What is an Appraisal?

Appraisals for Farm Loans by Farm Plus Financial Farm Loans

An appraisal is a document that gives an estimate of the fair market value of your agricultural property. An appraisal is generally required by all farm lenders before a final farm loan approval to ensure that the farm mortgage loan amount is not more than the current value of the property. The appraisals for farm loans are performed by a approved "appraiser" who is typically a state-licensed individual trained to render expert opinions concerning agricultural property values. In an appraisal, consideration is given to the property, its location, amenities, as well as its physical conditions. Farm Plus Financial has built relationships with accredited appraisers across the nation and will provide assistance with scheduling an appraisal of your property.

Why get an Ag Appraisal?

The most common reason for ordering an appraisal is to obtain a farm loan on a property. However, there are several other reasons why an appraisal might be needed. Below are just a few:

  • to establish the replacement cost (insurance purposes);
  • to contest high property taxes;
  • to settle a divorce;
  • to settle an estate;
  • to use as a negotiation tool (in farm real estate transactions);
  • to determine a reasonable price when selling farm real estate;
  • to protect your rights in an eminent domain case;
  • because a government agency requires it;
  • lawsuit.

What are Appraisal Methods?

Appraisers use three common approaches when establishing the value of a given agricultural property:

  1. Cost Approach:

    In this approach the following formula is used to arrive at the property value: Value of the land (vacant), added to the cost to reconstruct the appraised building or buildings as new on the date of value, less accrued depreciation the building suffers in comparison with a new building.

  2. Sales Comparison Approach:

    In this approach the appraiser identifies 3-4 comparable properties in the area which have recently been sold. Ideally, the properties are close in vicinity (within a 10-50 mile radius of the subject property) and have sold within the last six months. The appraiser then compares the sold properties to the subject property. The factors used in the comparison include type of agricultural products grown, acreage, land improvements, square footage, number of bedrooms and bathrooms, property age, view, and property condition.

  3. Income Approach:

    In this approach the potential net income of the property is capitalized to arrive at a property value. This approach is suited to income-producing properties and is usually used in conjunction with other valuation methods. The process of converting a future income stream into a present value is known as capitalization.

After thorough exercise of the three approaches, a final estimate or opinion of value is correlated. When evaluating agricultural properties the sales comparison approach is most heavily weighted by an appraiser.

Who owns the Appraisal?

Even though the borrower pays for the appraisal, the farm loan provider owns it. This is because the farm loan lender orders the appraisal on the borrower's behalf, and the appraiser lists that farm loan provider on the appraisal report. However, the borrower has the right to receive a copy. It is at the farm loan lender's discretion whether or not to give the borrower the original appraisal.  Farm Plus Financial in particular will always provide an original copy of the property appraisal report to the customer post closing.

Can I use another farm loan lender even after the appraisal has been completed?

Yes. In most cases, changing your farm loan lender does not mean you will have to pay for another appraisal. The first lender can transfer the appraisal to your new farm loan provider. Some appraisal firms may charge a small fee, however, because there is clerical work involved in editing the appraisal to reflect the new farm loan provider. This fee is called an "Appraisal Retype Fee." The original farm loan provider has the right to refuse to transfer the appraisal to another farm loan lender. In this event, you will need to get a new farm appraisal.

Who determines the market value of a agricultural property?

The seller of the property is the person who sets the price of the property, and not an appraiser. This is because sellers normally do not order an appraisal when selling their farms. Sellers wish to obtain the highest selling price possible for their farms and hence do not want to be bound by the appraiser's assessment of their property. The real estate agent, who receives a percentage of the price as compensation and often represents the seller in the transaction, normally assists the seller in setting the sale price.

The real estate agent performs a comparative market analysis (CMA). The appraisal laws in most states allow real estate agents to perform CMAs without an appraiser's license or certification. A CMA is a necessary part of the agent's preparation for a listing and consists of examining sales of properties in the area to arrive at a listing price. The reliability of the CMA depends upon the agent's experience and the characteristics of the property and the surrounding area. Typically, the agent will suggest a selling price to the seller based upon the analysis. However, the seller may not accept that price and choose to list the property for a higher price.

Assisting your Appraiser

In order for the appraiser to perform his/her job properly there might be requirements for additional information. Some information that may be requested is as follows:

  • What is the purpose of the appraisal?
  • Is property listed for sale and if so, for how much and with whom?
  • Is there a farm loan on the property? If so, with whom, when placed, for how much, interest rate, and any other types of financing.
  • What personal properties, such as appliances, are included in the property?
  • If it is an income-producing property, a breakdown of income and expenses for the last year or two and a copy of lease might be required.
  • Provide a copy of deed, survey, purchase agreement or other pertinent papers pertaining to the property.
  • Provide a copy of current real estate tax bill, statement of special assessments, balance owing and on what [sewer, water, etc.].

Farm Plus Financial can provide you with approved agriculture appraisers and guide you through the process of securing the right local appraiser. Contact Farm Plus Financial toll-free at 866.929.5585 or start your farm loan application online.