often these properties sell for prices that do not reflect the “bonus” aspect.

 

One situation like this is a house that, when combined with the house next door, generates surplus property – sometimes an extra building lot. The extra building lot may not be anticipated by the sellers. Unfortunately the down side is you don’t know when or if the neighbors will sell. But, if the home is in a typical residential area, the odds are in your favor as statistics show home owners tend to sell every five years or so.

 

If you pull it off, you get the benefit of the appreciation of the property plus the bonus value created by subdividing off the generated lot.

 

Sometimes properties may become appropriate for zoning changes that cause the property to take a leap in value. The big guys have the advantage here, and zoning changes don’t always work to your advantage, so you’ve got to be careful with this one.

 

And, I wouldn’t quit looking for hunting property. An interest in a duck club or a small club you can purchase with a couple friends. You may find a small ranch that has enough hunting potential for you and also an occasional friend. Then as you accumulate more buying power, you can expand or combine funds from the sale of the smaller hunting property with other equity to purchase a larger ranch or duck club.

 

By purchasing any high quality investment real estate, you are getting closer to owning a ranch. When the right ranch appears, get it into contract and sell your other property. By using the IRS 1031 Tax-Deferred Exchange rules, the equity can be transferred to the ranch along with your tax obligation.

 

These are some of the ideas I’ve used to speed up the process of building up buying power, but don’t stop with these. Use your own creativity to make your investments successful. In order to do that, you’ll probably need to set asside time to study real estate investements in your area and ponder over investment strategies. Make good decisions.

 

As I’ve said before, once you get to the point where you can own recreational property, you have an investment that gives you a continuous source of personal enjoyment while you own it, along with long-term income potential for your future should you decide to sell.

 

The first step is to get started and today’s buyer’s market is a good time for that.

Read Full Post »