Monday, November 12, 2012

What is an appraisal and how do I determine what my property is worth?

This is a great subject and dear to my heart. I have 4 appraiser friends and this topic comes up frequently. A real estate appraisal is an important component of the overall real estate transaction. The value determined is often used for financing.  There are three primary types of real estate appraisals that may be used, including the "cost approach," the "sales comparison approach," and the "income capitalization approach."
The "cost approach"  This method in simple terms determines the cost to replace the asset. It is determined by adding cost of materials, labor etc and is often used on unique property like churches etc.
The "sales comparison" This approach compares the price per unit area of similar properties  (or prices per acre) in the surrounding area. For example, a potential buyer will be presented with a full listing of properties that are similar in features, sales prices, including a comparison to their own property explaining the overall appraisal value. The price variations are generally averaged to create a fair market value for the property being appraised. This type of real estate appraisal is considered to be the most accurate appraisal as it utilizes recent market values on comparable properties.
The "income capitalization approach" to real estate appraisal is also commonly referred to as the "income approach" and is mostly used for commercial properties, not residential.  Most commercial real estate investors are interested and relying on the income possibilities or past income performance data when deciding to purchase a property. This type of appraisal is more technical and often lengthier than residential appraisals.

Now, how does this apply to land? Comparable sales appraisals are deeply flawed in the area of rural real estate. This method works well in an urban setting. You look at a subdivision built out in two years, compare 3 or 4 houses that sold over the last 6 months and there you go! However, the entire real estate industry seems to blindly follow this method because it’s the standard. How do you find good comps on rural land? I am not sure you can. No two properties are identical. One has a little field, one has established food plots, one has pine the other has hardwoods, one has 50 year old timber, the other has 20 year old timber. How do you put value on a creek? pond? road access and road surface? The list goes on and on. Sales seem to be more infrequent with rural land sales and therefore comparable sales have limited value.

In my judgment a combination approach should be taken. Land has production capacity which can be measured on timberland and agricultural land. The productivity of the property should impact value. In some cases the ‘highest and best use’ should be taken into account depending on proximity to growth corridors and utilities. One might have to use the comp approach on the land and add the value (cost value) of improvements such as barns, fencing and ponds. We might call this a hybrid approach and in my opinion, this should be the approach to appraising rural property!

For Information on Buying or Selling Land contact G. Kent Morris, ALC, RF at      (706) 457-0090