Who Owns all this Land?

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September 18, 2017

As I ride in my car looking at the landscape, I wonder who owns that home or that piece of property. What amazes me is that outside of national parks, basically 99% of American property east of the Mississippi is owned by someone. Ride for mile after mile and virtually every acre you see is owned by someone. I have clients in the agricultural business whose families grow cotton, soybeans, and timber who have held their property for generations. I have also witnessed families that have been forced to liquidate and divide their property. One thing has been constant – if you own it, then you can sell it. You might not like the price, but generally speaking there is a clearing price for property. This is true because there is no subsidy on the price of land, or so I thought!

Recently I have made some travels out West. I was dazzled by the vistas, rivers, mountains, and prairies. I am sure many of you have seen this for yourselves. Part of my trip involved some fly fishing on the Big Hole River. One evening after dinner I was speaking with the owner of the fishing outfit about property values. He stated they were good, primarily because of outside investors wanting to own a “piece of the dream”. I told him I get that, but then I asked him about his property. He had about 300 feet on the river with a view of three large mountains that bordered the other side of the river. This combo offered him a million dollar view. He said the three mountains were “federal land” and controlled by the Bureau of Land Management, a division of the Interior Department. I learned the Bureau is responsible for managing the massive tracts of federally owned land mostly in the west. As the West was homesteaded in the late 1800s much of the land was undesirable so the government kept it. The land no one wanted is now leased to ranchers to graze their cows, to energy and mining companies, or sold to logging companies that clear cut land. Debate rages as to the value the Bureau is providing.

My observation to the businessman who owns the property on the river with the free view was simple. What happens if someone buys one of those mountains? He responded, “who would want it?” I said, “whoever has the money to buy it.” And here is the problem I have: you see someone already owns it. People forget that the Federal Government is a substitute for you and me and every taxpayer in America. I’m not sure our Western land owners appreciate the subsidy we Americans are providing them.

Carl Gambrell


Investment or Lifestyle Asset?

second home

September 11, 2017

One measure of wealth in America is the number of homes per family. As wealth accumulates there is often an increasing desire to buy a “second home”. Lively family debates then take place over whether the right location is the lake, beach, or the mountains. Whatever the location, the aspiration to own a second home is common across the nation.

There is one aspect of the decision making process on second homes which is often overlooked. There frequently seems to be an assumption that the purchase will be a long term “investment”. In fact, just like a stock or a bond, homes can, and will, go down in value. A true investment should involve spending capital with at least one of two objectives, provide income or grow value. In most cases, the reasons for owning a second home do not include either of these two objectives. Of course there is nothing wrong with owning a second, or even a third, home. However such ownership should be recognized as having a “lifestyle asset”. In other words the purpose is for recreation and fun. A second home might generate some income if it is rented out, but in most cases there are only costs to pay. These costs of upkeep and maintenance can be high. The range of cost varies but is usually somewhere between $30,000 and $60,000 per year. If the cost of ownership is at the top of this range, and the home was purchased for $1,000,000, the “total return” from the property has to be 6% per year just to cover the cost of holding the asset.

When considering buying a second home it is also important to bear in mind that there is usually a less liquid market for such homes as compared with more typical residential properties. For example, only about 10% of Americans have second homes. Past experience shows than when the market gets soft for beautiful, well located recreational properties, it can stay soft for a very long time. We have seen situations where clients have sought to sell second homes for years before being successful.

Second and vacation home ownership is rising across the US. This is no surprise. The strong stock market is a driver of people’s perception of wealth, and as noted above, rising wealth means that more and more people are thinking about owning second properties. Some baby boomers are even acquiring property in anticipation of their retirement downsizing event.

This weekly was not meant to be a killjoy. Owning a property for fun can be a wonderful thing! However, we do want people to be careful when buying an extra home. The universe of second home buyers is much smaller than primary home buyers, and that means the liquidity can be quite limited. We prefer not to have to share the disappointment over how long it took to sell a property, or about the final price achieved.

Carl Gambrell