Raw-land deals not suited for babes in the woods

Although real estate typically is an excellent long-term investment, vacation property buyers should be cautious when buying vacant or raw land even if there is marketable timber on the property.

Raw land, or “raw ground,” differs from vacant property. Vacant land and lots generally have all or most services, including sewers, water, access and power. Raw land does not have the services necessary for building and usually is a tract larger than a single-family lot. Depending upon location, the costs to turn raw land into a ready-to-build site can easily be tens of thousands of dollars.

Like any investment, vacant and raw land hold boom-or-bust potential. The boom often occurs through development. Bust is typically brought on by taxes, little or no appreciation in land value and lack of tax deductions or depreciable dwellings. For example, you can depreciate your rental unit, but if the lot is vacant, there is nothing to depreciate. There is no monthly rental check on raw land.

When a buyer borrows money to buy land, the interest rate will probably be at least 6.5% -- even if you have seller financing. When the buyer eventually sells, he’ll pay an agent a 6% to 10% sales fee. (Commission rates on vacant- and raw-land sales are often higher than on land with houses.) To offset those costs, the property should appreciate about 20% a year.

If you plan to use the property solely as a getaway, however, and expect to derive joy out of it -- consider that as your return on the investment.

The idea of using available timber to offset costs raises a variety of issues. You probably have heard the awful stories of landowners who buy or divide their property, clear-cut all or a portion of the land, sell the timber and then quickly move on. Those stories become more and more common as the price of timber goes up and more private owners purchase public land.

An alternative to clear-cutting is a selective “thinning” that not only can protect homes from precariously perched trees but also can help prepare a site for development while possibly netting thousands of dollars in timber sales. In fact, some woodsy lots are so thick with trees that a very lucrative thinning can go unnoticed.

Many timber companies, especially smaller, local ones, will dispatch “cruisers” to determine if your lot contains enough (at least one truckload) of marketable timber.

On single-family lots, owners can flag the individual trees to be harvested. Landowners can also contact a local lumber mill and ask about minimum loan requirements, price estimates and contractor referrals.

The amount a landowner nets after selling timber is called the stumpage price. It represents the value of the trees “sitting on the stump” after harvesting and hauling costs are considered.

Many variables affect the price paid for standing timber. On larger tracts, too much is at stake to sell timber without having accurate information on the process, products, volume and value of the timber and efficient methods for protecting the environment. Prices vary widely given worldwide supply and demand and seasonal fluctuation.

There are no daily market price reports for stumpage, and smaller landowners must rely on estimates provided by local mills. In many states, landowners must file a harvest plan that is monitored by a licensed timber operator. As always, preparation pays off -- even in a small-time timber sale.

But remember, trees are a precious commodity that should be handled with extreme care. When removing trees to create an access to newly subdivided land, make sure you get a reliable timber contractor with a solid reputation to harvest, market and replace the trees and who can make suggestions on how to plant new trees to replace the ones taken.

Tom Kelly’s new book “Cashing In on a Second Home in Central America” was written with Mitch Creekmore, senior vice president of Houston-based Stewart International and Jeff Hornberger, the National Assn. of Realtors’ international market development manager.