Rural Property Appraisal in the U.S. - Iowa State University · based on sale prices of comparable...

Rural Property Appraisal in the U.S.

Dr. Wendong Zhang张文栋

Assistant Professor of Economics and Extension [email protected]

China Agricultural University, June 21th, 2016

mailto:[email protected]

A Quick Introduction:

– Grown up in a rural county in Shandong Province– BSc. in Environmental Science from Fudan 2009– Ph.D. in Ag Econ in 2015 from Ohio State U– Exchange student in U of Hong Kong 2007 fall– 2012 summer intern at USDA-ERS on farm

economy and farmland values– Research interests: land value, land ownership,

agriculture and the environment, China Ag– Teaches Econ 364: Rural Property Appraisal

Why Care About Farmland Market?

Source: USDA ERS

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

2011 2012 2013 2014 2015F

Billi

on $

Distribution of U.S. Farm Assets

Real estate Livestock and poultry Machinery and motor vehicles

Crops stored Purchased inputs Financial assets

Outline of this Talk– Overview of US and Iowa agriculture and farmland market– Rural Property Appraisal using Iowa as an case study

• Income Approach• Cost Approach – land only, not buildings• Market (Sales Comparison) Approach

– Resources on Rural Property Appraisal• University: ISU Ag Decision Maker, Iowa Farmland Value Portal, U

Missouri Ag-Site Assessment Tool• Association: American Society of Farm Managers and Rural

Appraisers, Accredited Rural Appraiser• Private: AcreValue, Auction Results, What’s Your Farm Worth

Current Situation of U.S. and Iowa Farmland Market

Source: USDA ERS

Source: USDA NASS

Iowa Soil Association Map

Iowa in U.S. agriculture

• # Farms: 87,500 (47k primary farming)• Average Farm Size: 349 acres (2119 mu)• Corn Acres: 13.7 million acres (#1 in US)• Soybean Acres: 9.3 million acres (#1 in

US)• Hogs and pigs: 20.5 million (#1)• Layers/Eggs: 52.2 million (#1)• Cattle: 3.9 million (#6)

Source: USDA NASS

Iowa’s farm characteristics• Average net cash farm income: US $110,329• # farms by value of sales in Iowa

Source: USDA NASS

AVERAGE VALUESall farmland 1950−2015

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

1950

1953

1956

1959

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

2013

Land

val

ues (

$/ac

re)

Year

Nominal vs. Inflation Adjusted Iowa Farmland Values

Nominal Real

% Change in Iowa Farmland Values 1951-2015

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

Source: USDA-NASS

Farm real estate values by state; % change from August 2014 to August 2015

Beyond Iowa

US Farm Income 1990-2025

Source: USDA OCE

Overview of Rural Property Appraisal: Definition and

History

What is an Appraisal?

“An assessment or estimation of the worth, value, or quality of a person or thing,”

The Free Dictionary, www.thefreedictionary.com

“the act of placing an estimated value on an asset or assets.”

American College Dictionary

“systematic process of classifying and evaluating the characteristics of an asset in order to make a well-reasoned judgment of its value.”

Farm Appraisal and Valuation by Murray, et.al., ISU Press, 1983

http://www.thefreedictionary.com/

Def.: Rural Property Appraisal

Rural Property Appraisal:

“systematic process of classifying andevaluating the characteristics of ruralproperty in order to make a well-reasonedjudgment of its value.”

Appraisal “key words”

“systematic process” or appraisal process will involve three major activities:

a. Collection of relevant datab. Inspection or viewing assetc. Organizing and analyzing data to arrive at a value opinion

“value” - in appraisal, refer to economic value or monetary value as measured by the amount of other things for which it can be exchanged

“Value” for Appraisals

Market value -- refers to what the asset can be sold for on the open market

Tax Value -- refers to value for “tax” purposes; can be more or less than market value

Insurable value -- refers to value for insurance purposes; can be more or less than market value

Liquidation value -- refers to value under “forced sale” conditions; often less than market value

Business value -- value of an operating business enterprise

“Asset Appraisals” – Real Property

Rural Property Appraisals Farmland, buildings, facilities; grain elevators; wind farms; swine confinement facilities; specialized dairy facilities; permanent plantings; orchards; vineyards; forested land; etc.

Residential Property Appraisals Houses (single-family); apartment buildings, condos, duplexes(multi-family); retirement communities, etc.

Commercial Property Commercial buildings, retail business establishments, industrialbuildings, etc.

History of Rural Property Appraisal (ISU)• Started during “depression” years of 1930s

• Strong collaboration between Universities and “practicing” farm managers and “practicing” individuals involved in land valuation

• 1929, ASFMRA founded; 1933, ASFMRA recognized need for farm appraisal education; Universities provided input and taught classes; Dr. Murray, ISU, started an undergraduate farm appraisal class

• 1980s, increased gov’t involvement in regulating professionals; establishment of Uniform Standards of Professional Practice (USPAP)

• Today, increased emphasis on scientific approach; emphasis on 3 approaches to value; high ethical standards; and high demand for well-trained appraisers

Why do we do appraisals?

Richard Isaacson Agri Management Services

Loans LitigationPartition New ConstructionEstates Financial PlanningCondemnation ROW–Right-of-wayOther

The Intended Use

Why do we do appraisals?


What are we appraising?


Cropland Recreational LandDairy Grain ElevatorOrchard AcreageHog Facilities Poultry Barn Farm Supply Company

What are we appraising?


Who wants an appraisal?

• Individuals, Banks, Courts, Government, Estates

• Each has different needs and may require a different type of appraisal

• The Intended User


Process of Rural Property Appraisal

Terry Kestner Rabo AgriFinance

Analyze the subject property

• Legal description• Aerial photos• Soil maps• Topographical maps• County records


Richard Isaacson Agri Management Services January 16, 2014

Richard Isaacson AgriManagement Services

January 16, 2014

Richard Isaacson Agri Management Services January 16, 2014

One Legal Description Example

W 1/2,

40 Ac10 Ac5 Ac 160 Ac 640 AC

T3N, R3E, 5PMSec 11,SE 1/4,NW 1/4,NW 1/4,

1 mile

1 mile

NE 1/4

SW 1/4 SE 1/4

NE 1/4NW 1/4

SW 1/4

Highest and Best UseHighest and best use is defined as that reasonable and probable use that supports the highest present value, as defined, as of the effective date of the appraisal. Alternatively, that use from among reasonably probable and legally alternative uses, found to be physically possible, appropriately supported, financially feasible, and which results in the highest land value.Based on potential use, not actual use

Three Approaches to Rural Property Appraisal

- Cost Approach- Income Approach- Market Approach (Sales Comparison Approach)

– One of the three accepted approaches for valuing real estate

– It employs the technique of summing all the land and building components to indicate a value• Each improvement is valued separately• Level highly productive land valued

separately than side hills

COST APPROACH

Basic Steps1. Estimate the value of the land as bare

ground– Value for high quality land– Value for medium quality land– Value for low quality land

2. Estimate the reproduction or replacement cost for the improvements

3. Estimate the depreciation4. Sum for the costs

• New cost of improvements $300,000• Depreciation -175,000• Depreciated value of

improvements $125,000• Value of the land $600,000• Value from Cost Approach $725,000

Format

Cost approach• Most applicable when:

– Improvements are new and are highest and best use

– Subject property has characteristics typical in the area

– Subject property is a special use property– Enough data to value the property

components but limited data to value the whole property

Cost approach• Least applicable when:

– No vacant land sales available– Construction costs are hard to measure– Depreciation is hard to measure– Improvements are very old

Use soil productivity index to figure out land quality class

Use soil productivity index to figure out land quality class

High quality class CSR > 9080-90, 70-80, <70…

Value of the land classes• Assume that the appraiser knows that

unimproved sales indicate this division for each land class– Class I 100%– Class II 60%– Class III 40%

• What is the value of each land class if we had a sale for $260,000 with 100 acres of Class I, 200 acres of Class II and 100 acres of Class III.

Land class example• Class I 100%, Class II 60% and Class III 40%• 100 ac. Class I, 200 ac. Class II, 100 ac. Class III• $260,000 sale price• 100 * 100% = 100• 200 * 60% = 120• 100 * 40% = 40

260$260,000/260 = $1,000 Class I

$1,000 * .60 = 600 Class II$1,000 * .40 = 400 Class III

Income Approach

• This appraisal method derives a value for the rural property by capitalizinganticipated future net income flows for the subject property

Present Value and the capitalization formula

• For $20 yearly stream for 5 years at 10% PV= $20 +$18.18 + $16.53 + $15.04 + $13.70 = $83.45

• For a constant stream of income into infinity, rule simplifies to PV= R/i = $20/.1= $200

∑= +

=n

tti

RPV0 )1(

V = I / D• V = value of the property being

appraised• I = net annual income accruing to the

property• D = the discount rate

How do we find the value of I?1. Cash rent that can be received minus

owner’s costs2. Net landlord earnings from a crop-

share lease3. Net earnings by an owner-operator

1) Cash Rent Approach• ISU Cash Rental Rate Survey

– www.extension.iastate.edu/agdm– Whole Farm, File FM 1851– Dr. Alejandro Plastina

• USDA (NASS) Cash Rent survey (biannual)

http://www.extension.iastate.edu/agdm

Example: Sioux County, high quality• Expected rent = $334 per acre• Property taxes ($15 – 30 / acre) = $25• Insurance = $5?• Maintenance and depreciation (tile) = $25• Management charge (8%) = $27• Net income to landowner =

$334 – 25 – 5 – 25 - 27 = $252 = I

How do we find the value of D?

Interest rate on long-term investmentsMinus expected rate of inflation= real interest rate = R

Example: interest rate on farm real estate loans is 4.6% (Chicago Fed Res)Expected rate of inflation is 2.4%Real interest rate = 4.6% – 2.4% = 2.2%

Alternative: Find Capitalization Rate (CAP RATE)based on sale prices of comparable sales

1. Find sales of similar properties (comparative sales)2. Estimate cash rental value for each one3. Subtract ownership costs4. Divide landowner’s net earnings by the sale price = %

return5. Average them to find the current capitalization rate

“CAP RATE” = C6. C is the observed value of D

Sales Comparison Approach• Obtain information on sales, listings and offers for

all properties similar to the subject• Verify that information; too many tall tales with

respect to land; be aware!• Get the right unit for comparison; dollars per acre• Compare the subject property and the comparable

sales and adjust the price of comparables as needed or eliminate them: Goal is to make comparable as similar as the subject as possible

• Reconcile the values from the comparables into a single value or range of values

Six Types of Adjustments for Comparisons• I. Type of rights being conveyed

– Fee simple• II. Financing conditions• III. Conditions of the sale• IV. Market conditions• V. Location• VI. Physical adjustments: soil quality, %

tillable

Adjustment: time

Adjustment: soil quality -CSR

Adjustment: location

Sales Comparison Grid

Reconciling the estimates

• The reliability of the data is crucial:

• garbage in, garbage out• A wide spread in the estimates

from the different approaches indicates a strong possibility there were mathematical and/or technical errors made.

Source: Mr. Issacson, sample appraisal

Source: Mr. Jensen, Farm Sample Appraisal

Professional Rural AppraiserQualifications & Licensing in the U.S.

Professional Rural AppraiserQualifications & Licensing

• Apply for Certified General Real Property Exam

• Pass the Certified General Real Property Appraiser Exam

• Complete Work Product Review (WPR) process– Submit work log– 3 appraisals (randomly selected) reviewed by Board– Appraisals may be reviewed by outside consultant

• Submit Application and Final Interview

Accredited Rural Appraiser (ARA)American Society of Farm Mgrs. & Rural Appraisers (ASFMRA)

• ARA Requirements (ASFMRA)

– 4-year college degree or equivalent– Complete and pass ASFMRA required courses– 5 years of real estate appraisal experience– Submit one demonstration report– Submit six (6) actual appraisal for committee review– Complete and pass ARA accrediting exam

American Society of Farm Managers & Rural AppraisersASFMRA & Iowa Chapter

• Iowa Chapter, ASFMRA

– Objectives parallel objectives of ASFMRA– 182 members– 59 AFMs, 14 ARAs, 14 Dual (AFM/ARA)– 60 State Certified General Appraisers– Work responsibilities

• Farm Management -- 101 members• Rural Appraisal -- 74 members• Consulting -- 36 members

(Many members are involved in one or more of these)

Uniform Standards of Professional Practice (USPAP)• Assures “quality control” standards -- all appraisers

• Administered by The Appraisal Foundation – Appraisal Standards Board (ASB)– Appraisal Qualifications Board (AQB)

• Prescribes 10 standards but not appraisal methods– Covers development of appraisals– Covers valuation methods used– Covers specific practices, writing, and reporting

• All “state certified general appraisers” must comply

Big Data in Ag – New Digital Resources for Farmland Valuation

Land Sales Records Website- Beacon

Beacon – comparable sales list

A New, Interactive Iowa Farmland Value Portal

http://card.iastate.edu/farmland/

Iowa Farmland Value Portalhttp://card.iastate.edu/farmland

Iowa Farmland Value Portal

http://card.iastate.edu/farmland

http://card.iastate.edu/farmland

Iowa Farmland Value Portalww.card.iastate.edu/farmland

Acre Value – Farmland Valuation Portal

AcreValue – Summary of Parcels

AcreValue – Ownership History

AcreValue – Land Use History

What is My Farm Worth

Farmland Auction Listing

Plat Map

Thank You!Wendong Zhang

Assistant Professor and Extension Economist478C Heady Hall

Iowa State University515-294-2536

[email protected]://www2.econ.iastate.edu/faculty/zhang

mailto:[email protected]

http://www2.econ.iastate.edu/faculty/zhang

Survey Systems in U.S.

Public Land Survey

Metes & Bounds

Beginning of Legal Description - township

T3N, R3E, 5PM

Base Line

24 miles

24 m

iles

6 mi

R1E R2E R4ER3E

T2N

T1N

T3N

T4N

Each Township is divided

T3N

R3E 1 mi.

1 mi.

Section

123456

36

117 8 9 10 12

Section 11T3N, R3E, 5PM

Sections can be subdivided

1 mile

1 mile

SE 1/4

Contains 160 Acres

NW 1/4 NE 1/4

SW 1/4 SE 1/4

Rural Property Appraisal in the U.S. - Iowa State University · based on sale prices of comparable...

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