Rural Property Appraisal in the U.S.

Rural Property Appraisal in the U.S. Dr. Wendong Zhang 张文栋 Assistant Professor of Economics and Extension Economist wdzhang@iastate.edu China Agricultural University, June 21 th, 2016

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

3,500.0 3,000.0 Why Care About Farmland Market? Distribution of U.S. Farm Assets 2,500.0 Billion $ 2,000.0 1,500.0 1,000.0 500.0 0.0 2011 2012 2013 2014 2015F Real estate Livestock and poultry Machinery and motor vehicles Crops stored Purchased inputs Financial assets Source: USDA ERS

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 VALUES 10000 9000 all farmland 1950 2015 Nominal vs. Inflation Adjusted Iowa Farmland Values Land values ($/acre) 8000 7000 6000 5000 4000 3000 Nominal Real 2000 1000 0 1950 1953 1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 Year

% 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%

Beyond Iowa Farm real estate values by state; % change from August 2014 to August 2015 Source: USDA-NASS

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 wellreasoned judgment of its value. Farm Appraisal and Valuation by Murray, et.al., ISU Press, 1983

Def.: Rural Property Appraisal Rural Property Appraisal: systematic process of classifying and evaluating the characteristics of rural property in order to make a well-reasoned judgment of its value.

Appraisal key words systematic process or appraisal process will involve three major activities: a. Collection of relevant data b. Inspection or viewing asset c. 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, industrial buildings, 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 welltrained appraisers

Why do we do appraisals? Richard Isaacson Agri Management Services

Why do we do appraisals? Loans Litigation Partition New Construction Estates Financial Planning Condemnation ROW Right-of-way Other The Intended Use Richard Isaacson Agri Management Services

What are we appraising? Richard Isaacson Agri Management Services

Richard Isaacson Agri Management Services What are we appraising?

What are we appraising? Richard Isaacson Agri Management Services

What are we appraising? Cropland Recreational Land Dairy Grain Elevator Orchard Acreage Hog Facilities Poultry Barn Farm Supply Company Richard Isaacson Agri Management Services

Who wants an appraisal? Individuals, Banks, Courts, Government, Estates Each has different needs and may require a different type of appraisal The Intended User Richard Isaacson Agri Management Services

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

Richard Isaacson Agri Management Services January 16, 2014

One Legal Description Example 1 mile NW 1/4 NE 1/4 1 mile SW 1/4 NE 1/4 SW 1/4 SE 1/4 W 1/2, NW 1/4, NW 1/4, SE 1/4, Sec 11, T3N, R3E, 5PM 5 Ac 10 Ac 40 Ac 160 Ac 640 AC

Terry Kestner Rabo AgriFinance

Richard Isaacson Agri Management Services

Terry Kestner Rabo AgriFinance

Highest and Best Use Highest 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

Richard Isaacson Agri Management Services

Three Approaches to Rural Property Appraisal - Cost Approach - Income Approach - Market Approach (Sales Comparison Approach)

Terry Kestner Rabo AgriFinance

COST 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

Basic Steps 1. 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 depreciation 4. Sum for the costs

Format 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

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 > 90 80-90, 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 capitalizing anticipated future net income flows for the subject property

Terry Kestner Rabo AgriFinance

Present Value and the capitalization formula PV = n R (1 + i) t t= 0 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

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 costs 2. Net landlord earnings from a cropshare lease 3. 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)

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 investments Minus 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 one 3. Subtract ownership costs 4. Divide landowner s net earnings by the sale price = % return 5. Average them to find the current capitalization rate CAP RATE = C 6. 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

Terry Kestner Rabo AgriFinance

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 Appraiser Qualifications & Licensing in the U.S.

Professional Rural Appraiser Qualifications & 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 Appraisers ASFMRA & 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 Portal http://card.iastate.edu/farmland

Iowa Farmland Value Portal ww.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 Economist 478C Heady Hall Iowa State University 515-294-2536 wdzhang@iastate.edu http://www2.econ.iastate.edu/faculty/zhang

Survey Systems in U.S. Metes & Bounds Public Land Survey

Beginning of Legal Description - township 24 miles T4N T3N T2N 6 mi 24 miles T3N, R3E, 5PM T1N R1E R2E R3E R4E Base Line

Each Township is divided 6 5 4 3 2 1 11 7 8 9 10 12 T3N Section 36 1 mi. Section 11 T3N, R3E, 5PM R3E 1 mi.

Sections can be subdivided NW 1/4 NE 1/4 1 mile SE 1/4 SW 1/4 SE 1/4 Contains 160 Acres 1 mile