A Horse Story

Once upon a time in the East Bay, a post-depression, pre-war family lived on five acres east of Livermore.

The son and grandmother lived with the gainfully employed mother and father. On the side the family tended almonds, bee hives and chickens.

A benefit for their teenage son was the ability to own a horse which he rode to Coral Hollow with his buddy whose family owned a ranch at the end of Tesla Road.

When the war came, the son enlisted and grandma passed away. The mother and father decided that they could no longer handle the chores that produced the income that made the small ranch worthwhile.

One issue became a problem. What should they do with the horse? They decided to purchase a 20-acre parcel close to town for $450. There the horse lived out his years, but after he died, the 20–acre parcel was retained.

When the mother and father reached retirement age, they spent summers camping in Plumas County where they set up camp from May to September.

As the years went by, they became cramped in a 19 ft trailer. To solve the problem, they sold the 20-acre parcel. In 1963 they received enough money from the sale proceeds to allow them to afford a lake-front summer home at Lake Almanor.

This was something they never dreamed they would be able to do.

Thank you Mr. horse.

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 acre 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-core 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.

The Williamson Act (Agricultural Preserve)

A recent release by the California Outdoor Heritage Alliance mentioned that Governor Schwarzenegger is considering elimination of  funding for the Williamson Act in an effort to reduce the State deficit.

The Williamson Act is critical to conserving agricultural land near urban areas. When land values rise due to speculation because it is in that path of development, the Williamson tax break makes the investment economically viable.

By being economically viable, the investors can keep the property in ag until the site is ready to be developed. This is a benefit to the agricultural community and sometimes to wildlife. For this reason the agricultural preserve benefits us all.

There was a time during the (1960s) when ranch owners lost their land to tax sales because they could not afford to carry the taxes with the slim agricultural income. Rapid growth and land speculation raised their taxes to the point where they had to either sell to developers of lose their ground.

However, the advent of Prop 13 in the 1980s reduced the importance of the Williamson Act by tying the property tax to the value of the property and the value is typically determined by the sales price.

Because property that is true ag property is usually based upon ag income, the need for the Williamson Act was greatly reduced. In fact, many ranch properties is the East Bay are not in the Williamson Act and the taxes are not an unreasonable burden.

Therefore, a revision of the Williamson Act makes sense. Not all properties should qualify for tax relief. Another problem with the Williamson Act is that it is often abused.

Once a ranch is in the Williamson Act, it is often subdivided into smaller ranch parcels which retain the designation. Once a parcel is too small to be truly agricultural, it should not enjoy agricultural preserve status, but because agencies are overburdened, they are unable to facilitate change.

Land owners make the case that everybody should be treated equal and that valid argument allows them to keep property under the Act when in reality, their property should be taxed at its full value.

As an owner of land that is in the Williamson Act and other land that is not, I see many inequities in the program.

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.