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Land Value and Purchase: Lesson 3: Appraisal Techniques
Land Value and Purchase: Lesson 3: Appraisal Techniques
Land Value and Purchase: Lesson 3: Appraisal Techniques
AND PURCHASE
Preparedby:MichaelD.Duffy,extensioneconomist,Iowa
StateUniversity,andEdwinRoach,RoachFarms,Inc.
Lesson3:AppraisalTechniques
Overview
An appraisal is an estimate of value at a given
point in time. Although there are different
types of value (loan value, insurance value, use
value, etc.), estimating market value is the
purpose of most appraisals. A definition of
market value is 'the most probable price,
estimated in terms of money, that a property
will bring if exposed for sale in the open
market with a reasonable amount of time
allowed in which to find a buyer who has
knowledge of all the uses and purposes to
which the property is best suited and for which
it is capable of being used.'
This definition implies the highest and best
use concept. Property is appraised according
to its highest and best use regardless of whether
that is the present use. Although most farmland
is usually being used in its highest and best use,
this may not always be the case. An example
might be an area of pasture that could be used
for row crops.
Location
Legal Description
Ownership History
Present Use
Highest and Best Use
Farm Service Agency Data
Tax Information
Soils and Topography
Improvements
Climate
Schools
Zoning
Approaches to Value
Capitalization Rate
.05
.025
.075
.05
Value
Cost Approach
This approach estimates the value of the
property as indicated by the sum of the value
contributed by the land as though
unimproved, but available for improvement
in its highest and best use, and the value
contributed by the improvements. The land
is broken into classes and valued based on the
market value of each class of land. The value
of improvements is estimated based on the
replacement cost new (RCN) less
depreciation which includes physical
deterioration as well as functional and
economic obsolescence. This approach will
often be the highest value indication since
some of the component parts may have less
value when combined with other component
parts than alone. An example could be ten
acres of pasture on a 160-acre farm with
grain storage and no livestock improvements,
or a farm with excess grain storage for the
potential crop production. Table 3 outlines
this approach to value.
In Table 3, the grain bin has an estimated
replacement cost (RCN) of $1.25 per bushel
and has a remaining value after all
depreciation of 60 percent.
The old barn has an estimated replacement
cost (RCN) of $8.00 per square foot and a
remaining value after all depreciation of only
5 percent. The cropland is valued based on
the market indication for the various soils. In
this example, the acres in the building site are
given a value of $800 per acre since some
expense would be incurred to convert this
area to cropland. Estimated values for the
various land classes would be obtained from
comparable sales. No value is given to the
area taken up by ditches and roads.
Comparison of Approaches
Notice that the three approaches to appraising
a parcel of land can result in different
estimates of land values. This is especially
true comparing the market approach with the
income approach. Similarly, the results from
the income approach would be different if the
Sale 1
January 2001
Bank
Smith
100,000
Cash
100,000
80
1,250
Sale 2
March 2001
Jones Est
Miller
162,000
Contract
151,364
120
1,261
Sale 3
July 2001
FLB
Nelson
88,000
Cash
88,000
80
1,100
Sale 4
March 2001
Roberts
Peterson
208,000
Cash
208,000
160
1,300
Subject
July 2001
Percent Tillable
Average CSR
Building Value
95%
70.5
0
90%
68.0
9,000
85%
66.5
0
90%
71.0
24,000
90%
70.0
8,000
-25
35
25
10
17
0
110
100
0
0
25
-20
-50
20
17
1,323
1,310
1,292
0
0
0
0
0
Average
1,305
B. Adjustments ($/A)
Location
0
Land
-80
Improvements
100
Size
0
Time
25
Indicated Value
1,295
80
Sale 1
38.0
120.0
2.00
4,560
Sale 2
54.0
115.0
2.00
6,210
Sale 3
34.0
110.0
2.00
3,740
Sale 4
72.0
125.0
2.00
9,000
Subject
36.0
120.0
2.00
4,320
38.0
42.0
5.25
4,190
0
8,750
54.0
40.0
5.25
5,670
3,000
13,880
34.0
38.0
5.25
3,392
500
7,632
72.0
44.0
5.25
8,316
2,400
19,716
36.0
42.0
5.25
3,969
300
8,589
90.00
3,420
87.50
4,725
85.00
2,890
92.50
6,660
87.00
3,132
30.00
1,140
4,560
30.00
1,620
6,345
30.00
1,020
3,910
30.00
2,160
8,820
30.00
1,080
4,212
0
70
990
150
130
1,500
0
70
860
300
280
2,100
100
120
1,020
Total
666
6,286
1,020
9,145
547
5,387
1,534
13,034
715
6,167
Net Income
2,464
4,735
2,245
6,682
2,422
100,000
151,364
88,000
208,000
---
2.46%
3.13%
2.55%
3.21%
2.84%
- Acres
Yield
Price
Amount (50%)
Soybeans
- Acres
Yield
Price
Amount (50%)
Bldg/Pasture Rent
Total
Expense
Corn
- Cost/acre (50%)
Amount
Soybeans
- Cost/acre (50%)
Amount
Total Crop
Expense
Repairs
Insurance
Taxes
Management
(10% of net before taxes)
Sale Price
Capitalization rate
(net income/sale price)
85,282
1066
Price/Acre
1,500
1,350
1,100
800
0
Acres
13
51
8
4
4
Value
19,500
68,850
8,800
3,200
0
100,350
8,012
Per Acre
108,362
1,355
B. Building Improvements
Item
Grain Bin
Barn
Totals
Date
1988
1955
Size
10,000 bu.
32' x 40'
Rate
1.25
8.00
Replacement
Cost
12,500
10,240
22,740
Depreciation
40%
95%
Remaining
Value
7,500
512
8,012