Estimating realistic marketing prices
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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

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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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Remaining Adjustments

  • Location

  • Physical

  • Economic

  • Use

  • Non-real estate items

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Adjusted Price

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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

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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

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Exercise

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Exercise

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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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