What you should know about farmland appraisals
Farmland is an undeniably valuable asset.
Farm real estate, which includes land and structure, accounts for 80 percent of the total value of all farm assets in the United States in recent years, according to the United States Department of Agriculture Economic Research Service. Farmland values themselves have not grown much since 2014, but values have tended to see some increases year-to-year.
Farmland values are dependent on a number of factors. The general economy, local farm economy, policy and location-specific characteristics all affect farmland values, the USDA states. How the land is used also affects its value.
Putting a price tag on the land can get a little tricky, though. That’s where appraisals come in.
What is a farmland appraisal?
How much a piece of farm property is actually worth, though, or at least an agreed-upon number, often comes down to an official farmland appraisal.
A farmland appraisal provides an estimate of a property’s fair market value. Appraisals are conducted by a state-licensed appraiser who has been trained to properly assess the value of agricultural land.
The end result of an appraisal is a document that can be required in certain situations. For example, many farm lenders require before they can approve farm loans. That way, the lender can make sure the farm mortgage amount doesn’t exceed the property value.
What factors influence farmland appraisal?
While evaluating land, the appraiser will examine many factors and features of the property before setting an official appraisal amount. Here are just a few examples of what an appraiser may look at in a piece of land.
The appraiser will no doubt look carefully at how easily the property is accessed. An appraiser will want to know whether there are roads leading to the property or if it is landlocked.
They also will look at whether that access is legal, public, private, graded, paved and who is responsible for maintaining that access. For example, if the land is accessible by a county-owned road, which means the county will maintain the road, that will influence an appraisal differently from a road that is privately owned and maintained.
Topography and amenities
The topography of the land could also determine its value. Certain land types will be more valuable than others. A tract of land with many hills, rocks or ravines will be appraised differently from a generally flat parcel with excellent soil that lends itself even better to planting crops.
Some amenities, such as water access, can add both practical and sentimental value to property.
Configuration and size
A property’s general layout will also influence its appraisal. Long, narrow tracts of land could make equipment access more difficult, for example.
The size of the property has an impact on appraised values, too. Too small and the land uses could be limited, while a property that is too large may be appraised at a price that won’t attract many buyers unless it is able to be divided into separate parcels for sale.
A note on buildings on farmland
FarmProgress points out that farm buildings are not actually as valuable as some would believe. The problem is that buildings lose their value very quickly, some as soon as they are built.
Why have farmland appraised?
There are numerous reasons why one might seek to have their farmland or agricultural property appraised. The following are examples of situations in which farmland likely will be appraised, according to Farm Plus Financial:
- Find replacement cost for insurance purposes
- Appealing property taxes
- Divorce settlements
- Estate settlements
- Negotiations in real estate transactions
- Determining a price when selling farm real estate
- Eminent domain cases
- Required by government agency
How is fair market value determined?
As FarmProgress shares, the fair market value is defined by Fannie Mae as “the most probable price that a property should bring in a competitive and open market under all conditions to equisit to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus.”
It’s the appraisers job to provide a determination of that fair market value. This removes other factors, which include emotion, from farmland transaction decisions.
Appraisal values do not set the price
Simply because a piece of farmland was appraised at a specific value does not mean that is what the purchase price should be. This is similar to other appraisals where the purchase price may be below or above an appraised value. That could be especially true in the case of farm auctions if the bidding is very competitive.
A bank will still want to know what a farm property is worth - and that’s where the appraisal comes into play, FarmProgress notes. The bank wants to know what the farm would be with if the buyer were no longer in the market.
How are appraisals conducted?
Generally speaking, there are three common appraisal methods when farmland property is concerned. Farm Plus Financial lays out these appraisal methods very well.
The first approach is known as the cost approach. With this approach, the appraiser will take the value of the land (vacant), add the cost to reconstruct appraised buildings or buildings as new on the value date, and then less accrued depreciation of the building in comparison with a new building.
Sales comparison approach
This method entails the appraiser taking several comparable properties in the area that have been sold recently and compares those to the property being evaluated. Comparisons could look at products grown, number of acres, land improvements, details of buildings on the property, etc.
The income approach is fairly straightforward. The potential net income of the property is used to determine a property value. If the property in question produces income, then this appraisal method makes sense.
Get farm real estate questions answered
Don’t get stuck in the weeds that are the details of farm real estate. If you have questions about farmland appraisal details or need information on another farm real estate topic, reach out to our team at Midwest Land Management.
Contact us and we will gladly work to address your specific land needs.