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Why Do We Buy Ranches? Why Do We Sell Ranches?
By John S. Baen PhD
G. Brint Ryan College of Business
University of North Texas
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We have all heard the cliché: “Buy land. They are not making any more of it” or perhaps “Under all is the land” or still another, “classic truth: land, the true basis of wealth.”
With few exceptions, land throughout history, has been worth FIGHTING FOR! Most, if not all, wars are about land, territory or riches found on or under the LAND. Even the various Native American tribes fought over the “rights” to the best hunting lands in historic and ancient Texas.
The Alamo-War of independence was at its core about LAND and LAND VALUES. All the heroes of the Alamo who signed up for and volunteered to fight in order to earn their way to LAND:
· 3 months for 320 acres.
· 6 months for 640 acres.
· Until the war was over for 1280 acres.
After the war, David Crockett’s wife was deeded 1280 acres (2 sections) and Texas named the county of Crockett in his honor.
Land worth fighting for (or the assets under it) included World War I and II. Even the Vietnam War included potential land, minerals, metals and rare earth materials now vital to the industrial and high-tech worlds. And for those who think the Iraq War was only about the “Freedom of the Iraqi People” and NOT about oil and gas and the freedom of American People to have gasoline at less than $4.00/gallon and drive 70 miles per hour…need to check their brains at the door!
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So why do we buy Land!! There are many reasons. They include but are not limited to the following:
1. Any family worth their salt, wants to leave their heirs a legacy, a tangible proof that their hard work in life paid off. Something besides stocks, bonds, cash or a business that can be liquidated, spent or piddled away by a bunch of undeserving heirs.
2. We buy LAND because we love and respect LAND as a place to go in our minds. A quiet place we think about and ‘go to’ when stuck in traffic in the big city, or a business meeting or sitting on a runway waiting to deplane. Our LAND is a destination in our mind when we are not there and the greatest thrill when we are actually there!
3. We buy LAND because that is what rich people do. They buy LAND to store wealth for a very long time. Unlike financial assets and improved commercial real estate… LAND…never disappoints us and never depreciates; the fences and barns might depreciate and need repair but not the LAND!
· We know that cows and hunting and every potential income source is likely not going to make more than 1 – 2% cash yield per year. Our expectations of cash flow from ranches are low. In fact, we often have to feed the LAND from city income! A pipeline of cash to pay for it from our ‘real jobs’ or income sources!! And that’s OK, because LAND is worth it!
· LAND is a place to diversify investment and to store wealth in a safe place. Big names in the US and throughout the world own LAND as their preferred long-term investment. A few Texas names include, the Hunt family (Hunt Oil and Trusts), The Bass family, Ross Perot Jr, D.R. Horton family (Home Builder). Ted Turner, former Time Warner executive and Entertainment industry billionaire, while not a Texan, he owns over 2.8 million acres of land and the majority of his net worth is perhaps the largest collection of privately owned “national parks” in the world.
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4. LAND generally takes little management compared to other forms of investments
· Never leaves in the night like commercial real estate tenants
· Hard to steal!
· Rarely burns down
· Just sits there
5. LAND is very stable, less volatile, less risky compared to stocks, bonds, commercial paper, crypto currencies, even oil and gas investments!
6. LAND ownership can be an important part of a family’s estate planning by innovative co-ownership forms, such as Family Limits Partnership, Texas Limits Liability Company (ownership to share) that can be partially distributed over to death to family members et. The “fractured” ownership of the LAND can then be valued on a reduced value basis under current IRS regulations.
7. LAND should be purchased to be enjoyed, used, shared with loved ones, hunting, shooting, fishing, ranching or just plain sitting on the porch! Ranches do NOT have to make economic justifications or reasoning. If you want to own LAND you can bullshit yourself how it’s going to make money each year! Cows, goats, horses, vacation B&B, High Fenced Hunting Ranch, private camping grounds, fishing, etc. etc. (Let’s face it, I did exactly that!) If you just plain want a ranch, then just buy one!
8. A person or family can do a lot of great things for the wrong reasons and things often turn out great! LAND can feed the ranch founders EGO. While we walk with confidence and not arrogance. There is a fine line between becoming a modest LAND owner and an ego buyer. I have been a bit of each during various period of my life.
9. LAND the cowboy way! The cowboy traditions, boots, spurs, horses, roping, riding, saddles, branding are the cowboy way. The vast majority (93%) of the 172 million acres of LAND in Texas is privately owned. Unlike the western states, New Mexico, Colorado, etc., the general lack of public land in Texas assures that the future of private hunting leases and wildlife management will provide positive cash flow to any ranch land owner who chooses to lease out their hunting rights. In many parts of Texas, the wildlife, fishing and other outdoor activities generate more income to the LAND than cattle, goats or farming.
10. LAND can be financed with high leverage, large tax deductions and low down payment, unlike stocks and bond options, etc.
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11. The hidden attributes of land can be the potential icing on the cake to ownership and even become the cake!
· Oil and gas royalties
· Hard mineral leases (sand, gravel, etc.)
· Wind/electric income
· Water rights
· Solar energy
· Etc, etc
12. Ranch LAND can be subdivided into affordable sized and priced tracts of land for average families to share in the wealth. While not my preferred approach to being a land manager, the facts are that larger tracts of LAND purchased or held are Wholesale Values per acre and can be monetized with great profits into retail tracts of land. This trend contributes to larger ranches not “cut up” worth even more!
13. Ranches held for long periods of time, (and often between two cities or markets) generally benefit over time as the cities and urbanization, suburbanization move out to our LANDS.
14. New and alternative and “highest and best uses” for LAND can yield great profits to the owners in either increase values or cashflow. (Private camping, game ranches, trail rides, large communities, off road racing tracks, etc.
15. The COVID Pandemic has added to LAND rush in Texas, according to the Texas Association of Realtors, with people and families wanting more space, less congestion and ‘protection’ from infection’.
172,000,000 AC ÷ 29,200,000 Texans as of 2021 = 5.9 Acres per person
The census and agriculture department report that there are only 248,000 working ranches are farms in Texas. While farms and ranches vary in size vastly from on region of Texas to another and using pure math, the distorted average size is “693 Acres”
172,000,000 acres ÷ 248,000 agricultural operations = 693 acres average
However, many, many non-economic “hobby farms” are much smaller. In any event, there are only a fraction of Texans who own significant LAND as part of their investment portfolio or lifestyle. The Texas population is 2021 is estimated to be 29,200,000 and rapidly growing due to immigration and migration and corporate moves. The data indicates that less than 1% of the individual Texans own significant farms and ranches.
29,200,000,000 Texans ÷ 248,000 operating farms and ranches = .0085 or less than 1% of the population of Texas owns farms and ranches. This small number of elite landowners is distorted by the fact that many larger land owners have many family member/owners or fractured ownership structures.
LAND transactions or volume of sales increased by 34% last year with 10,465 sales of 200 acres or less, according to the Texas Association of Realtors, with the statewide average of $6,471 per acre and in North Texas $10,568/acre!
LAND as an investment and market is a very imperfect market! Scattered data and the uniqueness of each property and variables include:
· Size
· Improvements
· Water (ponds, creeks, lakes, etc)
· Topography
· Wildlife resources
· Minerals
· AG productive
· Etc.
Imperfect LAND markets with sketchy market data allow special opportunities for buyers (or sellers) who understand value components and potential not readily seen or understood by the average investor or seller. A professional and trusted LAND broker that knows the market can assist in seeing value components or potential for clients who are receptive!
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Conclusion and perspectives.
Net worth factors contribution or included are: financial, emotional, real (real estate), imaginary and priceless/precious assets. Rich people and legacy families own LAND as a serious component of their net worth. A way to enjoy their investment and store wealth over the generations. While LAND is a long-term investment with generally low cashflow, and lower liquidity the appreciation rate over long periods of time compares competitively with other conventional forms of traditional investment such as stocks, bonds, etc.
I personally purchased three thousand acres (3000 acres) in 1992….29 years ago! Two years later, our family, my dad and 2 brothers, scraped together enough down payment to finance and buy an adjoining 5000 acres. Over the years that followed, I personally purchased an additional 1700 acres with Dad buying another 900 acres to round out the ranch in size and shape to 10,800 adjoining acres.
We all loved the ranch. It performed as an investment PERFECTLY. Excellent management and hunting resources paid for the ranch together with all the mortgage payments. From the initial purchases of the initial 8000 acres, the LAND appreciated or grew in value 450% which is the actual. The appreciation over the holding period and over 29 years.
Texas yeild per year and appreciation, if we had paid cash for it, would have been 5.33% per year. However, based on our leveraged 20% down payment 29 years ago and the ranch paying for itself through hunting revenue that paid off the mortgages, the yield per invested dollar, return of a return on every investment dollar has yielded after sales expenses-zero (T°) to T-29 years (T²⁹) has been over 10.5%! The dividends beyond the financial and performance included but we are not limited to: great hunting, many deer heads on the wall, an arrowhead collection second to none, unforgettable family gatherings and memories that will eco across the canyons and generations.
Last year, 2021, when it was time to sell, we chose Mr. Sheldon at Texas Ranch Sales L.L.C. as the professional firm to do the job. Two other firms had marketed the ranch with no luck. Sheldon Grothaus and his agents used excellent marketing efforts, resulting in a very satisfactory sale and closing. Trust me, they more than earned their fee that resulted in a closing.
If ranch investments are so good why did I/we sell the 10,800 acres?
Great question! An explanation is forthcoming in the next installment to this fine publication. Please know that I have not been paid for being a contributing author. These words are my own and no one else’s.
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John S. Baen Phd
G. Brint Ryan College of Business
University of North Texas
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John S. Baen PhD, Professor of Real Estate, at the G. Brint Ryan College of Business at the University of North Texas, Box 310410 Denton, Texas 76203. He received all his degrees from Texas A&M University. BS ’70, MS ’72, and PhD in Land Development ’82 He is a practicing commercial Real Estate Broker, Certified General Appraiser (Texas) and Certified Right of Way Agent. He has published 3 books, 70 journal articles and is and expert witness in many Federal and State Courts. He does not win lawsuits, however justice nearly always prevail to his professional opinion because he tells the truth and is ethical. To inquire about UNT Real Estate Student Scholarship contributions contact John.Baen@unt.edu.
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