Transcript AgriLand Brokerage and Marketing

Estimating Realistic Marketing
Prices
Put properties into the context of
current markets
Objectives
Read and construct credible analyses
of market transactions to justify price
 Know how to adjust sales to a subject
 Describe major agricultural activities
 Understand estimating value by
replacement cost
 Examine results of different estimates
to derive a value

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Analysis of Comparables
Continuous information collection
 Information clarifies possibilities
 Property variation limits use of raw
sales information
 Rigorous analysis yields real
knowledge

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Systematic Sales Analysis
Identify value determining features
 Specify measurable units for
comparison

per acre
per animal unit
per farm
per ranch
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Example
High percentage of Class I soils
 Versus mostly Class III soils
 Class I increases price per acre

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Adjustment Process

Simulates market of identical properties
just like the subject
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Animal Unit (AU)
Production versus space
 Focus on forage production
 Composition varies greatly with
geographic variations
 Technology varies greatly as well

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Animal Unit Month (AUM)
Soil surveys often provide estimates
 AUM is 1/12th of AU
 Six AUMs is 1/2 of AU
 Acres per AU = 12 / AUM per acre
 Six AUMs per acre = 2 acres per AU

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Comparable Sales
Ideal — Array of recent sales that are
identical to the subject
 Reality — Substantial variation, often
older sales
 Correct for differences (adjust)

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REMEMBER
 Always adjust the comparables to
the subject!
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Direction of Adjustment
Subject is superior — adjustment is
added
 Subject is inferior — adjustment is
subtracted

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Information Gathered
Property rights conveyed
 Financing terms
 Date of Sale
 Location
 Legal description
 Sale price

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Information Gathered
Volume/page
 Grantor
 Grantee
 Acreage
 Selling agent

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Information Gathered
Productivity information
 Descriptions of improvements
 Assessment information
 All special conditions
 Confirmations of buyer and seller

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Sources of Sales

Mandatory disclosure
information must be analyzed
confirmation still required

No disclosure
real estate agents
bankers
lawyers
etc.
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Sales Comparison
Grid ensures systematic approach
 Focus on important differences
 Cases by case judgment about which
items to include

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First Adjustments
Property rights
 Financial terms
 Market trends

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7-17
Remaining Adjustments
Location
 Physical
 Economic
 Use
 Non-real estate items

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7-18
Adjusted Price
Sales Comparison Adjustments
Basis for
Comparison
1 Sale price
2
Property rights
3
Adjusted price
4
Financial terms
5
Adjusted price
Market trends
6
7
Adjusted price
8
Location
9
Physical
10
Economic
11
Use
12
Non-real estate items
Adjustments
$XXX,XXX
+- $X,XXX
$XXX,XXX
+- $X,XXX
$XXX,XXX
+- $X,XXX
$XXX,XXX
+- $X,XXX
+- $X,XXX
+- $X,XXX
+- $X,XXX
+- $X,XXX
13 Final adjusted sale price
14
Sale price per acre/AU
$YYY,YYY
$Y,YYY
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First Adjustments

Property rights
minerals
easements

Financial terms
favorable rate, etc.

Market trends
time
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Adjustments
Location
 Physical

size
soils
topography
etc.
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Remaining Adjustments

Economic
crop base
lease provisions
etc.
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Remaining Adjustments

Non-real estate items
equipment included
growing crop
etc.
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Example Adjustment
Sales Comparison Adjustments
Basis for
1
2
3
4
5
6
7
8
9
10
11
Market based
Comparison
Sale price
Property rights
Adjusted price
Financial terms
Adjusted price
Market trends
Adjusted price
Location
Physical (size)
Economic
Non-real estate items
adjustment
Condition
mineral rights
2%
favorable rate
-5%
prices increase
5%
inferior
larger
inferior lease
crop included
2%
1%
3%
-2%
12 Final adjusted sale price
13
14
Sale price per acre (rounded)
588 acres
RLI - AgriLand Brokerage and Marketing
Adjustments
$
475,800
9,516
$
485,316
(24,266)
$
461,050
23,053
$
484,103
9,682
4,841
14,523
(9,682)
$
503,467
$
856
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Example
Half of minerals reserved
 Favorable financial terms
 Market upward trend
 Inferior location
 Large property
 Inferior lease
 Crop included

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Adjustments
Percentage
 Dollar
 Quality-based
 Objective criteria

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Adjustments

Quality-based
experience
rules of thumb

Objective criteria
statistical analysis
cost
income capitalization
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Exercise
Basis for
Market based
Comparison
Condition
adjustment
Adjustments
Sale 1
1 Sale size and price
2
Property rights
3
Adjusted price
4
Financial terms
5
Adjusted price
Market trends
6
7
Adjusted price
8
Location
9
Physical (size)
10
Economic
11
Non-real estate items
588 acres
mineral rights
$
2%
$
favorable rate
-5%
$
prices increase
5%
$
inferior
larger
inferior lease
crop included
2%
-1%
3%
-2%
12 Final adjusted sale price
$
13
14
15
16
17
$
$
Sale price per acre/AU (rounded)
Total gross adjustments
Gross adjustment as percent of sale price
Total net adjustments
Net adjustment as percent of sale price
RLI - AgriLand Brokerage and Marketing
$
475,800
9,516
485,316
(24,266)
461,050
23,053
484,103
9,682
(4,841)
14,523
(9,682)
493,785
840
95,563
20.1%
17,985
3.8%
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Exercise
Market based
Condition
adjustment
Adjustments
Sale 2
650 acres
fee simple
$
0%
$
market terms
0%
$
prices increase
3%
$
inferior
larger
comparable
implement included
5%
-2%
0%
-1%
$
$
$
$
RLI - AgriLand Brokerage and Marketing
500,000
500,000
500,000
15,000
515,000
25,750
(10,300)
(5,150)
525,300
808
56,200
11.2%
25,300
5.1%
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Exercise
Market based
Condition
adjustment
Sale 3
475 acres
fee simple
0%
market terms
0%
comparable
0%
superior
smaller
comparable
inferior crop base
-10%
-5%
0%
5%
$ 448,500
$ 448,500
$ 448,500
$ 448,500
(44,850)
(22,425)
22,425
$ 403,650
$
$
$
RLI - AgriLand Brokerage and Marketing
850
89,700
20.0%
(44,850)
-10.0%
7-30
Irrigated Cropland
Land
 Irrigation systems
 Drainage systems

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Irrigated Cropland
Land classes
 Surface topography
 Irrigation system
 Water rights
 Water quality
 Drainage systems
 Crop base
 Etc.

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Irrigated Cropland
Soils determine ability to use water
 Topography important for flow and
drainage
 Water rights establish quantity and
quality of water

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Irrigated Cropland

Surface water rights
prior appropriation
riparian

Groundwater rights
prior appropriation
absolute ownership

Water marketing
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Drainage
Needed for tight, ponding soil
 Ditch systems
 Tile systems

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Water Measures
Acre foot
 43,560.2614 cubic feet
 325,853.3837 gallons
 12 cubic feet per second in 1 hour

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Livestock Operations
Soils Topography
 Types of forage and timing
 Water availability
 Estimated carrying capacity
 Noxious plants
 Improvements
 Recreational amenities

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Livestock Operations
Fee owned land
 Government leased land

federal
state
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Horticultural
Fruits
 Berries
 Nuts
 Grapes
 Trees
 Flowers

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Horticultural
Soils
 Development stage
 Irrigation (availability and adequacy)
 Varieties and rootstock
 Quality of product
 Climate (frost protection, wind
patterns, etc.)

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Horticultural
Pollination agents (bees, etc.)
 Pest control
 Improvements
 Local processing and marketing
facilities
 Number of similar operations

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Horticultural

Life stages
development (limited or no production)
maturity (full production)
decline (limited production, quality
limited)
redevelopment
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Timberland
Stumpage (value of timber)
 Plus land
 Industrial style operation

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Timberland
Soils
 Topography
 Type of timber
 Volume of timber
 Stage of timber growth
 Health of timber
 Location of mill

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Timber Harvest

Critical factors
terrain (slopes, creeks, etc.)
forest density
defective trees
mill nearby
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Timber Cruse
Sampling of forest to establish
volume of merchantable timber
 Measures

board feet
dbh — diameter at breast height
Characteristics of trees
 Numbers of trees
 Normally requires consulting
forester

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Stumpage Value
Often years in future
 Frequently little income prior to
harvest

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Dairies
Industrial style process
 Complicated improvements and
mechanical systems

feed
milking
milk storage
sanitation
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Dairies

Improvements important to value
milking parlors
loafing lots
feed storage
barns
houses (for employees)
etc.
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Farm and Ranch Improvements
Depreciated cost
 Plus land value
 Building contribution often less than
construction cost even when new

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Farm and Ranch Improvements
Land valued by sales comparison
 Improvements valued by estimated
cost new less depreciation

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Farm and Ranch Improvements

Cost new
reproduction cost — exact replica
replacement cost — equivalent utility
with modern materials and workmanship
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Cost Estimates

Marshall Valuation Service
http://www.marshallswift.com/index.asp
Costs adjusted to current month
and for location
 Index for updating or backdating
costs

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Depreciation Estimates

Loss in value from all causes
physical deterioration
functional obsolescence
external obsolescence
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Physical Deterioration
Wear and tear
 Frequently estimated by age-life

annual depreciation = 1/expected life
total depreciation = age x (1/expected life)

Pipeline 10 years old
50 year life
20 % depreciation
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Functional Obsolescence
Defect reducing ability to provide
intended function
 Inadequacy — missing required
features
 Superadequacy — unnecessary
added features
 Curable — cost to cure
 Incurable — capitalized income loss

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External Obsolescence
Negative influence outside property
 Nuisances
 Pollution
 Capitalized income loss

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Cost Value Estimate
Most valid for new improvements
 Difficult to estimate when much
depreciation is present
 Improvements often not an
important portion of value

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Sales Comparison Value Estimate
Very reliable when ample recent
sales are available
 Easy to explain
 Not reliable when dramatic market
changes have recently occurred

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Income Capitalization Value Estimate
Most valid when buyers focus on
income production
 Unstable when non-income
considerations motivate buyers

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Module 7 Review

Credible analysis of market
transactions
rigorous analysis of market transactions
recognizable units of comparison
simulate competitive market for subject
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Module 7 Review

How to adjust comparable sales
adjust comparables to subject
add when subject is superior to sale
subtract when subject is inferior to sale
confirm information with principals
first adjustments are for property rights,
financing, market trends
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Module 7 Review

Major agricultural activities
irrigated cropland
livestock operations (cattle, sheep,
goats)
horticultural operations (fruits, berries,
trees, grapes, etc.)
timberland
dairies
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Module 7 Review

Estimating cost
replacement cost versus reproduction
cost
cost less depreciation plus land equals
value
cost services
depreciation includes: physical,
functional, and external
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Module 7 Review

Review and reconcile
compare income, sales comparison, and
cost approach estimates
rely on most reliable data
rely on most appropriate for property
type
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Self Assessment Questions
Sales comparison analysis does what
 A 200 animal unit ranch has which of
the following
 The first three items in a sales
adjustment grid are:
 Two methods of obtaining adjustments
are

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Self Assessment Questions
An acre foot of water is
 A timber cruse is what
 Reproduction cost refers to what
 Depreciation in the cost approach
does what

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