Tom Kelly: Building a second home in the trees takes some preparation

You are off to the mountains to visit friends at their vacation-home paradise. While driving, you see a terrific tree-coverage piece that would be perfect for a getaway of your own.

“Maybe we could pay for the place by selling off some of the timber,” you say.

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

Raw land or “raw ground” differs from vacant property. Vacant land or 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 on location, the costs to turn raw land into a ready-to-build site can easily surpass $80,000.

Like any investment, vacant land and raw land hold boom or bust potential. The boom often occurs through development, while bust is typically brought on by taxes, slow (if any) appreciation in land value and lack of income-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.

In a land deal, the buyer usually has to pay interest on any borrowed money. The interest on that money most likely is going to be at least 5%. In addition, when the buyer is going to sell, he’s going to have to pay an agent a 6% to 10% commission (the going commission rate on vacant land often is higher) on the sales price. In order to offset those costs, the property should appreciate about 15% a year.

If you going to use the property solely as a getaway, however, and expect to derive great joy out of doing so – consider that as your return on investment.

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

An alternative to clear-cutting is a selective “thinning” cut that not only can protect homes from precariously perched trees but also can help prepare and show a site for a potential building while netting several thousand dollars. In fact, some woodsy lots are so thick that a very lucrative thinning often can go unnoticed.

Many timber companies, especially smaller ones working in the immediate area, are willing to dispatch “cruisers” to determine if your lot contains enough (at least one truckload) of marketable timber. On single-family lots, owners can even flag the specific trees to be taken so only designated trees are harvested. Landowners can also contact a local lumber mill and ask about minimum loan requirements, price estimates and contractor referrals.

The amount that a landowner realizes after selling timber is called the stumpage price. It represents the value of the trees “sitting on the stump” after all costs of harvesting and hauling 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 fluctuate widely given worldwide supply and demand and seasonal fluctuation.

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