Farmland Appraisals – 9 Things You Need to Know
by Mason Spurgeon
General Certified Real Estate Appraiser
November 2020
Farmland appraisals can be difficult to understand, but the information in this article will give you a good idea of what you need to know. This way you will feel more confident when ordering and reading a farmland appraisal.
1) Current use and highest-and-best use are different.
These two terms do not always equal the same thing on a farm appraisal. A cattle farmer may use a highly productive cropland field for pasture, but most buyers in the area would use the field for crop production. The appraiser must value the property at its highest-and-best use, and in our market tillable fields are typically higher in value than pasture fields. On the other hand, there are tracts that are being row cropped that should be in pasture production, and they should be valued as such based on their highest-and-best use.
2) Effective Dates are very important.
The effective date is the exact date of the appraised value. This date can be in the past, future, or present time, but it must be determined at the time of engagement, so the appraiser knows what value is needed. The most common is a current effective date or the date of the appraiser inspection. A retrospective (past) value is also common in estate appraisals which is usually the date of death for the property owner. However, we have also completed prospective (future) values for farm properties, though that is very rare.
3) An auction is not always market value.
Just because a property sells at auction does not mean it sold at market value. Yes, a buyer and seller are coming together and determining a sale price on the open market, but there could be other factors impacting the sale of the property. Two neighbors could be fighting over the property and end up paying an amount above market value. It could be argued that these two buyers were well informed, but they were not typically motivated. Expert appraisers should analyze and confirm sales in the market to find consistencies so they can use the correct data to compare to a property to get the right appraised value. Just remember, one sale does not make a market.
4) “Ballpark appraisals” do not exist:
An appraiser is not able to give a person a “ballpark” idea of what a property is worth. We must document everything we do and have sales analysis to backup our opinions of value, which we then certify. If you are only needing a good idea or a “ballpark” price for what your property is worth, and do not need an opinion of a Certified Appraiser, you should contact a realtor or auctioneer and they will be able to give you a BPO (Brokers Price Opinion) of what your property is worth. Just remember it is not the same as a Certified Appraisal.
5) Government programs are important.
CRP and WRP are examples of government programs that can be on a farm. CRP is the Conservation Reserve Program, and WRP is the Wetlands Reserve Program. These programs, along with several others, can drastically impact the value of a farm. Your appraiser will need to know about any contracts for these programs on your property. Make sure to contact your local Farm Service Agency (FSA) or Natural Resources Conservation Service (NRCS) offices to get that information, and provide it to your appraiser. This way you will ensure you get the correct value for your property. If the appraiser values your property as cropland when it’s in CRP, the appraised value could be drastically incorrect.
6) Improvements do not increase the property value dollar-for-dollar.
When an improvement such as a home, shed, fencing, or other real property is added to a farm, they rarely add the same amount of value as the cost. The market rarely recognizes cost as value because the buyers may or may not care about the improvement, and they may have had their own opinion of how it should have been done, and are therefore only willing to pay a small amount of what it would cost new. Please see our other blog post titled “Why Is My House is Worth Less?” for more detailed information about why this happens.
7) Buildings do not always add value on a farm.
Newer buildings often add value to farm properties, however, older buildings or buildings with a considerable amount of deferred maintenance do not always equate to a higher appraised value. Also, buildings that do not fit the highest-and-best use of the property may have limited to no value, like a cattle barn on a row crop farm. The farmer will likely not store equipment in the barn due to the low sidewalls and the chances for theft or vandalism. Older homes that are still inhabitable on a farm property will add little to no value to the property because the farmer does not have a use for the home and does not want the liability of renting the property to tenants. They also do not want to risk the tenants driving vehicles in the fields or damaging fencing. Many times, the buyer will just raze the buildings for ease and for more usable farm ground.
8) Get the right appraiser.
There are thousands of certified real estate appraisers throughout the entire country, but only a few of them are qualified to value farmland. Furthermore, not all commercial appraisers (i.e., Certified Generals) are qualified to appraise farmland. Ask lots of questions and look over their website to be sure they understand ag appraisals. You can usually tell how familiar they are with farm appraisals by the questions they ask you. I.e. “Are there any government programs on the farm such as CRP or WRP?”
9) Get the right appraisal.
The highest-and-best use of the property is the main determining factor for what type of appraisal is needed: Farm or Residential. A residential appraisal is performed when the property’s highest and best use is as a residence, usually due to limited acreage size or non-income-producing land. Meanwhile, a farmland appraisal is performed on properties with a larger number of acres, with income-producing land, and when most of the value is placed on the land as opposed to the building improvements.
Conclusion
The points noted in this article will help you to better understand your next farmland appraisal and may even make the process a little smoother for all parties involved. Please comment below and let us know your questions and how we can help.
