NOWADAYS JUST ABOUT ANYTHING A PERSON wants to buy may be found on the Internet -- including rural property. But making a long-distance property purchase is a significant investment that demands buyers do their homework. Be aware: Regional nuances and state laws could impact the value and use of the land.
Water Rights and Availability
As a property owner, your rights to the water on, and below, land can vary dramatically by region.
"Parts of Texas don't have good-quality water, and buyers need to know how deep they will have to drill a well to access good water," says James Synatzske, ARA , vice president/director of appraisal services for AgTexas Farm Credit Services.
Moreover, you're not guaranteed to have water just because there is a water line running in front of the property. "A lot of rural water systems were built years ago, and their infrastructure hasn't been updated to handle growth," he says.
In Texas, the "right of capture" means that whoever owns the land surface owns the right to drill for and capture groundwater. Surface water belongs to the state but may be used under permit. In New Mexico, where the state administers water rights, landowners don't have to pay for water; however, they do have to pay for its pumping or delivery via ditch system or dam, says Max Kiehne of Centerfire Real Estate in Los Lunas, N.M.
While water rights normally convey with a property in New Mexico and Texas, that is not always the case. "We're seeing more land sales in which the seller severs the water rights from the sale, and then sells those water rights to a municipality or developer," says Kiehne. In Louisiana, "the landowner owns the water underground and on the surface, unless the surface is a public waterway such as the Mississippi River," says real estate broker Jerry Brown of Brown Realty Co. in Rayville, La.
Minerals can dramatically impact property values in areas of active production, Brown notes. In Louisiana, the property owner can reserve mineral rights for 10 years. If there's no mineral activity during that time, the rights convey to the new owner.
Some states do not permit minerals to be severed from the land. But in Texas, New Mexico and Mississippi, mineral ownership can be severed from the land ownership indefinitely, regardless of activity. In areas of active production, those rights can be as valuable as the land itself.
In Texas, the mineral estate is dominant over the surface estate. "The minerals owner can come onto the property any time, but must compensate the surface owner for damages, right-of-way access or other impact," says Synatzske.
Prospective buyers should check ownership of both surface and underground minerals. "On properties where coal, sand and gravel can be extracted, the seller can explicitly exclude the transfer of certain surface minerals," says Kiehne.
In recent years, even wind-power producing capability can be severed from the land. "Here in parts of New Mexico and West Texas, where wind turbines are common, wind is becoming almost like a mineral," says Bill Yoakum, CEO, Ag New Mexico. "We're seeing instances where sellers retain rights to revenue from wind generation on a tract. We recommend that buyers have their attorney check to be sure the previous owner releases (rights to) any revenue from wind generation."
Texas property owners may obtain agricultural-use exemptions that reduce their property taxes. "In Texas, when a property sells with an ag-use exemption, the new owner must apply for an exemption in their name," says Synatzske. "The exemption makes a huge difference in annual tax assessments. If the exemption is lost, it takes significant documentation to regain the ag-use status."
Ag-use exemptions do not apply in other states in the Tenth Farm Credit District. "Taxes already are very low on agricultural property in New Mexico," notes Kiehne, "but to get that benefit, the property owner needs to run cattle or lease the land for cattle grazing."
Alabama taxes property based on current use. Lands in standing, growing timber are taxed as such, although they may actually be worth far more than "timberland."
Buyers might also consider doing a 1031 tax exchange, which can eliminate or reduce the tax burden on property sales. In a 1031 exchange, when
certain types of property are sold, they are replaced with a "like kind" property. The sale is structured so that the seller's profit is deferred.
"In Alabama, where the value of timberland has escalated in the last five years, a 1031 exchange makes sense," says Bill Hopewell, FLBA of North Alabama appraiser. "A person who has owned a timber tract for years could exchange it for income-producing lake property or recreational land."
Zoning and Restrictions
As urban sprawl reaches into once-rural countrysides, rural properties on the fringes of development may be drawn into a city's extraterritorial jurisdiction (ETJ). ETJs control the type and quality of development within a certain distance of the town. In Texas, small towns can invoke their ETJ up to a one-mile radius outside the city limits; larger towns can reach farther. "ETJs impact what you can do with your property, and they mean you are next in line for annexation," says Synatzske.
"We sell a lot of Kansas land to bird hunters from all over the country," says Brown. "It's important to physically inspect the property to know if it will have the turkey or quail population to support hunting."
Hunting leases usually must be renegotiated with the buyer, who should know the terms of the lease and the termination clause. Buyers also are advised to ask local wildlife officers about wildlife diseases. "There are a couple of pockets in Texas where deer have anthrax," notes Synatzske.
If you're looking at hunting property in New Mexico, find out the number of landowner permits available for elk, antelope and mule deer for that property. "The more landowner permits there are, the greater the interest in that land by hunting investors," says Kiehne. Permits are obtained through an annual draw. Factor in costs for hunting licenses, which are more expensive for nonresidents.
Also, get to know the local culture in an area before buying land for hunting. Recreational land has less appeal if it is still considered "free range" by local residents who have hunted there for generations, and may not be willing to give it up. Generally, in areas where hunting leases are common, the recreational value is recognized.
New Mexico is one of 13 western states with federal lands owned by the U.S. Forest Service or Bureau of Land Management (BLM). Many ranchers lease land from the state as well. In these states, beware that you may find a ranch advertised as having 20,000 acres, for example, but only 2,000 acres is actually deeded; the remainder is leased.
Most buyers, Kiehne says, want privately owned (deeded) land because there isn't much value in leasing federal tracts. State-owned leased land may have more value in some areas because the state may be easier to work with than the federal government.
While there are no taxes on federal land, grazing fees, lease terms, carrying capacity and water use vary by department.
Long-Distance Purchase Pointers
- Hire local real estate experts -- check references and check for complaints with the state real estate commission.
- Have a local attorney draft your closing documents.
- Be sure your broker fully understands your goals for the property.
- Invest in a thorough appraisal by a local appraiser.
- Check with the state highway department for rules on highway access from your property. "Line of sight" issues may restrict your access.
- Small tracts are typically surveyed; large ranches are not. A broker or local title company can help access legal descriptions, survey reports, BLM maps and Google Earth Pro aerials.
- Look at the property yourself. n When doing a 1031 tax-free real estate exchange, work with a qualified exchange intermediary to identify the new property before selling the old.
- When buying farmland, be sure there are potential tenants to work the tract. Check soil types, payment history and yields.
- Choose a lender who is familiar with the area, rural property loans and 1031 exchanges. n Find out if there are any environmental issues affecting the property.