Rural Valuation Topics

ASFMRA Rural Valuation Topics

The practice of rural property valuation is wide-ranging and covers numerous property types and rights that vary across North America. The following papers have been developed to expand the land professional's understanding of topics that impact the appraisal of rural properties. The ASFMRA is pleased to provide the following Rural Valuation Topics as educational resources to agricultural and rural property appraisers.

*For Educational Purposes Only

The opinions and statements set forth herein reflect the viewpoint of the American Society of Farm Managers and Rural Appraisers at the time of publication but do not necessarily reflect the viewpoint of each individual member. Neither the American Society of Farm Managers and Rural Appraisers nor its editors and staff assume respon­sibility for the accuracy of the data contained herein. Further, the general principles and conclusions presented in this text are subject to local, state, and federal laws and regula­tions, court cases, and any revisions of the same. This publication is for educational purposes with the understanding that the publisher is not engaged in rendering legal, accounting or other professional service.

ASFMRA’s “Valuing Rural America” published June 2019 contains or expands on definitions with rural application. Foundational definitions are relied upon in the valuation industry; however, translation is required in some rural situations.

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At times, clients inquire about “ag value” appraisals under the premise it is the same as market value required in legal situations. They may be similar in some isolated circumstances, but generally “ag value” is use-value. Prior to 1950, the value of rural lands was predicated purely on economic productivity due to the lack of demand for any other use.

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Property rights are the legal rights which are the “subject” of the appraisal. Nearly every valuation course and seminar begins with the concepts of market value and property rights ---- yet, the “property rights” portion is either taken for granted, “check-boxed” away as fee simple, mis-reported or not completely understood.

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Rural subject properties may include the gamut of property rights ranging from water rights, irrigation water storage rights (off of the property), mineral rights (may be split horizontally, vertically and by percentage), appurtenant easements, conservation easements, etc. Each of these rights require definition and explanation in the appraisal report so that the reader may move past the physical optics of the property.

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The area-regional information is “rooted in the social, economic, governmental, and environmental forces impacting supply and demand, and ultimately prices paid for real property. The appraiser is tasked to identify the ‘area’ with similar influences or delineating the ‘neighborhood’ of homogeneous uses in which the subject would compete. Within cities, this area tends to be much smaller than rural locations. Rural real estate markets tend to be geographically wider, possibly global, depending on the property type.

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The area-regional information is “rooted in the social, economic, governmental, and environmental forces impacting supply and demand, and ultimately prices paid for real property. The appraiser is tasked to identify the ‘area’ with similar influences or delineating the ‘neighborhood’ of homogeneous uses in which the subject would compete. Within cities, this area tends to be much smaller Comparable is a common term within the urban valuation industry. Most users of valuation services such as judges, juries, attorneys, or private citizens perceive that to be an “identical” property. In rural valuation, sales are generally less frequent with a lower degree of uniformity than may be found in urban markets.than rural locations. Rural real estate markets tend to be geographically wider, possibly global, depending on the property type.

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As markets become more complex with mixed agricultural, recreational, rural residential influences impacting the value of the whole property, the “degree” of confirmation or verification may be different. Knowing the reason why the buyer acted in the purchase and determining whether or not that motivation can be replicated in the competitive market may be key to supporting any opinion of value in rural markets.

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The Arm’s Length Transaction is a basic component of the concept or “notion” of Market Value. The phrase “willing buyer and willing seller” is a critical component of an arm’s length transaction and implies a transaction void of duress or undue influence, where “either party can walk away from the deal”.

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In rural markets, a single “site” location with multiple buildings supporting the highest and best use applies a degree of similarity in some cases. However, there can be multiple building sites within the whole --- all supporting the highest and best use but physically dispersed several miles apart and on multiple tracts.

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Allocation is defined as, “a method of estimating land value in which sales of improved properties are analyzed to establish a typical ratio of land value to total property value and this ratio is applied to the property being appraised or the comparable sale being analyzed." However, in rural valuation the land component may have multiple “layers” and possibly buildings.

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Price Ratios are defined as, “the mathematical relationship between multiple land components”1. Those relationships or ratios exist in all markets in the U.S. Whether or not practitioners employ this procedure is a matter of preference; but its consistency enhances the valuer’s ability to quantify elements within the market such as size, location, or other physical, legal and economic amenities or characteristics.

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“Proportionate land analysis, or price ratios, became a necessity with two or more land types were present within properties”1. This can be extended with multiple and different buildings compared to competitive properties. The overall price per acre of these types actually is better understood as “blended” prices per acre.

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The transition from “land intensive” to “building intensive” links to a fundamental question, “what percentage of the overall price or value” is represented by structures? Rural valuation procedures stress using unimproved sales to “appraise” the land contribution within an improved sale first thus leaving the remainder or residual to the buildings. As the building contribution increases, more in- depth analysis is required because multiple structures require a second analysis for each individual structure’s contribution.

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“Concurrent highest and best use” is not defined in traditional valuation literature. Rural properties may include mixed income streams that cannot be readily separated due to property configuration and ag-use dominancy in the area --- yet these diverse income streams contribute to the total property income and value.

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Land & Building Allocation or Mix: Land and building mix reflects the combination of land and buildings within a property (i.e. how many acres are in type x, type y, etc.). The land contribution (allocation of the price to the land) is the first “call” on price (estimated from vacant land sales) leaving the remainder to structures. Rural valuation practices stress that buildings are always approached as the “residual”. The “land portion” many include differing percentages of two or more land types.

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Equivalency Ratio (ER) or Equivalency Factor (EF): The ER or EF may be defined as the relative value of a property to a “standard” through a mathematical process. The process converts the mix to an expression of the analyst’s “100% standard”.

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Paired Sales Analysis is defined as, “a quantitative technique used to identify and measure adjustments to the sale prices or rents of comparable properties; to apply this technique, sales or rental data on nearly identical properties is analyzed to isolate and estimate a single characteristic’s effect on value or rent”1.

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Some valuers ask about manual allocation, i.e., adjusting the initial allocation suggested by the ratios for productivity differences by land category.

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The need for qualitative v. quantitative adjustment begins where the valuer may only be able to quantify market conditions (time) or land and/or building-mix adjustments, thus leaving the remainder of the elements as “unquantifiable differences”. Rural appraisal practitioners commonly use quantitative and qualitative procedures in the same report.

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Partial Interests are defined as, “divided or undivided rights in real estate that represents less than the whole, i.e., a fractional interest such as tenancy in common, easement, or life interest”1. Simply, this is a shared right of occupancy and liability of ownership.

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Easements contribute to, detract from, or are neutral to the base property to which they are attached. The encumbered property, or “sandwich” (see Advisory 12) is what sells. To measure the impact of an easement taking or acquisition, the traditional “before” versus “after valuation procedure should be applied.

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Understanding mineral rights and their valuation, whether producing or non-producing, could easily be a separate textbook. The valuation of minerals and/or mineral rights follows the same procedures as surface rights. However, familiarity with a few basic terms from traditional valuation sources is necessary to begin identifying what “mineral rights” actually mean.

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Water rights are complex due to variation in state laws governing ownership. Generally, water rights in the private sector are discussed in this Advisory. There are two primary types of water rights in the U.S.:

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Functional obsolescence is relegated to the design and utility of a specific improvement; while external obsolescence is the result of a change in value originating outside the property. Functional non-utility (in the property) may be economically feasible to cure; however, external obsolescence is always incurable and changes in accordance with market standards.

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Appraisal certifications are the same for urban and rural properties. i.e., USPAP and UASFLA have their respective requirements. Some clients (and/or rulesets) require the value opinion to appear on the “Certification” page. However, appraisers cannot “certify” their opinion. The only things that can be certified relate to the “professional and ethical standards” under which the work was performed.

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Rural buyers frequently purchase “residential sites” up to several thousand acres for second or third homesites, for quiet enjoyment, investments, etc. History suggests this category may have been referred to as “ranchettes”, but, that term also implies something closer to a “rural lot” rather than these larger tracts that have transitioned away from traditional agricultural use even though the “interim” use shows livestock on- site.

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Sales are generally building-intensive and vary from common square or rectangular “boxes” to vertically integrated components of an agricultural operation or business with special design and/or equipment. Portions of one or more buildings in a rural “compound” may be finished as office space, or to a degree higher than the manufacturing, warehousing or storage space. Thereby, the assignment complexity accelerates.

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USPAP (Uniform Standards of Professional Appraisal Practice) and the UASFLA (Uniform Appraisal Standards for Federal Land Acquisitions) are similar excepting the elements described in this document.

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A client engages you to complete an appraisal. At the same time, the property was valued by another appraiser for a different client. My client received a copy of the second appraisal report and asked if I could act as a consultant in developing questions regarding the provided report.

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