How do you know what your farm is worth?
Every farmland owner should know what their farm is worth – even if they are neither selling now nor plan to sell in the near future. It’s simply valuable information that is very useful whenever other financial discussions need to take place, such as when you are applying for a loan or want to assess how your business is faring year to year.
But determining the value of land is not something someone can just guesstimate for you. It takes expertise and working knowledge of how to apply certain factors regarding the land that is being evaluated.
In short, knowing your farm’s worth is a conversation that must take place – but it can’t take place with just anybody. It’s best to seek out an expert opinion on the matter to get an accurate land valuation.
However, once you start that conversation, here are the factors they will likely take into consideration when placing a dollar figure on your farmland.
Why accuracy is critical
As far as farmland values are concerned, accuracy is always absolutely critical.
This is because there are so many scenarios in which landowners will need this information. The obvious scenario is when they are seeking to sell their land, but others include but are not limited to:
- Securing credit
- Estate planning
- Determining lease rates
- Paying taxes
- Succession planning
You can’t hope to enter any of those scenarios with a best guess of the value of your farm. You need accuracy. Others involved in these situations with you, such as bankers, a seller or buyer, partners and family, will also need accuracy.
These are two common ways of valuing farmland
Once you get down to business and start working with someone to determine your farm’s value, you may find they try to find its worth using one of the two most common methods, the sales comparison approach or the income approach.
Both of these methods need certain basic data in order to accurately pinpoint a dollar value for your land and farm. According to Farmland Finder, that data includes:
- Total acres
- Tillable acres
- Soil rating
- Comparable sales
- Price per acre
- Price per tillable acre
- Price per soil rating
- Net operating income
- Capitalization rate
- Return on investment
Now, if you aren’t sure what any of those data points are or represent, then it’s definitely recommended that you reach out to a trusted advisor or mentor to learn more.
From here, though, one of the two methods mentioned above will be used to determine your farm’s value. Once again, Farmland Finder offers a good rundown on both if you would like to dive deeper.
Sales comparison approach
The first of these common approaches that we’ll take a closer look at is the sales comparison approach. It’s the most common as it examines sales in the area of land that is similar to yours.
With a sales comparison approach, you can compare features of your farm to the features of the farm that has already sold. It gives you a good idea of a price range that you could expect should you also decide to sell the land at this time or relatively soon.
One factor that is important to note when it comes to the sales comparison approach for figuring out land value is that the more data points you have to compare each property, the better.
Next up is the income approach. With this method, you will again be using the same data to determine value. However, the difference here is that what you – or a buyer – is looking for is a determination of the land’s return on investment (or ROI) instead of the land’s value. This method is popular for buyers who are investors or another type of nonoperating landowner.
To find the ROI, two formulas are used. First, the net operating income (NOI), which is rental income minus expenses, needs to be calculated. Then, the capitalization rate (or the cap rate) will need to be determined. The cap rate is the NOI divided by the purchase price of the land.
Remember: There are different types of value
Whenever we are talking about farmland values, we need to keep in mind that there are in fact different types of land value that we could be talking about. These values differ based on factors that could be affecting either the seller or the buyer. They are market value, liquidation value, auction value and going concern value.
First is market value. This dollar figure assumes that no outside pressure is pushing the buyer or the seller one way or the other in terms of price. According to Successful Farming, market value would assume that both parties are both motivated and informed at the same level and that neither is facing a pressure to buy or sell.
Liquidation value would indicate that the person selling the land is under a lot of pressure to sell in a short amount of time.
With auction value, the assumption is that the land and equipment will be sold at auction with average time for marketing.
Going concern value
Going concern value combines the value of the land with the value of the business operation that’s based on that land.
Do you know what your farm is worth?
Now that we have touched on some of the basics of determining land values, is it time for you to get an updated land valuation? Our experienced staff at Cotton Grave Farm Management is ready to assist you. We have been a leader in this industry since 1960 and we would be honored to work with you.
Simply call today for a complimentary quote on a land appraisal or evaluation. We have the staff, knowledge and resources on hand to provide you with a result you can trust whether it is for estate planning and settlement, farm land determinations and acreage determinations.
We have experts ready to help you reach your farm operation goals. Contact us today.
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