What you should know about farmland appraisals
A farm's value cannot be overstated. As an asset, farmland is incredibly valuable. The question that is top of mind for many landowners, though, is how much is their farm worth.
According to the United States Department of Agriculture Economic Research Service, farm real estate, including land and structures, accounts for 80 percent of all farm assets in recent years. What's more is the fact that farmland values have tended to rise from year to year.
Why farmland values increase, or sometimes decrease, is dependent on a number of different factors. A variety of factors affect farmland values, the USDA states, including the general economy, the local farm economy, policy, and location-specific characteristics. Land use will also contribute to the decided-upon value.
Reaching that value is often the trickiest part – and often the most debated.
What are farmland appraisals?
A farmland's worth or agreed-upon value often comes down to an official appraisal.
A farmland appraisal estimates the fair market value of a property. An appraiser who specializes in assessing agricultural land values, and is certified by the state in which they can work, conducts the appraisal.
An appraisal can be required in certain circumstances. For example, many farm lenders require an appraisal before they can approve farm loans. That way, the lender makes sure the farm mortgage amount isn't higher than the property value.
What factors can affect farmland appraisals?
Before setting an official appraisal amount, an appraiser will examine many characteristics and differing features of the land. Here are some examples of what an appraiser may consider.
A good appraiser will look closely at how easy it will be for a buyer to gain access to the property and whether there are any roads that can lead to the property or if there is a landlock on the property.
Access will also be evaluated for legality, public vs. private, grade, paving and who is responsible for maintaining it. An appraisal will be impacted differently if the land is accessible by a county-owned road, which means the county will maintain the road, than if it is accessible by a privately owned road.
Topography and amenities
Topography can also be a factor in determining the land's value. Some kinds of land will be more valuable than others due to their topography. In contrast to a flat parcel with excellent soil that lends itself even better to growing crops, a tract of land with many hills, rocks, or ravines would be appraised differently.
Some amenities can add both practical value, but also sentimental value. Water access is one example of this.
Configuration and size
An appraisal will also be affected by the general layout of a property. For example, long, narrow tracts of land could make it more difficult to access equipment.
It is also important to consider the size of the property when determining its appraised value. A property that is too small may be restricted in what it can be used for, whereas a property that is too large may not be appealing to buyers unless it can be subdivided into separate parcels.
Buildings and farmland
One sometimes surprising note is in regards to buildings on the land. FarmProgress points out that farm buildings are not as valuable as some believe. The problem is that buildings lose their value very quickly, sometimes even immediately after they are built.
Why appraise farmland?
An appraisal of farmland or agricultural property may be necessary for a variety of reasons. According to Farm Plus Financial, farmland may be appraised in the following situations:
Insurance purposes, such as determining replacement costs
- Appealing property taxes
- Divorce or estate settlements
- Real estate transaction negotiations
- Lawsuits or other legal matters, including eminent domain
- When required by a government agency
- How fair market value is determined
Fannie Mae defines fair market value as “the most probable price that a property will fetch on a competitive and open market under all reasonable conditions to equisit to a fair sale, where the buyer and seller act prudently and with knowledge, and the price is not affected by undue stimulus," according to Farm Progress.
Providing a fair market value is the appraiser's job. This removes other factors, such as emotion, from farmland transactions.
Appraisal values do not set the price
If a piece of farmland is appraised at a certain price, that doesn't mean that it should be purchased for that price. This is similar to other appraisals where the purchase price may be below or above an appraised value. In the case of farm auctions, this is especially true if the bidding is extremely competitive.
According to FarmProgress, a bank will still want to know what a farm is worth - and that's where an appraisal comes into play. The bank wants to know what it would be worth without the buyer.
How are appraisals conducted?
When it comes to farmland property appraisal, there are three common appraisal methods that Farm Plus Financial lays out in great detail.
Sometimes, a cost approach is used. In this approach, the appraiser will take the value of the land (vacant), add the cost of reconstructing the appraised buildings or buildings as new at the value date, and then subtract the accrued depreciation of the building from the value date.
Sales comparison approach
In a sales comparison approach, the appraiser compares the property being evaluated with several comparable properties that have recently sold in the area. Among other things, you could compare the products grown on the property, the number of acres, the improvements to the land, and details of the buildings.
An income approach is a straightforward way to determine the value of a property. If the property in question generates income, then it is a viable appraisal method.
Still have questions about farmland appraisals? We're here to help.
Don't get caught up in the weeds of farm real estate details. Contact Midwest Land Management if you have questions about farmland appraisals or need information on another farm real estate issue.
We are happy to assist you with your specific land requirements. Please contact us for more information.