A Guide to Appraisal of Agricultural Real Estate
The following discussion is intended to assist you in understanding the basics of an agricultural real estate appraisal. The need for an appraisal can be driven by financing, estate planning or settlement, property partition, establishment of original basis, court action, and various other reasons.
Nebraska was the first state to require licensing of real estate appraisers, and did so before 1975. Licensing is now universal in the United States as required by federal regulations. Most states have several levels of licensing to indicate the ability and authority of the individual appraiser. Certified General is the highest level of licensure, and authorizes that appraiser to work on any real estate property (agricultural, residential, or commercial). Extensive amounts of education and experience are required for licensure by The Nebraska Appraiser Board, which also requires annual continuing education to maintain that license.
Most appraisers concentrate on appraising only one category of real estate, as each type requires significant experience in order to be competent. An agricultural real estate appraiser typically would not appraise residential properties in a town, and vice versa by the residential specialist. An appraiser needs a solid understanding of the industry associated with the real estate to be appraised, a complete library of production and other factors, and years of experience as an appraiser.
The first step in appraising an agricultural property is to understand it from every angle. When an assignment is received, Agri Affiliates creates a complete file as to legalities and amenities of the property. Such items as exact legal description, taxed acres, water rights and well registrations, NRD Certified Acres, FSA Base Acres, soils maps, taxes/assessments/buildings, plus School Leases and Forest Permits are obtained. The file needs to include every factor that might influence productivity or value of the property.
With this information, the appraiser is ready to complete a thorough physical inspection. Not every acre must be viewed, but the appraiser must understand terrain, fencing, water sites, range condition, quality and condition of irrigation equipment, and such items as access to and within the property. Additionally, extent, condition and utility of building improvements, and the condition of cropland soils must also be inspected.
Items outside of the physical property must also be researched. Is the property subject to easements that interfere, are the NRD Certified Acres compatible with those actually irrigated, is the property subject to a lease, does the NRD have water allocation or other rules and regulations. Any factor that impacts the property value needs to be researched and understood.
Once all physical and legal aspects are determined, the appraiser can then identify the Highest and Best use of the property, which is appraisal terminology indicating the most economically productive use as limited by legal, physical, and financial considerations. (As an example, if there are no Certified Irrigated Acres then the Highest and Best Use can’t be an irrigated farm.)
After the property is researched and the Highest and Best Use is determined, the search for sales comparable to the property can begin. These sales must be in the same market area, and as similar as possible in such factors as date of sale, size, land use, soil type, irrigation equipment and building improvements.
The effective date of an appraisal can be the current date or a prior date such as 1990. Depending on value appreciation, depreciation, or a flat market, truly comparable sales may be limited to only a few months or to a span of several years. Comparable sales for an irrigated farm may need to come from only that county; for a Sandhills ranch from anywhere in the Sandhills area; and for a commercial feedlot from maybe 2 or 3 states. Bottom line, comparable sales must truly be comparable to the Subject property in as many characteristics as possible.
Three Approaches to Value
In lieu of selling a property to determine the value, an appraisal is an estimate of what the property would sell for if offered for sale – an estimate of market value. All based on the legal and physical amenities of the property, and on the determination of Highest and Best Use. There are 3 approaches available to the appraiser with which to estimate the value of an agricultural property. The foundation of all three approaches is the proper analysis of the selected comparable sales.
The Cost Approach to an estimate of value is based on the contributory value of the individual components of the property. As indicated by comparable sales, what is the per acre value of pivot irrigated cropland, non-irrigated cropland, rangeland or even wasteland? Obviously irrigation equipment, productivity of soils, and condition of rangeland fencing all influence value. A depreciated value of any building improvements is established considering the age and physical condition, utility under current agricultural requirements, and as impacted by forces outside of the property. In summary, how does an acre of meadow or bushel of grain storage add to the value of the property?
The Sales Comparison Approach utilizes a total property basis, versus individual acreages in the Cost Approach. If an unimproved agricultural property is 70% rangeland, 10% meadow and 20% irrigated cropland – what do comparable sales of similar size and makeup indicate as the per acre value overall? In addition to gross value per acre, building improvements may influence value. What does a recently built 5,400 sq. ft. house contribute to the market value of a 1,000 acre farm on a per acre basis?
The Income Approach is also based on the analysis of comparable sales. This approach utilizes a mathematical formula to convert indications from the sales into an estimate of value for the Subject. An identical analysis is completed for each sale and for the appraised property, including income production and property expenses. This approach can be applied on an owner-operated basis, including every income and expense. Or it can be applied as if the property was subject to a typical lease within the community. Lease income is estimated, along with only the following four expenses: real estate taxes, management costs, repairs and maintenance, and insurance.
The difference of income minus expenses is net operating income (NOI). For the comparable sales, NOI is divided by the Sale Price to arrive at a Capitalization Rate for the sale. From comparable sales, an appropriate capitalization rate is selected for the appraised property. To obtain the estimate of value, the equation is reversed, where NOI of the Subject is divided by the selected capitalization rate. The mathematical equation thus projects an estimate of value for the property.
The three above approaches typically indicate a range of possible values. The appraiser must then reconcile this range into a final value estimate based on the strength or applicability of the individual approaches. The current market era of rapidly changing incomes and expenses has made the Income Approach less reliable. However, the other two approaches can be applied because of the large number of very recent sales.
Under license law, specific discussions of value by a licensed appraiser on a certain property is considered an appraisal. Every appraisal must be backed by a complete file to provide evidence that the appraiser properly arrived at the estimate of value. In other words, an appraiser must be very careful in providing a “verbal appraisal”. Agri Affiliates utilizes a long-established format for reporting appraisals. This format is consistent for each appraisal, throughout the company. The report format basically follows the discussion above. It is a tried & tested format that is appreciated by everyone that utilizes our appraisal services. This format is a written appraisal report as compared to check-form reports utilized by some appraisers.