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Ask the banker: How does an appraiser value farmground?

Erica Louder for Progressive Forage Published on 31 May 2018
Appraising value of farmground

Appraising farmground isn’t an exact science, but the approaches and the details that can separate one property from a neighboring property are the same.

If you have had an appraisal completed before, it may seem like an appraiser does nothing but inspect your property for five minutes and wave a magic wand to determine value. While some may say that’s a fitting description, it is considerably more complicated. If your region is like most, what farmground is worth per acre is a topic of wide speculation.

The coffee shop gossip may have property at $10,000 per acre, but your neighbor swears his uncle sold his for upward of $12,000 per acre – yet the property you are looking at purchasing is listed for $7,500 per acre. Who is right? And, maybe the more important question, how did they determine that value?

Trevor Knudsen, Northwest Farm Credit appraiser, says, “In a perfect world, an appraiser valuing a 160-acre irrigated farm would look at the nearly identical 160-acre farm next door that sold last week and value the subject – the farm being appraised – at the value of the neighbor’s farm.

However, the neighbor’s farm may have been sold to the owner’s child at a family discount, it may have different water rights, different soil types, different buildings or any number of different attributes that impact its value. To account for differences in properties, appraisers will consider three common approaches: cost, sales comparison and income.”

Let’s break down those approaches and hone in on a few details that can separate your property from the neighboring property.

Cost approach

Farm Plus Financial defines the cost approach in the following terms: “The value of the land vacant, plus the cost to reconstruct the improvements as new on the date of valuation, less accrued depreciation the improvements suffer in comparison with newly constructed improvements.” Unless you are an appraiser, that definition is pretty technical.

To put it simply, the cost approach is the value of the land plus what it would cost to replace all of the improvements (buildings, corrals, houses, etc.), less appropriate depreciation.

Because farmground typically has minimal improvements, the cost approach is rarely the primary approach for appraising farm property. However, for property significantly improved, like a dairy or feedlot, the cost approach can provide an important comparison when used with the sales comparison approach.

Sales comparison approach

The sales comparison approach is the valuation method familiar to most of us. It involves the direct comparison of the property being appraised to similar properties that have recently sold. It relies on the idea of “fair market value.” Zac Baker, certified appraiser with First Illinois Ag Group, says, “An appraisal is the determination of that (fair market) value.

Emotions are often a factor in what a buyer is willing to pay, especially with farmland, and an appraisal removes that emotion by sticking to a standard template”

Again, using the Farm Plus Financial definition, “In this approach, the appraiser identifies three to four comparable properties in the area which have recently been sold. Ideally, the properties are close in vicinity (within a 10- to 50-mile radius of the subject property) and have sold within the last six months. The appraiser then compares the sold properties to the subject property.

The factors used in the comparison include type of agricultural products grown, acreage, land improvements, square footage, number of bedrooms and bathrooms, property age, view and property condition.”

Income approach

Knudsen says, “The income approach looks at the income potential of a property and converts that into an expected value; this approach determines what a property would be worth if, for instance, the net income were $100,000 per year and similar properties were experiencing a 5 percent rate of return.” Another definition may be, “The potential net income of the property capitalized to arrive at a property value.”

This approach is suited to income-producing properties and is usually used in conjunction with other valuation methods. While all farmground could be described as “income-producing,” this approach is appropriate for property where the value is in its income stream, like a rental unit.

If the income approach for a farm appraisal is completed, it will likely be based on a landlord-tenant assumption. Knudsen goes on to say, “All approaches may not be appropriate for all farmground, which is often the case with the income approach.

Sometimes only one approach is completed, and sometimes all three are completed, depending on the property type, the market information available and the judgment of the appraiser.”

Other factors to consider

Understanding the types of approach is only part of the battle when determining how an appraiser values your farm. Here are some other factors to consider in the appraisal process.

  • Access: Many appraisers may argue access is the single-most important factor when it comes to value. Is there both legal and physical access to the property? And what does that access look like? Zac Ryan of Zac Ryan Appraisal Services says he considers whether the property can be accessed by a road, whether the access is public or private, whether the access is graveled or paved, whether the access is one-sided or multisided, and who maintains the access: county, city, owner. The answers to those questions can add or detract from the property value.

  • Easements: By definition, an easement is the right to cross or use someone else’s land for a specific purpose. An easement will be included in the title report, and the appraiser will determine if an easement does or does not impact value. Power companies and canal companies often have easements to complete maintenance. Those types of easements generally do not impact value. However, easements for a neighbor’s access or for a public walking trail may have considerable impact.

  • Water rights: Steven Herzog, member of the Appraisal Institute, says, “Water is big news, and the water rights associated with a parcel of land can have a huge impact on property value. However, those water rights and the value of those rights will vary widely by region, and an appraiser knowledgeable in a region will be able to correctly determine value.”

  • Soil type and topography: Considering both the soil type and the topography can help determine what crops can or cannot grow in that soil and the ease by which that farming can occur. These considerations can have a large impact on value.

An appraiser will also consider location, size of property, condition of improvements, any flood plain details and other issues specific to the property. All of these considerations may impact value and may be the reason for a variance when comparing seemingly similar properties.

Knudsen says, “Appraisal work is not an exact science; in fact, one definition of an appraisal is ‘an opinion of value.’ If 10 appraisers value the same property, chances are you will get 10 different values. However, if the appraisers are following prescribed appraisal techniques, the value one appraiser places on a property should be similar to the value the other nine appraisers have placed on the property.”

There you have it – how an appraiser values your farmground. However, keep in mind, when gossiping at the coffee shop, the words of Warren Buffett: “Price is what you pay; value is what you get.” That $12,000-per-acre price tag may sound appealing when you decide to sell – but is it reality?  end mark

ILLUSTRATION: Illustration by Corey Lewis.

Erica Louder is a freelance writer based in Idaho. Email Erica Louder.