Dairy Appraisals: The Basics & Common Misconceptions
Appraisers constantly monitor market trends and sales to stay informed about the future of property values and appraisals. They pay attention to changes in land use, such as the transition from cropland to development, and the impact of economic factors like interest rates and milk prices.
An appraiser uses this market-based data to provide an objective, impartial opinion of the value of a real estate property. This generally includes the land and buildings on the property. Appraisers use three approaches to value in their reports.
- Cost Approach: breaking down the land into different categories, such as cropland, woods, pasture, wetlands, and more. The appraiser then determines the value of the land and the buildings separately, taking into account any external depreciation.
- Sales Comparison Approach: finding similar properties that have sold and making adjustments based on the differences between the properties. The appraiser then selects a value within a range based on these comparisons.
- Income Approach: focusing on the income generation potential of the property, taking into account factors such as rental income and applying a cap rate based on similar properties.
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Combatting Common Appraisal Misconceptions
When requesting an appraisal, it’s important to understand exactly what you’re getting. Firstly we want to correct some common misconceptions to iron out the role of a certified appraiser.
- Appraisers and assessors are different roles. Assessors determine taxes, not appraisers.
- A business’ income stream is not included in a valuation. An appraiser only values the physical buildings and acreage included in the property.
- Appraisers consider all the buildings and improvements on the property when determining its value; they take more into account than sales on a dollar per acre basis.
Factors That Impact Appraisals
Appraising a dairy farm isn’t as straight-forward as a home or even a 40-acre farm. Dairies don’t stand still, so understanding all the components appraisers consider when valuating the property can be useful. And choosing an appraiser who specializes in agriculture becomes even more important.
- Age and past maintenance of the facility
- Location and size of the property
- Presence of a CAFO (Concentrated Animal Feeding Operations) permit
- Availability and cost of new construction, as farmers may be more willing to pay more for an existing facility than to build a new one due to rising construction costs
- Economics of the industry such as milk and feed prices
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The Role of Milk Prices in Appraisals
Milk prices play a significant role in appraisals, particularly in the dairy industry. Higher milk prices can result in lower external depreciation, meaning that farmers may be willing to pay more for properties during periods of higher milk prices. However, it is important to consider the cost of building new structures, as rising construction costs can also impact the value of existing facilities. The correlation between milk prices and external depreciation is influenced by the cost of build and replacement costs.
Including the Next Generation
The next generation of farmers should be included in the appraisal and value conversation to ensure they have a clear understanding of the process and its role in decision-making. The next generation is often innovative and willing to take risks to accommodate more families within the operation. By educating them about the appraisal process, they can make informed decisions and understand how appraisals can assist them in making difficult, life-changing decisions.
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Keeping an Eye on the Future
By staying up-to-date with market trends, appraisers can provide accurate, unbiased valuations for their clients. And by considering the three approaches to value, avoiding common misconceptions and staying informed about external factors that impact appraisals, dairy farmers and property owners can make informed decisions about their properties or transition plans.
For more dairy content, check out our blog or contact one of our dairy specialists. For a professionally trained and certified appraisal from your local Compeer appraiser, reach out today.