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The value of land is never more than a buyer is willing to pay for it. Farm land is unique, as potential buyers are influenced by emotional factors such as introducing family members into the farming operation, as well as geographical and practical factors when making a purchasing decision. Ultimately, however, farming is a business. Like any business, potential for profit determines farm land's worth.
If any party to your transaction requires a loan, the bank will require an USPAP appraisal by a certified rural appraiser.
While it is possible to estimate land value based on income and comparable sales data, economic demand ultimately determines its value. Land in an area of short supply attracts higher values than land in an area of plentiful supply, even if the tracts produce similar yields.
Determine the ultimate land usage. Farm land bought or held for production is valued differently from farm land acquired as an investment, where the goal is to convert the land to its highest value use, typically by development.
Confirm the area of the subject land. Measure land tracts in square acres: this is the standard unit of appraisal for farmland. Break this down into land already in agricultural production, land with such potential, and other land.
Apply the following income formula to estimate the per-acre value of land already used for growing crops and pasture: land value ($/acre) = annual net income ($/acre)/alternative annual interest rate. The annual net income is the per acre profit for crop land. Deduct production costs (machinery, seeds, labor, fertilization) from total revenue to reach the net income figure. The alternative annual interest rate is the annual rate of return that the land holder, as an investor, seeks on his investment. In other words, if the land holder sold up and invested the cash in stocks and bonds, what return would he expect to receive?
Look at recently completed sales of reasonably proximate and comparable farm land. Sales price data indicates how much buyers are willing to pay for both productive and investment land in the area.
Pull together your income calculation and your comparable sales data to come up with a baseline valuation for your land.
Appoint a certified rural appraiser. Appraising farm land is a complex process and a qualified, experienced appraiser is best placed to put a true value on land that adheres to the Uniform Standards of Professional Appraisal Practice (USPAP). For example, an appraiser will adjust the baseline valuation to factor in deed restrictions, such as easements burdening the farm land, and physical characteristics that alter appraised value, such as the quality of commercial buildings and soil type. He will also have access to all recent sales listings. Find a certified rural appraiser at the American Society of Farm Managers and Rural Appraisers website.
Jayne Thompson earned an LLB in Law and Business Administration from the University of Birmingham and an LLM in International Law from the University of East London. She practiced in various “big law” firms before launching a career as a commercial writer. Her work has appeared on numerous legal blogs including Quittance, Upcounsel and Medical Negligence Experts. Find her at www.whiterosecopywriting.com.