“How much is that per acre?”

written by

Jim Estep, Broker, ESTEP REALTY SERVICE

You’ve been saving money for your dream - a place of your own in the country. Now you’re ready to buy that perfect 5-acre piece of land to build your dream home. You’ve heard through the grapevine that farmland can be bought for $2,000 ‘per acre’, timberland for less. Your hopes couldn’t be higher. Surely you can find a landowner who would be thrilled to sell 5 acres to you for $6,000 ‘per acre’, three times the going rate.  You call our office, and we give you a price for some land that is available out in the country.  Your first question, “How much is that per acre?”

My silent response to that frequently asked question is always the same: “Aaaaggghhhh”. Why? Because the term, ‘per acre’, is not a useful term when applied to smaller tracts. It is a term applied to farm or large tract purchases as a point of reference. Unfortunately for the general public, it is a little understood indicator, one that unfairly raises your expectations as a buyer, and is equally unfair to the seller. It is, at best, a misleading standard to apply to a smaller tract land purchase.

I’m going to explain why, using your 5-acre dream tract as the example. The truth of the matter can be considerably more complex than what I describe, but the following is an easy to understand, simplified description of why believing in a ‘per acre’ standard will end up disappointing you as you shop for a small tract.

In today’s regulatory environment, which I support wholeheartedly, the cost of splitting off a parcel of land has risen dramatically. Let’s use the example of a farm purchased in the 1970s for $400 ‘per acre’. Today, the landowner is approached by you, a well meaning, and in your mind, generous soul expecting to pay $6,000 ‘per acre’ for 5 acres of road frontage property. You’ve done your homework by researching this tract at the courthouse. You know the owner paid $400 ‘per acre’. You believe in your heart that a profit of $5,600 ‘per acre’ is a windfall for the landowner. In reality, exactly the opposite is true. Allow me to explain.

Low Cost of Ownership - That 5-acre parcel of land is probably costing the landowner about $50 per year in real estate taxes, if that, effectively resulting in no cost of ownership. The landowner may even be profiting from the land by farming it or managing the timber on it efficiently. At the very worst, the cost of ownership is negligible.

Wastewater Treatment - In order for the landowner to sell this parcel, a subdivision will need to be completed. This process includes a perc test to determine suitability for onsite sewage treatment. The application fee alone will be several hundred dollars. Add to that the cost of hiring a backhoe to dig test probes, bringing water to the site for the actual testing and other incidentals. The landowner will spend $800 or more just for this item.

Parent Tract - It is important to note here that the Department of Environmental Protection (DEP) and the Sewage Enforcement Officer (SEO) will also look at the history of the parent tract dating back to 1972. If more than 10 parcels have been carved from the parent tract starting in 1972, then a major subdivision will be required by DEP, which will include determining the status of on-site sewage treatment on each previously subdivided tract. The regulations were much more relaxed in the 70s, thus it is quite possible that the parent tract has been divided into 10 or more parcels since then. It is also likely that at least one of those parcels may not be in compliance with today’s regulations. No new subdivision will be permitted until all existing parcels are brought into compliance, which could prove costly for the seller. Our experience bears out these possibilities.

Land Survey - Next will come a land survey of the entire farm, unless one exists. You ask why can’t just the 5-acre tract be surveyed? The codes require the entire parcel to be subdivided with the larger tract becoming the residual tract, i.e. Lot #1 and Lot #2, assuming this is the only tract being subdivided. Therefore, a survey of the entire property is required. The cost of surveying 200 acres could be perhaps $5,000, and quite possibly more depending upon a variety of factors.

 Plan Submission - Once the tract has been surveyed and the new tract delineated, an application must be submitted to the municipality, along with, you guessed it, a fee. At the Planning Commission meeting it may be determined that, when including past subdivisions of this parcel, your parcel may actually be considered to be a fourth lot. Most municipal codes require storm water management if a parcel has been divided into more than three tracts. Bearing in mind the residual tract concept, if the current landowner sold off two tracts, and now sells one to you, that becomes a total of four, not the three you would think. The municipality may require a comprehensive storm water management plan to be designed, approved and installed for the entire 200-acre tract. Engineering and review alone could cost several thousand dollars, not to mention the cost of installation. At this point, the landowner may possibly be obligated to invest more money than the $30,000 you offered.

  Best Case Analysis - In the very best case, the landowner may be saddled with expenses totaling $4,000 or more. Let’s use this very conservative number for sake of discussion. The offer of $6,000 ‘per acre’ totals $30,000. From this, subtract the cost of subdivision -  $4,000.  Subtract real estate transfer taxes of $300.00 attorney fees at closing of $200.00. Net proceeds to the owner after expenses, but before taxes: $25,500.

 Capital Gains Tax – We’ll assume the landowner’s cost basis for income tax purposes is $400 ‘per acre’, or $2,000.00. Subtract that from the net gain before tax, and we now have a capital gain of $23,500. Assuming a capital gains rate of 20%, the landowner will net $18,800.00 or $3,776 ‘per acre’ after taxes, considerably less than the $6,000 ‘per acre’ you believed would be received by the seller when you offered. And remember, this land effectively was costing the owner nothing to own and quite possibly producing income.

 In a mid-case scenario, the landowner may net less than $10,000.00, and in a worst-case scenario it could cost the landowner to sell this parcel for $30,000.00.

 It is far better for you to think in terms of a ‘home site’ rather than in terms of ‘per acre’. You do yourself a great disservice when thinking in ‘per acre’ terms. People today are paying $40,000.00 for a 1/3-acre building lot with municipal utilities in a neighborhood. That equates to $120,000.00 ‘per acre’. They might not sleep too well if they thought of their home site in terms of ‘per acre’.

 In closing, determine what you can allocate to your home site before you go looking, and then do your best to find your dream parcel. Whatever you do, do yourself a favor and ignore the legend of ‘per acre’ valuation, and be respectful of the cost of subdivision to the landowner before you get your hopes too high.

If you or someone you know are looking for land for a homesite, please give us a call at 472-6660.