CHAPTER NINE

SELLING TIMBER

Get it Right the First Time

Managing stands of trees to reach defined objectives is essential to successful forestry investing. However, possibly the greatest single risk to a forestry investment comes from failing to market timber wisely. Selling trees is a business deal. No more, no less.

Indeed, a single timber sale may very well be the largest one-time business transaction that some woodland owners will face in their lifetimes. When you sell a stand of timber, you generally have only one opportunity to get it right. Regardless of the purpose for the sale, whether for a thinning or final harvest, the process should remain the same.

Appraisals

Obviously, the first step in carrying out a timber sale is to define the area you intend to harvest. That area must be clearly defined on the ground so that buyers know what you are selling, and later on, loggers know the very specific area they are to work in.

The second step is to determine the amount, type and quality of timber you have to sell. This will require a "timber cruise" conducted by Tennessee Timber Consultants, as we will establish an estimate of the number of trees, and the volume of each species of trees within the designated sale area. The cruise will also, as a minimum, define average tree sizes and quality. In many cases, especially with thinnings, it is necessary that we identify with paint each tree that is to be sold.

The information from the cruise can be used to determine the fair market value of the timber. Our foresters apply various methods for appraising timber including comparable sales results and current average prices for lumber or delivered logs. Of course, variables apply including logging difficulty, contract restrictions or mandates, and contract length.

Specifically designating the area to be harvested, determining the number, type, volume, and quality of trees to be sold, and establishing the fair market value of the stand are all absolutely essential to conducting a successful timber sale.

Marketing Strategies

Woodland investments are very long term, and the potential returns and risks are too high to trust to luck when it comes time to sell timber. It is imperative that woodland owners use our experts at Tennessee Timber Consultants.

A prime consideration in marketing is to identify the highest and best markets for the trees to be sold. For example, white oak veneer trees should not be sold to a local sawmill that will saw these trees into lumber, nor should pine sawtimber be sold to pine pulpwood dealers who will chip the trees for a paper mill. On the whole, buyers with the highest end product values can pay the highest stumpage prices on the front end, and it is essential that all of the players be contacted.

But as previously discussed, many woodland owners foolishly sell their timber to the first timber buyer that shows up on their doorstep. These owners do not know the volume or quality of the timber they are selling, much less its' true market value. Yet, they trust the purchaser ("He seemed like such a nice, honest fellow") to offer them a "fair" price. What successful businesses do you know that have no concept of the type, quantity or value of their products, but allow a single customer to establish prices and purchase their entire inventory? It makes no sense does it?

Other owners market their timber by contacting a few local sawmills or buyers, and negotiate a sale based upon the highest offer. Invariably, they have not had their timber appraised, so they have no concept of the true value of their woodlands. Therefore, what assurance do they have that they received the highest possible offer? Obviously they are guessing and hoping for the best. They limit their income potential by limiting their markets to only a few known, and possibly the wrong, local buyers. Negotiated sales rarely result in highest possible timber sale returns.

The timber owner’s best method is to use the services of our marketing professionals at Tennessee Timber Consultants. Our professional services include identifying and appraising the specific trees to be sold, conducting a sealed bid process, and developing and administering the sale contract. An increasing number of woodland owners realize that our marketing specialists will, in virtually every case, generate the highest profits.

Payment Methods

In the vast majority of cases, payment for timber should be made as a lump sum settlement. That is, you should receive total payment for your timber before any trees are cut. We ensure that the amount of the sale is clearly stated in your written sale agreement. Other types of payments are commonly offered, but they are not advisable for the great majority of owners, or for most tracts.

Occasionally very large tracts of land require more than one year to harvest. Where harvesting takes place during two subsequent calendar years, tax considerations could enter the picture. It could be advisable to accept two separate specified payments; one in each year based upon a pre-determined amount of timber, or specified portion of the tract that will be harvested during each year.

No discussion of payment strategies in Tennessee can avoid the practice of selling timber on a unit basis, or what is locally termed "on shares." Unfortunately, woodland owners routinely agree to this payment method, and it is so prevalent a practice that it merits serious review.

A unit sale, or "shares deal" means that a "purchaser" will harvest your trees, then deliver the logs to a sawmill or woodyard where he will receive payment for them. He will then return to you some percentage, normally forty or fifty percent, of the proceeds. It is a sweet deal for him because the only thing he has invested is his time, labor, and equipment. Giving the man 50 to 60 percent of the delivered price of a low value tree is one thing, but do you really want to pay him that percentage on a tree worth, say $1,000? It becomes even sweeter if he "forgets" to mention and pay you for all of the trees he cut and delivered. It happens far too frequently. Furthermore, you are totally at the mercy of the marketing skills of an individual who quite possibly doesn’t have the confidence of a local banker who would loan him enough to pay you cash for your timber.

The biggest concerns associated with unit sales are trust and confidence. Can you trust the individual you are doing business with to pay you an appropriate percentage for the trees harvested? Can you place total confidence in them to pay you for every load of logs that leaves your property? Can you place confidence in their marketing skills to merchandise the logs in the highest and best markets? Trust and confidence are important in any relationship, but they should not be the sole basis for a business transaction.

As a final caveat, under a “shares” arrangement, you are retaining a financial interest in every tree and each log. To protect yourself from potential liability claims, require that the logging contractor provide proof of workman’s compensation insurance coverage on his employees before they begin harvesting his/your trees. Do not rely solely on a “hold harmless” clause in a contract. Are you liable if one of his/your logs falls off the truck and causes a traffic accident? If so, are you properly insured? No doubt, the potential liability aspects associated with “selling on shares,” should be thoroughly investigated by an attorney prior to entering into such an agreement.

Regrettably, so many Tennessee landowners have been, and still are for that matter, taken advantage of by a few dishonest timber dealers that it places the integrity of the entire industry in doubt.

Contracts and Timber Deeds

Entering into a formal contractual agreement scares the daylights out of many people. The only thing scarier is selling timber without one. At Tennessee Timber Consultants, we always work with an attorney to develop a detailed contract that fully protects your interests.

Planning a harvest operation should not be a hit or miss proposition. We will discuss your concerns with you to ensure that each of your expectations are included in a written contract. Contracts should specifically spell out exactly “who, what, when, where, and how” a harvesting operation will be conducted. Again we work with attorneys so that every aspect of the sale is evaluated and terms written to meet your exact requirements. If you want something done, we make sure that it is put it in writing in your contract. If you want something prevented, again we will work to put it in writing in your contract.

Many timber companies offer their own form of a written contract. They are generally pretty fair, but some of the worst, after taking out the legal mumbo-jumbo, merely say, "For a specified sum, the buyer has the right to cut the timber on this tract when and how he chooses." Those buyers don't take prisoners. You are selling your timber on your land. We will work with you to make certain your needs are protected.

Some buyers require a Timber Deed. That is fine, as it is merely another type of formal agreement. A timber deed will be recorded by the purchaser, at their expense, at the County Courthouse. This gives them needed protection in cases where property is sold from one owner to another before the timber is harvested. That does not mean the property cannot be sold while the timber deed is in force, only that the new owner must honor the already existing timber sale agreement. Basically, a Timber Deed serves as a registered lien against the property guaranteeing that the buyer retains the right to harvest the purchased trees within the terms of the agreement.

Contract requirements should be made available for prospective buyers to review before they are asked to make an offer for your timber. They have every right to know about any restrictions or limitations beforehand, and prior knowledge will prevent later surprises both for you and them. A good contract will be good for both parties.