|Undeveloped tracts draw land lovers

Land in rural West Texas now fetches premium prices.

By Jeff D. Opdyke
THE WALL STREET JOURNAL
Saturday, July 29, 2006

The real estate market has a new cry: Land ho!

As the nation's housing market cools, there's a rush to snap up undeveloped property as buyers stake their claim on everything from New England creek-front parcels to mountainous woodlands in Tennessee to big-sky vistas in Montana.

Rural land, such as this rolling field near Ottumwa, Iowa, is drawing folks interested in building second homes or selling the acres later.

Some people are buying dream lots now, while the land is available and prices affordable, with plans to one day build a vacation or retirement home.

Others are investing in recreational property they want to use today: In rural West Texas, for example, scrubland that wouldn't even sell a few years ago has become so popular with deer hunters and the off-road vehicle set that it now fetches premium prices from buyers flying in from Florida, Illinois and California.

Keith and Mary Payden of Minneapolis a few years ago bought 35 acres in a wooded canyon in southwestern Colorado. They've put in a well and set up temporary living quarters above a barn to use when they visit. "This is where we want to spend our retirement," says 59-year-old Keith Payden, an information technology consultant. The land "fits our hobbies, since there's horseback riding, skiing and golf nearby." Their eventual plan: Put up a small house they can use there.

In the face of demand like this, prices for undeveloped land in many parts of the country are shooting up. Across the country last year, farmland values rose at their highest year-over-year rate — 11 percent — since 1981, according to the Agriculture Department. Rural land in Texas hit a historic high of nearly $1,500 an acre on average last year, up about 75 percent since 2000, according to Texas A&M University Real Estate Center.

Ins and outs of land

In some ways, buying land and buying a second home are similar. Both are capable of generating income — a house through rental income; land through leases for farming, hunting, fishing, ranching or mineral rights. And in both cases, the first three rules of a successful purchase are location, location and location.

Land also comes with its own set of problems that can quickly turn a picture-perfect parcel into just that: something that's pretty to look at, but not much else. Among the important questions: If you plan to build a vacation home there or eventually live there, can you get electric power onto the property? And can the land support a water well and septic system?

What's more, land might make a good investment, but it can be harder to sell in a pinch than a house because fewer people are looking for land.

The U.S. has roughly 1.5 billion acres of rural land, excluding public lands, representing about 65 percent of the country. Prices vary widely: Rural land can fetch $250 an acre in the brush country of far Southwest Texas; $3,000 an acre for timber and pasture land in Iowa; or nearly $27,000 an acre for a scenic, 37-acre property in southwest Colorado that straddles both sides of a river.

Of course, not all plots are in the depths of the wilderness. Wagner Brothers Land Co. in Dunlap, Tenn., charges $20,000 to $30,000 an acre for parcels in the mountains north of Chattanooga that come equipped with utilities but no house.

In some circumstances, it can make a lot of sense to buy land long before you intend to build on it, especially if you find a scenic plot of which you're particularly fond. Over the course of years or decades, the price of the land is likely to escalate more quickly than the cost of one day building a house on it. On undeveloped land, real estate taxes are typically lower, and you have no expenses for electricity, water and insurance.

Study the details

But there are many pitfalls. First, even before you buy, consider having a survey done of the land you're interested in, or at least work through a local land agent who knows the area and terrain. Property lines aren't always well defined, and soils may be too wet to support a building in the spot you really want to build.

Also, pay attention to how you access the land. In some places, makeshift roads that cross a variety of property lines have become semipermanent through the years — although nothing about them is legal. As a result, you may not have legal access to your property, which could result in lawsuits.

In urban developments, lots are often zoned to prevent certain types of construction or businesses. But that's not always true with rural land, meaning you could find one day that your dream property is bordered by a new mobile-home park. A local real estate agent with land expertise will know the zoning and covenants in place.

Land prices often don't move in the same way home prices do. Despite the run-up in recent years in some housing markets, home prices are typically expected to rise alongside the rate of inflation. But with land, price appreciation is traditionally more closely tied to how much money it can generate from activities such as farming or grazing. And in general, land prices, when they cool, don't tend to fall as much as an overpriced residential market might, largely because while a housing market can be overbuilt, land can't.

Increasingly, however, recreational demand is defining land prices.

Land has become such a popular investment "that if prices keep going up at the same pace, we could see a bigger correction than we'd want to," says Clint Bumguardner, president of West Texas Appraisal Associates, an Abilene firm that appraises land from Texas to Montana.

One final consideration: mineral rights. In some instances — particularly in energy-rich Texas and the Rocky Mountain states — sellers retain the rights to oil or minerals buried beneath the land you own. This can have ramifications years or decades later. Not only does it deny you your own Jed Clampett moment of discovering bubbling crude oil and striking it rich, but, more important, it means that the owner of those mineral rights can drill or mine on your property, and you must allow it.