The Southwest is a unique, colorful landscape that is too often overlooked. Similarly, the area’s ranchland real estate market lately has been unique, populated by colorful buyers, and too often overlooked in terms of ranch and pasture land.
“It’s been pretty slow,” summarized Jim Long, owner/broker of Southwest Ranch and Farm Sales, which covers Texas and Oklahoma.
“We don’t have that much inventory for sale.”
Sam McNally, owner/broker of Bar M Real Estate, which covers New Mexico, had much the same to say.
“The ranch real estate market and irrigated farm market here in our area is, I would say, good. Demand’s good. What we suffer from is a lack of inventory.”
Oil, gas, and 1031
Both men noted that the two primary buyer groups in their states have been oil and gas companies, and ranchers who have sold elsewhere and were looking for production ranches to buy on 1031 exchanges.
McNally described his region of New Mexico, specifically the southwestern corner, as being “part of the Permian Basin and the oil and gas business down there has just been overwhelming the last several years.”
He described the usual situation of the past: Ranchers would sell water to the oil and gas companies and negotiate with them on payments for surface damages as a result of fracking activities. He said the ranchers “enjoyed good income opportunities” from this arrangement.
Recently, however, the oil and gas companies decided to dispense with negotiating with ranchers and just buy the ranches for the water and convenience factor.
“They started throwing big money at the ranchers and it was just kind of like the Godfather; they made [the ranchers] an offer they couldn’t refuse,” McNally said, saying he was aware of four or five large ranches in the area.
“We’re talking tremendous amounts of money for these ranches and those ranchers in turn had that money to reinvest so they have been in the market.”
Enter the 1031 exchanges.
“Just about the only people that are buying anything much are people who are doing a 1031 exchange,” noted Long of his area. “They sold something, and then they need to reinvest that money to keep from paying taxes on it.”
He did point out however that ranch buyers, even on the 1031 exchanges, have changed recently.
“It used to be we take people to a farm or ranch and say, ‘This is what it will produce,’ and they could figure out they could probably make payments on the ranch by using it. But it’s not that way anymore.”
He explained that most people who are coming in and looking to buy Texas ranches are investors seeking to avoid the taxman rather than running ranches for their own merit.
“It’s not that they don’t plan to use it—they will—but they’re not doing it to make a living or anything like that.”
McNally had similar descriptions of the use behavior of the oil and gas companies.
“I suspect that at some point [the oil and gas companies] will lease part of that surface for grazing. But in some of those areas, it has gotten so congested with oilfield traffic … you just couldn’t run cattle down there with any kind of consistency.”
Pricing problems
With memories of cattle prices from 2014 and 2015 still in their minds, a lot of potential ranch sellers have been pricing their properties too high. This mindset presents a challenge.
McNally said that convincing some sellers that they are overpricing their property can be difficult. He opined that if a ranch in the area is on the market for six months with a lot of lookers who don’t act, the price is likely too high.
Given the supply shortage, McNally described the situation as a seller’s market, but with a caveat.
“I’d say to a degree it’s a seller’s market, but the buyers today do their homework and their due diligence. They’re kind of in tune to what the market is and you’ve got to be priced reasonably within that market.”
“I think we’ll all be challenged to price farm and ranches at a price everybody can live with,” Long said for his area. He also noted that “finding people to buy them” at those prices are the flipside to that challenge.
However, McNally saw some opportunity for potential buyers in the Southwest.
“New Mexico has always trailed behind the rest of the West as far as what ranchland values are and I think it’s beginning to attract more and more attention because of the fact that you can get more bang for your buck down here.”
USDA data bears out some of McNally’s perspective. According to the 2018 USDA Land Values report, the national average for pasture land was $1,390/acre. By comparison, New Mexico was significantly lower at $390/acre. Arizona’s pasture price data was withheld to avoid disclosing individual operations’ information—usually due to there being too few sales in a given year—as has been the case for years. On the other hand, Texas’ pasture values were above the nation’s average at $1,750/acre, up 6.1 percent compared to the year before.
“I don’t know that we’ll ever catch up to the values up north like in Colorado or farther north, but a lot of folks from the northern states can sell those properties up there for big dollars and most of the time, in the winter, they’re putting hay out and they’re getting tired of fighting the cold,” continued McNally.
“They can sell something up there and come down here and buy something with twice the capacity and not put hay out in the winter.” — Kerry Halladay, WLJ editor
