Estimating Realistic Marketing Prices

Estimating Realistic Marketing PricesEstimating Realistic Marketing Prices

Put properties into the context of current markets

RLI - AgriLand Brokerage and Marketing

7-2

ObjectivesObjectives

Read and construct credible analyses of market transactions to justify price

Know how to adjust sales to a subject Describe major agricultural activities Understand estimating value by replacement

cost Examine results of different estimates to derive

a value


7-3

Analysis of ComparablesAnalysis of Comparables

Continuous information collection Information clarifies possibilities Property variation limits use of raw

sales information Rigorous analysis yields real

knowledge


7-4

Systematic Sales AnalysisSystematic Sales Analysis

Identify value determining features Specify measurable units for

comparisonper acreper animal unitper farm per ranch


7-5

ExampleExample

High percentage of Class I soils Versus mostly Class III soils Class I increases price per acre


7-6

Adjustment ProcessAdjustment Process

Simulates market of identical properties just like the subject


7-7

Animal Unit (AU)Animal Unit (AU)

Production versus space Focus on forage production Composition varies greatly with

geographic variations Technology varies greatly as well


7-8

Animal Unit Month (AUM)Animal Unit Month (AUM)

Soil surveys often provide estimates AUM is 1/12th of AU Six AUMs is 1/2 of AU Acres per AU = 12 / AUM per acre Six AUMs per acre = 2 acres per AU


7-9

Comparable SalesComparable Sales

Ideal — Array of recent sales that are identical to the subject

Reality — Substantial variation, often older sales

Correct for differences (adjust)


7-10

REMEMBERREMEMBER

Always adjust the comparables to Always adjust the comparables to the subject!the subject!


7-11

Direction of AdjustmentDirection of Adjustment

Subject is superior — adjustment is added

Subject is inferior — adjustment is subtracted


7-12

Information GatheredInformation Gathered

Property rights conveyed Financing terms Date of Sale Location Legal description Sale price


7-13


Volume/page Grantor Grantee Acreage Selling agent


7-14


Productivity information Descriptions of improvements Assessment information All special conditions Confirmations of buyer and seller


7-15

Sources of Sales Sources of Sales

Mandatory disclosureinformation must be analyzedconfirmation still required

No disclosure real estate agentsbankerslawyersetc.


7-16

Sales ComparisonSales Comparison

Grid ensures systematic approach Focus on important differences Cases by case judgment about which

items to include


7-17

First Adjustments First Adjustments

Property rights Financial terms Market trends


7-18

Remaining AdjustmentsRemaining Adjustments

Location Physical Economic Use Non-real estate items


7-19

Adjusted PriceAdjusted Price

Basis forComparison Adjustments

1 Sale price $XXX,XXX2 Property rights +- $X,XXX3 Adjusted price $XXX,XXX4 Financial terms +- $X,XXX5 Adjusted price $XXX,XXX6 +- $X,XXX7 Adjusted price $XXX,XXX8 Location +- $X,XXX9 Physical +- $X,XXX10 Economic +- $X,XXX11 Use +- $X,XXX12 Non-real estate items +- $X,XXX

13 Final adjusted sale price $YYY,YYY14 Sale price per acre/AU $Y,YYY

Market trends

Sales Comparison Adjustments


7-20

First Adjustments First Adjustments

Property rightsmineralseasements

Financial termsfavorable rate, etc.

Market trends time


7-21

Adjustments Adjustments

Location Physical

size soilstopographyetc.


7-22


Economiccrop baselease provisionsetc.


7-23


Non-real estate itemsequipment includedgrowing crop etc.


7-24

Example AdjustmentExample Adjustment

Basis for Market based

Comparison adjustment Adjustments1 Sale price 475,800$ 2 Property rights mineral rights 2% 9,516 3 Adjusted price 485,316$ 4 Financial terms favorable rate -5% (24,266) 5 Adjusted price 461,050$ 6 prices increase 5% 23,053 7 Adjusted price 484,103$ 8 Location inferior 2% 9,682 9 Physical (size) larger 1% 4,841 10 Economic inferior lease 3% 14,523 11 Non-real estate items crop included -2% (9,682)

12 Final adjusted sale price 503,467$ 1314 Sale price per acre (rounded) 588 acres 856$

Sales Comparison Adjustments

Market trends

Condition


7-25

ExampleExample

Half of minerals reserved Favorable financial terms Market upward trend Inferior location Large property Inferior lease Crop included


7-26

AdjustmentsAdjustments

Percentage Dollar Quality-based Objective criteria


7-27

AdjustmentsAdjustments

Quality-basedexperiencerules of thumb

Objective criteria statistical analysiscostincome capitalization


7-28

ExerciseExerciseBasis for Market based

Comparison adjustment Adjustments

Sale 11 Sale size and price 588 acres 475,800$ 2 Property rights mineral rights 2% 9,516 3 Adjusted price 485,316$ 4 Financial terms favorable rate -5% (24,266) 5 Adjusted price 461,050$ 6 prices increase 5% 23,053 7 Adjusted price 484,103$ 8 Location inferior 2% 9,682 9 Physical (size) larger -1% (4,841) 10 Economic inferior lease 3% 14,523 11 Non-real estate items crop included -2% (9,682)

12 Final adjusted sale price 493,785$

13 Sale price per acre/AU (rounded) 840$ 14 Total gross adjustments 95,563$ 15 Gross adjustment as percent of sale price 20.1%16 Total net adjustments 17,985$ 17 Net adjustment as percent of sale price 3.8%

Condition

Market trends


7-29

ExerciseExerciseMarket based

Condition adjustment Adjustments

Sale 2650 acres 500,000$

fee simple 0% - 500,000$

market terms 0% - 500,000$

prices increase 3% 15,000 515,000$

inferior 5% 25,750 larger -2% (10,300) comparable 0% - implement included -1% (5,150)

525,300$

808$ 56,200$ 11.2%

25,300$ 5.1%


7-30

ExerciseExerciseMarket based

Condition adjustment

Sale 3475 acres 448,500$

fee simple 0% - 448,500$

market terms 0% - 448,500$

comparable 0% - 448,500$

superior -10% (44,850) smaller -5% (22,425) comparable 0% - inferior crop base 5% 22,425

403,650$

850$ 89,700$ 20.0%

(44,850)$ -10.0%


7-31

Irrigated CroplandIrrigated Cropland

Land Irrigation systems Drainage systems


7-32

Irrigated CroplandIrrigated Cropland Land classes Surface topography Irrigation system Water rights Water quality Drainage systems Crop base Etc.


7-33


Soils determine ability to use water Topography important for flow and

drainage Water rights establish quantity and

quality of water


7-34


Surface water rightsprior appropriationriparian

Groundwater rightsprior appropriationabsolute ownership

Water marketing


7-35

DrainageDrainage

Needed for tight, ponding soil Ditch systems Tile systems


7-36

Water MeasuresWater Measures

Acre foot 43,560.2614 cubic feet 325,853.3837 gallons 12 cubic feet per second in 1 hour


7-37

Livestock OperationsLivestock Operations

Soils Topography Types of forage and timing Water availability Estimated carrying capacity Noxious plants Improvements Recreational amenities


7-38

Livestock OperationsLivestock Operations

Fee owned land Government leased land

federalstate


7-39

Horticultural Horticultural

Fruits Berries Nuts Grapes Trees Flowers


7-40


Soils Development stage Irrigation (availability and adequacy) Varieties and rootstock Quality of product Climate (frost protection, wind patterns, etc.)


7-41


Pollination agents (bees, etc.) Pest control Improvements Local processing and marketing facilities Number of similar operations


7-42


Life stagesdevelopment (limited or no production)maturity (full production)decline (limited production, quality limited)redevelopment


7-43

Timberland Timberland

Stumpage (value of timber) Plus land Industrial style operation


7-44

Timberland Timberland

Soils Topography Type of timber Volume of timber Stage of timber growth Health of timber Location of mill


7-45

Timber HarvestTimber Harvest

Critical factorsterrain (slopes, creeks, etc.)forest densitydefective treesmill nearby


7-46

Timber CruseTimber Cruse Sampling of forest to establish volume of merchantable timber Measures

board feetdbh — diameter at breast height

Characteristics of trees Numbers of trees Normally requires consulting forester


7-47

Stumpage ValueStumpage Value

Often years in future Frequently little income prior to

harvest


7-48

DairiesDairies

Industrial style process Complicated improvements and mechanical systems

feedmilkingmilk storagesanitation


7-49

DairiesDairies

Improvements important to valuemilking parlorsloafing lots feed storagebarnshouses (for employees)etc.


7-50

Farm and Ranch ImprovementsFarm and Ranch Improvements

Depreciated cost Plus land value Building contribution often less than

construction cost even when new


7-51


Land valued by sales comparison Improvements valued by estimated

cost new less depreciation


7-52


Cost newreproduction cost — exact replicareplacement cost — equivalent utility

with modern materials and workmanship


7-53

Cost EstimatesCost Estimates

Marshall Valuation Servicehttp://www.marshallswift.com/index.asp

Costs adjusted to current month and for location

Index for updating or backdating costs


7-54

Depreciation EstimatesDepreciation Estimates

Loss in value from all causesphysical deterioration functional obsolescence external obsolescence


7-55

Physical DeteriorationPhysical Deterioration

Wear and tear Frequently estimated by age-life

annual depreciation = 1/expected lifetotal depreciation = age x (1/expected life)

Pipeline 10 years old50 year life20 % depreciation


7-56

Functional Obsolescence Functional Obsolescence

Defect reducing ability to provide intended function

Inadequacy — missing required features Superadequacy — unnecessary added features Curable — cost to cure Incurable — capitalized income loss


7-57

External Obsolescence External Obsolescence

Negative influence outside property Nuisances Pollution Capitalized income loss


7-58

Cost Value EstimateCost Value Estimate

Most valid for new improvements Difficult to estimate when much

depreciation is present Improvements often not an important

portion of value


7-59

Sales Comparison Value Estimate Sales Comparison Value Estimate

Very reliable when ample recent sales are available

Easy to explain Not reliable when dramatic market

changes have recently occurred


7-60

Income Capitalization Value EstimateIncome Capitalization Value Estimate

Most valid when buyers focus on income production

Unstable when non-income considerations motivate buyers


7-61

Module 7 ReviewModule 7 Review

Credible analysis of market transactions

rigorous analysis of market transactionsrecognizable units of comparisonsimulate competitive market for subject


7-62

Module 7 Review Module 7 Review

How to adjust comparable salesadjust comparables to subjectadd when subject is superior to salesubtract when subject is inferior to saleconfirm information with principalsfirst adjustments are for property rights, financing, market

trends


7-63


Major agricultural activities irrigated croplandlivestock operations (cattle, sheep, goats)horticultural operations (fruits, berries, trees, grapes, etc.)timberland dairies


7-64


Estimating cost replacement cost versus reproduction costcost less depreciation plus land equals valuecost servicesdepreciation includes: physical, functional, and

external


7-65


Review and reconcilecompare income, sales comparison, and

cost approach estimatesrely on most reliable datarely on most appropriate for property type


7-66

Self Assessment Questions Self Assessment Questions

Sales comparison analysis does what A 200 animal unit ranch has which of the

following The first three items in a sales adjustment grid

are: Two methods of obtaining adjustments are


7-67

Self Assessment Questions Self Assessment Questions

An acre foot of water is A timber cruse is what Reproduction cost refers to what Depreciation in the cost approach does

what

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Estimating Realistic Marketing Prices