This is one of the most frequently asked questions, and the answer can be summed up in two words: It depends. I know, it is not what anybody wants to hear, but it is true.

The goal of a land sale is to get the most money that you can as a seller. But wait, this is not as simple as it may appear at first glance. There are many considerations that must be addressed to arrive at the correct answer for each individual case. And the first consideration is time, and not money. How long do you want to wait, or can you wait, before you receive the proceeds from the sale of your land? Do you have a need for the money sooner than later? And even if you do not have a real pressing need for the money in the short term, you should never ignore the time value of money. In this case, time value of money refers to the value of the money with respect to the present value of future earnings and cash flows. You can invest the money received from a land sale to make more money. If your money is tied up in the land, it is just that, tied up. Other than using it as collateral, there is not much you can do with it. Oh yeah, you can sell the timber, and we will get to that after a little more discussion. So the first question you need to ask yourself is: How soon do you need the money?

The next consideration is risk. Risk? Yes, risk. Decisions whether to sell the land or the timber are made based on market conditions that prevail at any given time. Market conditions can and do change, sometimes rapidly and with devastating results. In addition to market fluctuations, acts of God can change things. Have you ever had damage due to a hurricane or a forest fire? I have, and it can really hurt.

The point is, regarding risk, selling property in an expedient manner and having the money from that sale in the bank takes risk off of the table. And further, risk and time can work together, or against one another. Market fluctuations, fires, and hurricanes are not a factor when the money is in the bank. And the sooner you get your money safely in the bank, the sooner you take risk out of the equation. So the next question to ask yourself is: Can you afford to lose value in your property if risk goes against you, or do you really need to capture the value and profit you can get today?

As a side note, only you can answer these questions. What somebody else thinks really has little bearing on the matter, and every situation is different.

Now, for a few factors to consider regarding cutting timber: First, you will receive money for the sale of your timber. This is the good news. Second, it will take time to get the timber off of your property, perhaps as much as a year or two. Third, your land will be torn up to some extent, and possibly a large extent, during the harvest. Fourth, your land will probably be worth less after the harvest than it was before the harvest. Fifth, it will take either time or money to get your land looking good again after the harvest is complete. And last but not least, if you do decide to cut the timber before selling your property, the type of harvest prescribed should be geared toward the best use and hence marketability of the property when it will eventually be sold. For example, if the property is going to be sold as a timber tract, a thinning or seed tree cut would be a good idea. If it is to be sold for recreation, hunting, or a home site, a residential cut would make sense, leaving some trees strictly for aesthetic purposes. Important Note: Rarely does it make sense to perform a total harvest when contemplating a sale of the residual land after the harvest.

The idea of cutting the timber before selling the land, is that the sum received for the timber sold and the value received for the remaining dirt, will be greater than the amount that would be received if you simply sold everything together as a single package without cutting the timber. But you must keep in mind that if you choose to cut the timber first, there will be time involved, perhaps significant time, before you receive the proceeds of both sales. And the more time that the money is not in your bank account, there will inherently be more risk.

If you are still reading, you are probably still asking the question: Well, should I sell my timber before selling my property? Again, it depends. Even if you can afford the time delay and risk, there is a fundamental question, and that is this: Will the income from the sale of the timber exceed the damage incurred by the harvest process to the value of my residual land? Most people want to start with this question, and completely skip past the time and risk issues. Now that we have covered time and risk, we can move forward to where you wanted to go in the first place.

Every tract is unique, and every seller has his or her own priorities, needs and wants. To get to the point of this part of the discussion, I will have to make some general statements. Your case may vary from the norm, but these guidelines may help you arrive at a proper decision for your property and situation.

Before we get started, a caution is in order. Often, sellers wish to ask what the value of dirt is in a particular area, and then add that number to whatever they believe the timber is worth. The real estate market does not respond well to this logic, and you will frequently arrive at a number that exceeds what the market will pay for your dirt plus timber. Every tract must be valued as it stands, with or without trees, in accordance to market conditions and pressures. It ultimately comes down to a few simple economic principles: supply and demand, what other similar properties have sold for, what a buyer is willing to pay a seller, and nothing else.

Too often, I see large tracts of land, say 100 acres or so, with timber standing that is worth a total of maybe $10,000 if you cut every tree. This example equates to $100 per acre of timber value. And if this timber is scattered across the tract, and not concentrated on one corner of the land, the harvest will affect the entire tract. The damage that will be incurred to the sales price of the remaining property would far exceed the value of the timber received. A situation like this might involve a market value of $1,700 per acre prior to the harvest of the timber, and a value of $1,200 per acre for the land after the harvest. If you only received $100 per acre from the timber sale, and subsequently incurred a $500 per acre penalty as a result of the harvest damage, you would lose $400 per acre by selling the timber first. Clearly, this would not be a good economic decision.

Now let’s look at another case at the other end of the spectrum. We now have a 100 acre tract, with an awesome stand of timber worth $250,000, or a timber value of $2,500 per acre. Again, we will say that the residual land can be sold for $1,200 after the harvest. Most sellers will immediately say great, let’s sell it for $3,700 per acre! If you try this, you will most likely watch it sit on the market and not sell for years. Why? At that price, you are not attracting any recreational buyers, hunters, or home site seekers. These buyers can purchase other attractive parcels of land without paying for the timber value, and most of these buyers would not want to cut any trees anyway. When you have a high premium due to timber value, only serious timber buyers will be considering the tract for purchase. Furthermore, professional timber buyers need to make a profit to stay in business, and are not excited about gambling with the risk of selling the residual land to secure a profit. They may offer you $2,800 or even $3,000 for this tract, but not $3,700. They are not trying to take advantage of you, they are just trying to stay in business. In this case, if you really cannot afford to wait or take a risk, you should take the $3,000 from the timber buyers, put your money in the bank, eliminate the risk, and feel good about the transaction. You see, in this case, the timber buyers have provided a ready market and cash for your land with the timber in place, and the timber buyers have now assumed all of the associated risk. However, if you can afford the time and risk, you can sell the timber, and then sell the land, thereby maximizing your return at a whopping $3,700 per acre. And if all goes well as planned, you did it, you won, congratulations!

Unfortunately, most cases are somewhere in between these two examples. And in every case, the answer remains the same: It depends. As a general rule of thumb, (and this is a pretty good rule of thumb as far as rules of thumb go): IF your timber is worth LESS THAN $1,000 per acre, you should probably think long and hard before deciding to cut it before selling your land. An exception to this rule may exist if the timber is concentrated in a small portion of the tract and the harvest will not cause significant damage to the overall value of the remaining property. On the other hand, IF your timber is worth MORE THAN $1,000 per acre, it is probably worth taking a close look at selling the timber first, if you can stand the time delay and associated risk with this approach. And do not forget to take the time value of money into consideration when making your decision!

After all of the analysis and work, and considering the individual aspects and issues regarding each case, the answer will still remain the same: It depends.

© George G. Galloway 2010