Among the options in your land brokerage arsenal, transitional land is a hit-or-miss choice. Many landowners consider it too risky an investment, as it’s difficult to predict its profitability before you buy it.
However, transitional land can actually be a gold mine. For this to happen, you have to understand the ins and outs of what you’re transitioning from, what you’re transitioning to, and to change your management strategies accordingly.
As a land broker, you must be clear-eyed about how buying and selling transitional land differs from the norm. Read on for six factors you and your client should consider before buying transitional land.
Broadly speaking, transitional land refers to any type of land that changes from one use to another. There are a wide range of such applications, like from farmland to residential or commercial construction, energy farming, or hunting.
Within agriculture, transitional land can also encompass a change of agricultural practices. These can include a number of scenarios, including:
As the land transitions from one use to another, landowners and their farmers need to be aware of specific guidelines or practices that apply to the new use case. For example, landowners transitioning to organic land use will need to direct farmers to follow USDA certified organic practices.
If handled smartly and deftly, transitional land can deliver a significant upside to the landowner’s portfolio. If not, owners could end up in the red, usually due to one of these three risk factors.
No one wants to convert land to a use case that, at the end of the day, the market rejects. Nor do they want to exit a market too quickly just because short-term projections are down.
For example, a nationwide decline in farm income in 2023 may tempt some owners to sell off their land. However, as USDA notes, farm income is still above the 20-year average, and it’s impossible to say whether this downturn is permanent. And there’s no way to tell whether the commercial or residential real estate markets, themselves experiencing volatility currently, is a better option.
If a landowner is going to buy transitional land, they’ll want to move it from a less profitable to a more profitable use. This means they’ll need detailed insight into all markets involved to make the most calculated decision for the owner’s portfolio. As a land broker, you can provide this critical expertise and advice, giving the owner a full and complete picture of different scenarios.
Transitional land can be a money pit if you don’t know what you’re doing. Not only does it involve potentially building new structures on the property, but it could require you to raze existing properties; a practice that causes the land value to fluctuate (e.g. removing a barn to make room for housing units).
Whether your landowner is planting trees for forestry, removing trees to create tillable land, or transitioning from conventional to more sustainable farming practices, there are costs involved. If your landowner isn’t aware of what these costs entail, they could make an ill-informed decision that leaves them in the hole.
Buying transitional land isn’t a one-time endeavor. It requires continuous involvement in the transition process, as well as active management post-transition. Of course, your landowner can outsource land management to a third party, but they need to know at least enough to effectively manage and evaluate their performance.
If you have a landowner who’s used to managing farmland, they may not know exactly what goes into managing land for hunting use. Either they need a trusted advisor in their corner who can close those experience gaps, or go with a type of transitional land with which they’re more familiar.
As mentioned above, transitional land can be a risky investment, which is why potential buyers need to do their homework before buying. Here are some of the key considerations that you should walk through with your client before making that critical decision.
It’s important to start with a clear transition plan that accounts for not only short-term value, but your client’s long-term goals and vision for the land.
It’s particularly important for land brokers to have a realistic timeline in place for achieving the transition. Depending on the scope, it could take months or even years to complete. Knowing how long the transition will take, and then the subsequent recoup, can help set expectations and put the project into a broader perspective.
There are scores of complex regulatory requirements and certifications involved with land use, varying wildly by state. Whether you’re looking at organic farming practices, zoning designations, or local environmental regulations, it’s important to understand exactly what’s required to maintain compliance before your client purchases the land.
Your client’s ability to use the land for particular agricultural objectives will depend on a number of soil factors, including soil health, contamination risks, and potential environmental challenges. Not only will these factors influence your client’s ability to effectively transition the land, but it can inform land management practices post-transition.
As we mentioned earlier, your client will need certain farming or land management expertise to manage the transition successfully. If they don’t, this is one area where you can support them. The fewer obstacles to getting value out of the land, the more likely you’ll get them to buy.
Farming is a business, and transitioning land is a business decision. As such, you should help your client walk through the costs associated with the transition, including:
Additionally, it’s a good idea to walk through the various financing options, grants, or subsidies available, especially to farmers pursuing sustainable or conservation practices.
While the past isn’t always prologue, knowing the history of the land can tell you a great deal about your client’s ability to get value out of it in the future. Land history can include:
Transitional land can be a smart investment for landowners if they know how to navigate the process. Especially in today’s volatile market, finding creative ways to get value out of farmland and diversify their portfolio can help landowners stay afloat.
If you have clients looking for transitional land, GroundOS’s suite of tools delivers deep insight into the land, providing a full picture of the land’s value, usability, and associated risks. Get a demo today.
