For first-time landowners who have recently inherited a farm, it isn't always easy to know how much the asset is worth. The value of assets changes over time — whether it's the land itself, the farm or agricultural equipment.
"Buildings on a farm or agricultural equipment can depreciate over time as they wear and tear, but other kinds of assets like a 1967 muscle car may appreciate in value due to being vintage," says Jim Jansen, agricultural economist at the University of Nebraska-Lincoln. "That's why we want to get a third-party opinion. Because in addition to the land, we may have different kinds of improvements to the farm or ranch. If they're the kind of improvements for working cattle, the value of these things has changed and will continue to change aside from the physical depreciation. We also have functional obsolescence with some equipment on the farm."
That's one of the reasons Jansen advises land heirs to get a third-party appraisal of their property — whether or not they plan to sell the asset, as certain legal or financial needs may require a fair market value on the asset.
But there's another big reason. A third-party opinion gives not only a professional opinion of what the market value is at that point in time, but also an objective opinion. Jansen encourages landowners to use resources like the American Society of Farm Managers and Rural Appraisers website, which includes a public list of appraisers.
"Some of the conflict in dealing with estates comes about because on-farm and off-farm siblings may disagree on certain aspects if they're trying to figure out what some of these assets are worth," Jansen says. "The extended family members that are going to be the heirs of the asset are dealing with the stress of negotiating what something is worth, due to lack of knowledge from either party.”
3 appraisal approaches
So, how is land appraised? Jansen says there are three ways to calculate the value of an asset.
One of these is the market comparison or sales approach, which uses recent transactions for comparable assets in a given region to appraise the asset. "For example, if you're appraising an irrigated quarter, you'll look at an irrigated quarter with similar attributes — a well with similar gallons per minute and those kinds of things," Jansen says. "If you're appraising a farm site, you'll look at another farm site with a similar setup in terms of grain bins, equipment sheds, things like that."
Second, the income approach evaluates the income-earning potential of the asset and capitalizes it over time. "On cropland you would be looking at what would be a reasonable return per acre for a typical crop grown on a parcel of ground divided by the current market capitalization rate, which is somewhat similar to what the rate of return is," Jansen says.
Third is the cost approach, which evaluates the asset based on the cost of building a similar asset, and accounting for functional depreciation or obsolescence.
"These are the most common three approaches," says Jansen. "Depending on the scope and purpose of what you're appraising, the land professional will most likely arrive at using one of these three approaches to determine the final market value of the asset, but most often all three approaches will be included in the appraisal process."