Title: Farm real estate evaluation
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Title: Farm real estate evaluation
Series Title: Farm real estate evaluation
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Creator: Alston, Clifford.
Publisher: Florida Agricultural Extension Service, Institute of Food and Agricultural Sciences, University of Florida
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farm real



Florida Agricultural Extension Service
Institute of Food and Agricultural Sciences
University of Florida, Gainesville

Clifford Alston'
Appraisal of farm real estate is
the process of predicting the most
probable selling price of subject
property if offered for sale a rea-
sonable length of time. The pur-
pose of this publication is to
review some fundamental factors
affecting the value of farm real
estate, discuss different methods
of appraisal, and point out steps
in the process of appraisal of farm
real estate. Its primary objective
is to enable owners, prospective
owners, and others having a finan-
cial interest in farm real estate
to better understand different
methods of farm real estate val-
uation, with emphasis on the in-
come approach.
This approach is emphasized
because: (1) The capitalized value
is a major attribute of most of
the land used to produce agricul-
tural products, and (2) Real estate
zoned as "agricultural" in Florida
is taxed on the basis of its agri-
cultural value determined by farm
income capitalized at an accept-
able rate. This bulletin is designed
for the lay reader and not as a
guide for qualified appraisers.

Uses of Farm Appraisal
The demand for appraisal of
farm property results from prob-
lems or decisions relative to
placing a value on farm property.
Decisions pertaining to valuation
of farm real estate may come from
problems such as:
1. Transfer of ownership or
changes in control
2. Financing or credit
3. Compensation for loss of
4. Taxation

'Economist, Farm Management, Flor-
ida Agricultural Extension Serice.

Transfer Ownership Change
Major problems arise from sell-
ers trying to decide on a selling
price and purchasers trying to
decide on an offering price. Farm-
ers, or would be farmers, make
most decisions relative to the pur-
chase and sale of farm real estate,
and both sellers and buyers need
information on establishment of
relative values. In 19671 two
thirds of the buyers of farm real
estate and seventy per cent of
sellers were farmers.
In 19672 about 4.5 per cent of
farms in the United States trans-
ferred ownership. Seventy per
cent of these transfers were vol-
untary while the remainder were
caused by foreclosures, inherit-
ance, administrators and execu-
tors sales, and tax sales. Valuation
of farm real estate is needed for
involuntary sales as much as for
voluntary sales.
Change in the control of farm
property may take place from an
individual to a partnership or cor-
poration, from a partnership to a
corporation, from a corporation to
another corporation through mer-
ger, from a partnership or cor-
poration to an individual, and from
an individual to an individual.
Values must be placed on farm
real estate when control changes
in the same manner as transfer
of title for property by sale. For-
mation of family corporations is
a phase of transfer of control on
Florida farms that is becoming
more important. Economies of
scale to adopt capital intensive
technology requires continued firm

'Farm Real Estate Market Develop-
ments, Economic Research Service, U.S.
Department of Agriculture, CD-70,
April, 1968.

growth, and this growth will no
doubt accelerate the formation of
family and other corporations in
the control of farm real estate.
Financing or Credit
Lending agencies are concerned
with how much to lend and terms
of the loan. How much to lend
is based, to a great extent, on
value of collateral to secure the
loan. Of course, ability and will-
ingness to pay are of great im-
portance, but value of collateral
over time is loan "insurance".
Certain lenders are required by
law to restrict loans to a certain
per cent of the value of collateral
which means values must be esti-
mated accurately for collateral.
In 1967, the Florida farm real
estate debt amounted to about 660
million dollars1. The state's farm
income is about one billion dollars,
so farm mortgage debt (secured
principally by real estate) amounts
to about 66 per cent of gross farm
income. Sound financing of this
$660,000,000 debt requires an un-
derstanding of some of the funda-
mentals of good appraisal by both
the lender and the borrower. Capi-
tal intensive technology has caused


a great increase in the use of
agricultural credit. This trend
may even be accelerated in the
Compensate for Loss of Property
Loss of property is usually by
public taking (Eminent Domain),
fire, flood, freezes, and wind. Pub-
lic taking of farm property for
highways, power, recreation, and
flood control is an important area
for appraisal. The objective is to
compensate the owner for what he
has lost by condemnation, a simple
objective. Compensation for public
taking is complicated by State
statutes that say what is, and
what is not compensable. Many
condemnation suits go to court
which further complicates the pro-
cedure to compensate the owner
for real estate taken. Services of
competent appraisal are usually
needed for court cases.
Loss by fire is usually covered
by insurance. Appraisers of prop-
erty is needed for the claim ad-
juster of the insurance company,
and indemnification for loss incur-

'Farm Real Estate Debt, Farm Credit
Administration, December, 1967.

Fig. 1.-Real estate appraisal has widespread use in establishing values
for condemnation of property to be used for highways.

red by the present owner. Adjust-
ment is usually made without court
Real estate that is inherited
may be subject to federal taxation.
Also real estate transferred from
an individual or partnership to a
corporation may be subject to
federal taxation. This type of tax-
ation of real estate may come
about because of its earning capac-
ity in the form of capital gains.
Capital gains on farm land is com-
puted as the difference between
the price that land is sold for and
the price it was acquired for. A
value basis must be established
to meet legal requirements for tax-
ation of capital gains.
Taxation of farm real estate in
Florida depends on several factors
but a major one, as mentioned
previously, is its value for use in
producing a given agricultural
product. This means of assess-
ment, to a great extent, relies
heavily on a common method of
real estate appraisal, the income
approach. The assessment Divi-
sion of the State Comptroller's
office provides a guide for assess-
ment of farm real estate based
almost exclusively on the income
approach. This information is
available at the tax assessor's

Factors Affecting Farm
Real Estate Values
Three major groups of factors
affect the value of farm real estate
physical, location home, and
economic. Some items included in
these factors have no definite line
of demarcation and could be
classed in two or three categories.
A brief explanation of each fol-


Physical factors essentially de-
termine what can be produced.
Important physical factors are
climate, soil, and topography.
Climate refers to mean tempera-
tures, low and high temperatures,
length of growing season, total
rainfall, distribution of rainfall,
and prevalence of storms. Climatic
factors are very important to Flor-
ida agriculture because many crops
are produced in the state as the
result of a favorable climate. Most
United States citrus production is
concentrated in Florida because
many other areas cannot produce
citrus due to climatic factors.
Winter vegetable production is
also a result of climatic conditions.
The same is true for production
of sugar cane, sub-tropical fruits,
and many ornamental plants.
Soil properties determine to a
great extent the kind of crop to
be produced and is one of the most
important items to study when
appraising farm property. Soils
are usually classed as sandy loam,
loam, silt loam, and clay.
Soil texture and structure in-
fluence plant growth by the speed
soil warms up, ability of soil to
hold moisture, and ease of tillage.
Most Florida soils are deficient in
needed chemicals for plant growth
and they must be supplied. Excess
acidity is also found in most Flor-
ida soils.
'Topography affects temperature,
air drainage, water drainage, and
soil erosion. Much land in Florida
has a low value because of poor
drainage. Some areas cannot be
used for row crops because of ero-
Topography also influences the
type of irrigation used. Seepage
irrigation can be used on much
level land as contrasted to higher

cost overhead irrigation on rolling
land. Land adapted to seepage
irrigation is usually more valuable
for the production of a given prod-
uct than the same quality of land
that requires overhead irrigation.
Also availability of water for irri-
gation and other uses is an impor-
tant physical factor affecting land
Location Home Use
Location as used here, refers to
the desirability of the farm based
on the social, psychological, and
aesthetic values and not the rela-
tionship of location to a market
which is classed as an economic
factor. Availability of schools,
churches, transportation, hospi-
tals, shopping centers, etc., has a
major influence on land values. A
farm with these conveniences
available would sell for more than
a farm of equal productivity in
some remote area. Some other

items included in location, are
availability of utilities such as
water, natural gas, and telephone.
The general appearance of the
community, and activities also in-
fluence the desirability of a given
location. A community with good
houses in a high state of repair,
and with well landscaped yards,
enhances the value of farm land
in the area.
Since a farm is usually a place
to live, in addition to its being a
business, the house has an influ-
ence on farm real estate values.
A house that is well built, attrac-
tive, convenient, and in a high
state of repairs, would make a
farm more desirable than one with
very poor housing.
Neighborhood nuisances will de-
press farm prices. Factories, com-
mercial buildings, airports, city
dumps, noisy taverns, used car
lots, or trailer camps, are not con-
ducive to a good family living and

.1. t - t


Fig. 2.-A home like this will increase the value of farm real estate.

A-~' t


Fig. 3.-The value of a farm adjacent to an unsightly view like this is
usually decreased.

thereby decrease prices of land for
use as farm real estate.
Economic Factors
Some of the items mentioned
under location would almost qual-
ify under the heading of economic
factors. These factors can be
classified from the standpoint of
those that affect a specific farm,
and those that affect farm values
in general. No line of demarca-
tion will be made, however, in this
Historically, farm real estate
values and net farm income have
moved in the same general direc-
tion. An interesting phenomenon
of the agricultural real estate mar-
ket since 1950 is that land prices
have increased faster than net
farm income. Between 1950 and
1967 Florida farm real estate val-
ues increased 410 per cent.' During
the ten year period ending in 1964

'Farm Real Estate Market Developments,
CD-70, April, 1968.

land prices in the United States
increased 60 per cent more than
farm income'. In 1950 net farm
income per acre would pay for
farm real estate in 5 years. In
1964 it took 10 years income to
pay for farm real estate2. This
has been caused by purchase of
land as a hedge against inflation,
farm enlargement, capitalization
of farm program benefits in land
prices, and expectation of in-
creased appreciation of land. From
the above it is noted that net
profit from farming does not have
as much influence on land prices
as it once did.
Capital intensive technology has
caused a rapid increase in farm
size during recent years. Unless
land is purchased as an addition
to a farm, a large farm may sell
for a higher price per acre than
a small farm of the same quality,
location, etc. A small farm with

Economic Research Service, U.S.D.A.,

a large amount of usable capital
improvements (e.g., house and
other buildings) might sell for
more per acre than a large farm.
A farmer purchasing a farm as an
addition to his present one may
pay a higher price per acre for a
small acrage than he would pay
for a larger tract of land where
the acreage added would cause the
purchaser to duplicate certain in-
puts such as machinery and labor.
Availability of good markets af-
fects net profit, thereby affecting
land prices. A farm located on a
good road near a good market will
bring a higher price than one that
has no market or an unstable
market available.

'Farm Real Estate Market Develop-
ments, Economic Research Service,
U.S.D.A., CD-66, October, 1964.
"Farm Real Estate Market Develop-
ments, Economic Research Service,
U.S.D.A., CD-67, August, 1965.

Fig. 4.-A good market is essential
ranch, or grove.


Higher disposable personal in-
come in recent years has increased
the value of certain agricultural
products and consequently land
values. At the same time popula-
tion has increased rapidly and has
affected the demand for, and price
of agricultural products. Increased
population also affects land prices
as a result of increased demand
for residential uses.
Government policy, especially
acreage allotments, affects land
prices. For instance a farm with
a large tobacco or sugar cane
allotment will sell for more than
a comparable farm with a low
allotment. Availability of credit
resulting from Federal Reserve
Board policy, or other types of
government policy also affects
land prices.
Income tax regulations have
been favorable for the purchase
and sale of real estate. Only 50

for successful operation of a farm,

per cent of the net long-term
capital gain on the purchase and
sale of farm real estate is consid-
ered as taxable income subject to
Internal Revenue Section 1245.
Also the taxable rate on capital
gains will not exceed 25 per cent
of the net long-term capital gain
by using the alternate method of
computation. This provision is
more lenient than taxation of
regular income and has tended to
boost the price of agricultural
In recent years there has been
a continuous exodus of people from
cities to suburban areas. These
suburbs have converted much farm
land to real estate development
and has affected land prices in
nearby areas. At one time most
rural residents were engaged in
agriculture. This is no longer true.
Many people are seeking rural
residencies and have purchased
farm land for a home which has
caused speculative values to occur
in land prices specially in areas
close to cities.
A pattern of off-farm employ-
ment has evolved during recent
years. Availability of this type of
employment, perhaps for the wife,
the daughter, or the son can affect
land values. Off-farm employment
might also relate to the operator
in the event the farm is too small
for an adequate income.
Contingencies or accidental
chances, is a broad classification of
economic factors that can include
many things. It is impossible to
foresee all events that might
transpire but a few are listed
below. Some may increase real
estate value while others might
decrease it.
1. Limiting access to all areas
of the farm by constructing
a railroad, limited access

highway, canal, etc. across it.

2. Better drainage of land by
a public agency or through
cooperative effort of proper-
ty owners. Also water for
irrigation might be available
from the same canal.
3. Zoning of property whereby
certain agricultural enter-
prises are prohibited.
4. Use of nearby land for some
undersirable purpose such as
a garbage dump, a factory
with undesirable odors, and
pollutants, or an airport.
5. Location of some commercial
business that employs a large
number of people with dras-
tic land appreciation for
nearby farm property.

Methods of Evaluating
Real Estate Values
Three general methods are used
to determine value-capitalization
of income (income approach), re-
production cost (cost approach),
and sales of comparable property
(market approach). As stated
previously, value is represented as
the most probable selling price of
subject property if exposed to the
market a reasonable length of
time. Market value can also be
defined as a prediction of the high-
est price, estimated in terms of
money, which a buyer would pay
and a seller would accept for sub-
ject property provided both parties
were fully informed and acted
intelligently and voluntarily. All
methods of establishing values re-
sult in a prediction of value at
some future time.
Prediction of land prices is based
on imperfect knowledge and there-
fore is risky business. No one

knows all of the events that will
transpire at some future time. It
also represents a prediction of
human behavior. The prediction is
also based on facts available and
how these facts are interpreted.
As a rule the more good facts that
are available to the buyer or seller
the better the prediction will be
of its value as farm real estate. On
the other hand, the wrong inter-
pretation of facts may lead to
serious errors in judgement of
what will happen at some future
time. An attempt will be made
to describe how each method oper-
ates, and some of the weak points
and strong points of each method.
Income Approach
The Income Approach to deter-
mine the value of farm real estate
is based on the assumption that
the worth of an economic good is
the present value of future re-
turns. In the case of farm land
it assumes income generated is
capitalized in perpetuity. This
means that earning capacity of
land will not depreciate ("land is
indestructible"), as contrasted to
depreciation on machinery or
equipment, and will go on for-
The Income Approach also
makes the assumption that accu-
rate costs can be placed on all
inputs (expenses) except real
estate, accurate prices on outputs,
and that the difference between
revenue and expenses is credited
(accrues) to land. It must be
recognized that correct costs, es-
pecially for management, unpaid
family labor, depreciation, and
interest on investment are difficult

1The author recognizes that income
may increase or decrease or may last for
a certain number of years, but this
concept is not discussed in the publi-

to determine.
Capitalization is assumed to
represent the relationship between
the economic good, in this instance
farm real estate, and annual net
income generated, expressed as a
mathematical formula. It is a
ratio of net money income to the
capitalized money value of the
economic good. It is calculated by
dividing net income by a given rate
of capitalization.
An important step in the ap-
praisal process is determination of
the rate of capitalization, since
profit or net income divided by
the rate of capitalization indicates
the value of property being ap-
praised. If the capitalization rate
is too low, the value of property is
overstated. By the same token if
the rate chosen is too high the
value is understated.
Factors affecting the rate of
capitalization are usually placed in
three categories-the money mar-
ket, risk, and marketability. The
term money market is used to
represent the rate of interest for
safe loans or investments, or per-
haps the discount rate established
by the Federal Reserve Board. An
investor in government bonds at
5 per cent interest has a safe in-
vestment. It is good as long as
the U.S. government has the abil-
ity to redeem bonds. These bonds
can also be readily converted to
cash. Since farming has a risk
element greater than a safe in-
vestment, such as government
bonds, a given amount must be
added to an interest rate paid on
safe loans or investments to adjust
for the risk element. This means
that an investor might feel that
a 6 per cent return to capital in
agriculture would be equal to a
5 per cent return in government
bonds. The risk element in agri-
culture because of diseases, in-
sects, and climate, may be greater

than that in some nonagricultural
firms. Also different agricultural
enterprises vary from the stand-
point of risk. No certain amount,
therefore, can be established for
all agricultural enterprises in all
areas of the state.
The third factor affecting capi-
talization rates marketability-
might also be called liquidity. For
instance money deposited in a
savings account in a bank can be
withdrawn immediately. The sale
of farm property does not take
place on the day the owner desires
to sell because farm real estate
sales are relatively slow. The
factor of marketability must be
taken into account to allow for
this characteristic of farm prop-
erty as contrasted to readily avail-
able funds invested elsewhere.
Again, there is no particular rate
to use for determining the capi-
talization rate to set up for mar-
ketability of real estate.
Some appraisers include a
fourth item affecting the rate of
capitalization competition. It
assumes that each person with
capital has many opportunities for
investment and that the invest-
ment will be made where the profit
is greatest. This is true but alter-
native opportunities for invest-
ment have been given considera-
tion with the concept of risk, and
mobility incorporated in arriving
at the rate of capitalization. For
instance, it assumes that a 7 per
cent rate of capitalization in farm
real estate would equal, over time,
a return of 6 per cent in use X,
or a return of 8 per cent in use Y.
Also returns of 7, 6, and 8 per
cent would be the same as a 5 per
cent return on government bonds
over time.
The capitalization rate is the

sum of the discount rate (safe
rate), risk rate, and marketability
rate. For instance, if the investor
feels that 5 per cent is a safe
rate, 1 per cent is a satisfactory
rate for risk, and .5 per cent is
adequate for marketability the
discount rate would be 6.5 per cent.
The income method determines
what a buyer should pay based on
expected income and not what the
subject property might sell for.
Farm real estate is used essentially
to generate income over a period
of time and it is felt that valuation
based on income is a method that
can be used to determine what
farm real estate might sell for if
exposed to the market for a rea-
sonable length of time.
The income approach entails a
careful and accurate determina-
tion of production and prices for
the farm products to be produced.
Of equal importance is a determi-
nation of costs for all items of
expense. In order to make a sound
decision it is necessary to assemble
the best facts possible from all
sources on prospective yields and
prices for products produced and
resources used in production.
After assembling the facts an
evaluation should be made to de-
termine the most probable income
and expenses on the subject prop-
erty. Correct interpretation of
facts is as important as assembly
of facts. Most facts are historical
events prices, income, supply
technology, etc.-and these events
must be interpreted in light of
what will happen in the future.
The income approach needs some
adjustments for nonincome items.
These include such items as the
type of community; availability of
schools, churches, shopping cen-
ters, medical facilities, and non-

farm work; and appearance of the
neighborhood. Adjustments should
be made for oil and mineral re-
serves on the property. Property
should also be adjusted for home

use. Sometimes the strong influ-
ence of home use on rural property
values is overlooked or discounted
too much.

-mu o:
-s .~ -.-- -

Fig. 5.-Availability of a good shopping center like this tends to make
farm real estate sell for a higher price.

Examples Income Approach.
Three illustrations follow on the
use of the income approach in farm
real estate appraisal.
Wheat-Soybean Farm-A budg-
et for John Doe's farm in West
Florida is shown in Table 1 to
illustrate the income approach.
This farm consists of 400 acres
with 360 acres in cultivation. It
produces 360 acres of soybeans and
220 acres of wheat annually. Typi-
cal farms in the area have yields
of 35 bushels of soybeans, and 25
bushels of wheat per acre, and
these production figures are used
in calculating income. Wheat is
valued at $1.50 per bushel, and

soybeans $2.50 per bushel. Gross
income per acre is $87.50, and
$37.50, for soybeans and wheat,
Hired labor is estimated at
$2,200 per year, and the operators
labor and management at $5,000,
making a labor and management
charge of $7,200. Other cost fig-
ures were compiled from farm
records of typical farms in the
area. These costs were adjusted
for prospective changes in effi-
ciency in the use of resources and
prices for inputs used.
A capitalization rate of 7 per
cent is used and is based on the
summation method as follows:

Money market


Five per cent is estimated to
be the approximate discount rate
over a period of time. A risk factor
of 1.5 per cent is used because of
the short interval of time between
harvest of wheat and planting time
for soybeans to insure good yields.
Undue delay in planting soybeans
will cause a marked reduction in
production. Also heavy rainfall
may damage the crop before har-
vest in the fall and seriously cur-
tail production.
Farm real estate is in great
demand by farmers in the area for
farm enlargement. A factor of
only .5 per cent was used in mar-
ketability of the real estate be-
cause of the present and assumed
active market that will exist in
the near future.
In the hypothetical budget, re-

turn to real estate is $7,563. An
assumption is made that correct
values have been placed on all
items of income and expenses and
that the balance (residual) of
$7,563 is all credited (accrued) to
real estate. This amount divided
by the 7 per cent rate of capitali-
zation gives a capitalized value of
real estate of $108,043. The 400-
acre farm, therefore, has a value
of $270 per acre.
If a 6 per cent rate of capitaliza-
tion had been used the capitalized
value would have been $126,050 or
a value of $315 per acre. Also a
decrease of $2,100 in return to
real estate would decrease the
value $30,000 at a 7 per cent rate
of capitalization or $75 per acre.
Although the income approach
is a satisfactory method to deter-
mine the value of real estate the
above illustrations show the dras-
tic effect of errors in determining
the correct income, expenses, and
rate of capitalization.

TABLE 1-Example of the Income Approach Used to Evaluate a
Hypothetical 400-Acre Wheat-Soybean Farm
1. Income
360 acres soybeans @ $87.50 $ 3:
220 acres wheat @ $37.50
Tota income $ 3
2. Expenses
Labor and management $ 7,200
Machinery-equipment operation 3.045
Machinery-depreciation 3,313
Seed 3,855
Fertilizer ...9,005
Taxes 1,358
Insurance .. 483
Pesticides . 1,365
Utilities 150
Maintenance of buildings 680
Miscellaneous expenses 574
Interest on machinery 1,159
Total Expenses $ 3
3. Balance to pay all real estate capital costs $
4. Real estate value capitalized @ 7% ($7,563 7; ) $10i
5. Value per acre ($108,043 400) $



Farm Enlargement Table 2
presents another hypothetical
farm budget illustrating the in-
come approach to farm appraisal

for farm enlargement rather than
sale or purchase of an entire farm.
An assumption is made that John
Doe wants to enlarge his farm by

purchasing one hundred eleven
acres of adjacent land that is of
equal quality to his present farm.
One hundred acres is in cultiva-
tion, which will be planted to soy-
beans with an estimated gross
income of $87.50 per acre. Sixty
one acres of wheat will also be
planted with an estimated gross
income of $37.50.
It is estimated that five months
of extra hired labor will be needed
at a cost of $1,400. An added cost
of $876 is made for operation of
machinery and equipment. Added
costs for seed, fertilizer, taxes,
pesticides and miscellaneous items
are made in the amounts of $1,072,
$2,503, $378, $548, and $100, re-
spectively. No added cost for
machinery depreciation or interest
on machinery investment is made
since present machinery is ade-
quate for the added acreage. No
increase in cost is made for insur-
ance, utilities, and maintenance of
Total added costs amount to

$6,877 compared to added revenue
of $11,038 leaving a return to real
estate of $4,161. The same capital-
ization rate is used as shown in
Table 1 of 7 per cent. Return to
real estate divided by 7 per cent
gives a value of $59,443 for 111
acres or $536 per acre. It is noted
that this amounts to $266 per acre
more than the previous illustration
for the 400-acre farm.
This example explains why a
farmer can pay more for land
added to the farm. It also shows
the effect of larger tracts of land
on values where the income ap-
proach is used. If return to real
estate for the 400-acre tract is
added to the 111 acre tract of land
in Table 2, it is noted that the
total return is $11,724. This
amount capitalized at 7 per cent
gives a value of $167,486 for 511
acres or $328 per acre. This is
more than the value per acre for
the four hundred acre farm, but
less per acre than acreage for land
purchased for farm enlargement.

TABLE 2-Example of the Income Approach Used to Evaluate the
Purchase of 111 Acres of Land to be Added to
a 400-Acre Wheat-Soybean Farm

1. Income
Soybeans . ...........
Total Income
2. Expenses
Labor and management ......
Machinery-equipment operation
Seed .
Fertilizer ..
Taxes ..
Insurance ..
Pesticides -.....
U utilities .. .. ..... ... ...
Maintenance of buildings .
Miscellaneous expenses
Interest on machinery ..
Total Expenses ......
3. Balance to pay real estate capital costs
4. Real estate value capitalized @ 7%1 .
5. Value per acre

$ 31,500
$ 39,750
$ 7,200
$ 32,187
$ 7,563
$ 270

$ 8,750
$ 1,400


$ 6,877
$ 4,161
$ 536

South Florida Ranch Some
ranch appraisals are made on an
animal unit basis rather than on
the basis of acreage. The illus-
tration given in Table 3 is on the
basis of acreage using the income
approach. Actually all items of
cost and income are the same for
both acreage and animal units,
but values and costs per acre and
per animal unit differ.

1 $7,563 .07
$4,161 .07

$ 59,443

The ranch consists of 3,200
acres with 2,000 acres in improved
pasture. Nine hundred acres of
land has natural vegetation with
some scattered trees and provides
limited grazing. The remainder of
the land is in lakes, roads, etc.,
and affords little or no grazing.

Fig. 6.-Good improved pasture has
come for a ranch.

The hypothetical budget is based
on 911 cows, with all replacements
raised, and calves sold at weaning.
The sale of calves, plus gain in
the weight of replacement heifers
kept, is considered as beef pro-
duced. Improved pastures consist
of 1,500 acres in pangolagrass
and 500 acres in irrigated grass-
Beef production is at the rate
of 203 pounds per acre for im-
proved pasture when all beef pro-
duced is credited to this acreage.
Experiment Station results indi-
cate this production can be
achieved. Also business analysis
of commercial cattle operations
show that some ranches produce
more beef per acre than this. Ex-
penses are based on results from
business analysis of ranches in
South Florida.

a major effect in- determining in-

A capitalization rate of 6 per
cent is used and is based on the
summation method as follows:

Money market


Only .25 per cent was included
for risk in the capitalization rate
because ranching is a very low
risk enterprise when compared to
other agricultural enterprises. A
rate of .75 per cent for market-
ability might be considered low.

Since this is a highly improved
ranch it was felt that it would
sell more readily than unimproved
In this illustration return to
real estate amounts to $21,743 or
$113 per acre capitalized at 6 per
cent. This figure is much lower
than the illustration for the wheat-
soybean farm. It must be noted
that a crop farm is more intensive
than a ranch and will usually give
higher returns to real estate than
an enterprise with extensive land

TABLE 3-Example of the Income Approach Used to Evaluate the
Purchase of a 3,200-Acre Ranch in South Florida
with a Capacity of 911 Cows

1. Income
445 # beef produced per cow @ 25.41 per pound
2. Expenses
Labor and management
Machinery operation
Repairs-maintenance of buildings, fences
Miscellaneous cash
Depreciation-machinery & livestock
Interest-livestock & machinery
Total Expenses
3. Balance to pay real estate capital costs
4. Real estate value capitalized @ 61' ($21,743 6%)
5. Value per acre ($362,;83 3,200)



$ 81,227
$ 21,743
$ 113

Other Agricultural Enterprises
- Since Florida produces many
different kinds of agricultural
products it is impossible to give
illustrations for all of them. The
same appraisal method illustrated
in Tables 1, 2, and 3 would apply
to groves, nurseries, dairy farms,
poultry farms, foliage plants, etc.
and no attempt is made to give
illustrations for all agricultural
As mentioned previously the
income approach to valuation of
farm real estate can be used suc-
cessfully, but items such as the
following must be emphasized at

all times to increase
its use.

accuracy of

1. Careful estimates of future
prices for products produced
and production goods (in-
puts) purchased.
2. Inclusion of all inputs except
real estate capital costs in
3. Careful consideration of pro-
duction over time.
4. Accurate determination of
the capitalization rate to be
used. For instance a $12,000
return to real estate capital-

ized at 6 per cent is $200,000
while a 10 per cent rate of
capitalization gives a value
of only $120,000.

5. Adjustments for factors such
as hazards; contigencies;
neighborhood; home; avail-
ability of schools, churches,
shopping centers; and all
other factors mentioned pre-
viously that affect value of
farm real estate.
Cost Approach
This might be called "Cost of
Reproduction" method. Since land
is not reproduced this method is
of little value in farm real estate
appraisal because most real estate
values on Florida accrues to land.
Only 9 per cent of the value of
Florida farm real estate is build-
ings'. On a typical ranch, im-
provements in the form of build-
ings and fences represent only
about 4 per cent of total real
estate. A typical dairy farm
would have about 15 per cent of
total real estate in buildings and
This method of appraisal would
have application on a poultry farm
where about 60per cent of total
real estate might be in the form
of buildings and other improve-
ments. Cattle and hog feeder
operations might also lend them-
selves to the cost approach be-
cause about 90 per cent of total
real estate might be represented
in buildings, fences, concrete
floors, and other structures.
In using this method a value is
placed on the land, and then on
the contribution of improvements.
Land values are estimated by one

1Farm Real Estate Market Develop-
ments, Economic Research Service, U.S.-
D.A., CD-70, April 1968.

of the other two methods (usually
market approach), and not by cost
of reproduction. The value of land
is added to the value of improve-
ments to calculate total value.
Buildings and fences are valued
at cost of reproduction less de-
preciation, which may have oc-
curred through deterioration, ob-
solescence brought on by new
technology, or failure of the busi-
ness enterprise. Change of enter-
prises will also cause buildings
and other improvements to be ob-
solete. Cost of reproduction entails
a careful study of present con-
struction costs for farm real
estate improvements. Consultation
with construction firms is usually
a good method to secure accurate
construction costs.
This method of appraisal as-
sumes that cost and values are the
same, which, of course, is not
true. The eventual selling price of
subject property is market deter-
mined and not cost determined.
The cost approach has value for
settling insurance claims, or in
certain types of real estate where
the building is the major resource
to generate income, rather than
land itself.
Market Data Approach
Evaluation by market data is
based on the assumption that one
tract of farm real estate is valued
the same as recent sales of like
tracts. This method involves as-
sembly of data on sales of like
property during a recent period of
An obvious drawback to this
method is the definition of "like
property". No two farms are alike,
but in an active real estate market,
sale of farms with the most
characteristics that are similar
would be used in determining a
price for subject property.

Similar factors include items
such as type of soil, productivity,
home, hazards, markets, trans-
portation, neighborhood, roads,
and improvements. Adjustments
are made for differences that exist
between sales of other farm real
estate and subject property.
The success of the market data
approach depends on a real estate
market with a large number of
sales. It is of little use where very
few recent sales have taken place.
Deeds are recorded in the appro-
priate county office and an exam-
ination should be made of these
records for recent sales of farm
real estate in nearby areas. From
these records the following infor-
mation can be secured:
1. Date of transaction
2. Seller and purchaser
3. Legal description
4. Acres of land

5. Terms of sale down pay-
ment, interest rate, restric-
6. Book and page number of
recorded documents
7. Total amount of sale
While examining records be on
the lookout for "unusual" sales
such as foreclosures, transactions
between relatives, or taking by
eminent domain. Was the sale
from a father to a son, a distress
sale caused by some disaster, or
for some remuneration other than
that shown on legal documents?
A further check on the type of sale
might be made with realtors,
neighbors of the purchaser and/or
the seller of the property, or some-
one else that has personal knowl-
edge of the sale.
Data compiled on recent com-
parable sales might be presented
as follows:

Date of Purchaser Legal & Acres Sales Price
Sale Description Page Total Per Acre

8/ 1/68 Warburton N1/, S1-TWP 84N-Rge. 24W 11- 12 320 $106,000 $331.25
8/15/68 Davis NE1A, S3-TWP 84N-Rge. 24W 21- 28 160 $ 51,120 $319.50
8/31/68 Ferguson S11, S8-TWP 84N-Rge. 24W 94-115 320 $109,760 $343.00
Two other transactions of nearby farms were made during the month.
Sales data are not recorded for these transactions because one was from a
father to a son and the other from an individual to a corporation which the
seller had a financial interest in.

The next step is to investigate
property included in each sale
carefully. The inspection will in-
clude most of the various points
considered in valuation of subject
property, but will not be as much
in detail. Important items to con-
sider are:
1. Productivity of land and/or
2. Shape and size of fields
3. Erosion drainage

4. Type of soil
5. Total land use by acres
6. Hazards that may exist
7. Availability of markets,
roads, and services such as
schools, churches, etc.
8. Neighborhood
9. Condition of house and build-
10. Availability of off-farm em-

The market data approach in-
cludes comparative adjustments,
mentioned previously under the
income approach. Income is con-
sidered in this method, although
a breakdown of income and ex-
penses is not made on property
included in the market analysis
as was done with the income ap-

The Appraisal
As stated previously, this bul-
letin is not intended as a guide
for qualified appraisers. It is de-
signed primarily for farmers' use
in estimating farm real estate
values. A discussion of an orderly
procedure to determine real estate
values, a' rural appraisal checklist,
and a suggested appraisal outline
The farmer or other prospective
buyer should go through an order-
ly procedure in evaluation of val-
ues. If not, some items affecting
values may be omitted. Some
steps in this procedure follow:
Locate-Taxation-Zoning. The
first step is to locate the subject
property based on a legal descrip-
tion and a recent survey. Land
lines may not be where the present
owner thinks they are, and a sur-
vey will determine the exact lo-
cation. Be sure to note acreage
covered by the legal description.
When a study of the deed is made,
zoning regulations, the assessed
valuation, and taxes on the prop-
erty should also be determined in
appropriate county offices.
Inspect. A careful inspection
of the property should be made.
This inspection should include such
items as soil types, erosion, drain-
age, size of fields, hazards, utilities

available, and access to all parts
of the farm. Farm improvements
should be noted such as number,
size, and condition of buildings;
condition and adequacy of the
irrigation system, and fences; and
type of construction, condition,
and arrangement of the house.
Study Location. Observe the
location from the standpoint of
such items as churches, schools,
medical facilities, roads, neighbor-
hood, and freedom from nuisances.
The latter includes such items as
sewage disposal plants, city gar-
bage dumps, unsightly adjacent
property, industries with offensive
odors, airports, and heavily trav-
eled highways. Availability or
recreational facilities should also
be noted.
Climatic Conditions. Climatic
history should be studied from all
available data including people who
have lived in the community. Im-
portant items to consider in cli-
mate are length of growing sea-
son; high and low temperature;
rainfall, both total and distribu-
tion; and prevalence of hurricanes,
storms, and freezes. Prevalence
of killing frosts or freezes could
vary widely on properties that
are of close proximity to each
Markets. The long time prof-
itability of any agricultural prod-
uct depends on a satisfactory
market. Consideration should be
given to items such as distance to
market, roads, whether the market
is growing or declining, prices of
products sold on the market com-
pared to other markets, and
whether new technology may make
the market obsolete in a short
period of time.
Income-Expenses. Assemble
the best information possible on
the kinds of crops and livestock
produced in the area, production

rates and yields, and alternative
enterprises. Determine prices re-
ceived in the past, and study out-
look for future price trends.
The kinds of production goods
(inputs) used on Florida farms
have changed rapidly in recent
years. Study these changes and
evaluate possible future changes

Type of farm
Location and distance from
major cities and towns
Legal description
Farm map and aerial photos
Soil map and soil types
Location of schools
Location of churches
Location of shopping areas
Location of roads
Location of railroads
Location of streams
Location of ditches
Assessed value for the last
full year
Zoning and/or ordinances
Government crop allotments

Appraisers' Report
An outline of information con-
tained in an appraiser's report
follows. A farmer who is making

based on new technology. Also de-
termine price trends for produc-
tion goods and carefully estimate
their future costs.
Appraisal Checklist'
Following is a checklist to be
used before and during inspection,
and before arriving at a final value
of subject property:

Rights-of-way, easements,
Utilities available
Production records
Cleared land acreage
Woodland acreage
Other acreage
Road and stream frontages
Climatic information
Measurements and description
of buildings
Irrigation systems
Wells and springs
Sewage disposal systems
Tile drains
Sand, gravel, and mineral

an appraisal of farm real estate
would not write up a report like
this one but the outline gives the
content of a good appraisal report.

'Adapted from: Rural Appraisal Manual, American Society of Farm Managers
and Rural Appraisers, Stipes Publishing Co., Champaign, Ill., 1965. p. 38.

Appraisers' Report1

Outline of Information Usually Included in an Appraiser's Report

1. Full legal description
2. Description and interpretation of pertinent
economic factors for the region and country
3. Neighborhood analysis
4. Site analysis
Description of the site
Highest and best use
Utilities available
5. Buildings and improvements
a. Structural and construction detail
Age and size of buildings
Estimate of remaining useful life
b. Cost estimates
Estimate of cost of buildings, new
Less: Estimated accrued depreciation
(1) Physical deterioration
(2) Functional obsolescence
(3) Economic obsolescence
c. Present value of the improvement
The value of the buildings to the land
Land value found on market
Value indicated by cost approach
x Adapted from: Rural Appraisal Manual, American Society of Farm Managers and
paign, Ill., 1965, p. 38, 39.

6. Income Approach (capitalization)
Typical crops
Typical acreages
Typical yields
Share to the land
Landlord's gross return
Landlord's typical ownership expense
Typical net income attributable to
the land
Selection of the capitalization rate
Value indicated by income approach
7. Market price approach
Presentation of market price data on
comparable properties
Analysis of market data
Relation of market data to subject
Value indicated by market price
8. Correlation of methods and final
estimate of value
9. Contingent and limiting conditions

Rural Appraisers, Stipes Publishing Co., Cham-

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