How to Value Farmland
How to Value Farmland
Many dynamics affect real estate costs, particularly when talking about farmland. It could be difficult to come up with a figure, but investors and farmers need a procedure to give value to farmland.
A few main factors that influence a farmland’s value are the location, soil quality, farmability, and capitalization rate. While each offers similar information, many investors need to look at it to ensure they’re receiving a truthful assessment of a property before they sign an agreement.
Market Knowledge is Necessary for Deciding the Price
The first step in giving value to farmland is understanding the local market. An excellent beginning point would be comparable sales. This isn’t precisely an apples-to-apples comparison since each piece of farmland has distinctive qualities that increase or reduce value, but comparable sales give a good starting point to value the tract of farmland.
This isn’t a dependable method for establishing true value or a final sale price, although it is an excellent starting point. In real estate, the land agent typically inspects many comps and takes an average price. It’s a good idea to take samples from several properties since various factors may have a substantial impact on sale prices.
How to Calculate Comparable Sales for Farmland
A straightforward land valuation looks at comps of comparable sizes in the same area with similar soil quality and farmablility. A high-quality land valuation will factor in all the features of a farm since they add to the property’s value. Features that may be considered include:
- Location
- Drainage
- Irrigation
- Farmability
- Soil Quality
- Road access
- Capitalization Rate
- Proximity to Storage Facilities
Working with a knowledgeable broker could help fill in the gaps when there aren’t enough available comps in the area. These professionals possess the experience to assist in a sufficient evaluation. They know about numerous sales in their area and are frequently aware of the details of many of those sales.
Typical Ways to Calculate Farmland Valuation
Anyone can get a good idea of a property’s value just by gathering information on the local farming economy, looking at data on comps, and calculating farm income. But there is one main factor that should get your attention. The impact of short sales and foreclosures on the agricultural real estate market might falsely lower valuations.
Comps are risk-free in a steady market, particularly with agricultural land that is linked to the possible failure or success of a farm business. Each valuation should contemplate the effect of short sale data and foreclosure. Instead of getting hung up on whether to add in data on a foreclosure or short sale, investors do better by examining the percentage of these sales in the market.
If there are a lot of distressed sales, this may indicate other issues in the local area, such as a policy that upsets agriculture businesses. More research is necessary to see why so many farms are having a hard time in the area before going forward with an investment.
The Bottom Line on Farmland Valuation
Determining the value of farmland is harder than other commercial real estate types. First, there are a lower number of comps available. Also, when another farm has recently sold, some factors may affect an individual sale that has nothing to do with the other properties.
As the best place to find farms for sale in Iowa, Iowa Land Company is making the most of Iowa’s agriculture resources. Contact us to get started investing in farmland today.
