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Does USDA teach this madness??

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Terrel L. Shields

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Elite Member
Gold Supporting Member
Joined
May 2, 2002
Professional Status
Certified General Appraiser
State
Arkansas
Can we talk? I just got a copy of a poultry farm appraisal done on a farm that i had appraised previously as well. His is $710,000 4/02. The offer 9/02 is $840,000. He used USDA forms..pitiful forms that are wholly inappropriate for building intensive agriculture. And for reference, he lives 150 miles away from the property in Rural Oklahoma about 60 mi. E of Tulsa but works this area frequently for a Ft. Smith Bank and others.

For starters he lists Siloam Springs AR as the "Nearest Town". Here is the list of towns (some small, some not) that are closer. Rose, Locust Grove, Tahlequah, Leach, Twin Oaks, Oaks, Kansas(the town not the state), Jay (the county seat), Colcord, and Kenwood.

There are two styles of breeder hen barns. Barns prior to 1996 were 400' x 40' to 500' x 40' with partial concrete floors, they have curtain walls, require no back up generator, and have tunnel ventilation doing about 450 cfm. The newer barns have solid sidewalls, are 40' x 520', 100% concrete floors, autostart generators, and pull 625 cfm ml. The older styles pay $2.90 to $3.30 per SF. The new styles pay $3.75 - 3.90. They pay that because there is that much difference in how many eggs a chicken will lay in the better controlled environment. They are clearly different in age, quality and gross income. He used 2 old barn and 2 new barn styles as comps. He basically estimated barns on either styles at the same per foot and basically the same effective age.

Land values he estimated on Comp 1 (the newer style barn on 160 ac.) were $1,700/ac. in an area where the closest properties sold as vacant land were for $1,400/ac.; $1100/ac., and $1,200....all within 1 mile. This allows him to depress the per SF contribution of the buildings so that the apparent RCN are equal between this sale and the older sales.

He then proceeds to estimate land values on Comp 2 (the other new style on 150 acres.) That at $1,200/ac when similar land nearby sold for $650, $700, and $770/acre. Ditto...depresses the contribution of the barns.

The old style barns were in Arkansas where land values are higher. He estimates the land at $1,680/ac. for bulk & part at $2,800 on Comp 3. Nearest land sales? $3,000, $2,000, and $2,500/acre. This INFLATES the contribution of the barns.

Sale 4 as low as $925/acre....there hasn't been a land sale in this area for less than $1,000 an acre for nearly 10 years. Part appraised at $1925, about what it all was worth. Same old same. Inflates barn contribution.

Results? Undervalues the subject improvements dramatically, and slightly undervalues the land contribution!

Income approach. USDA form is a JOKE JOKE JOKE. Might be "OK" for cropland where a retired farmer may lease his property to a sharecropper or for cash rents. There are no "leased" poultry farms. There are no passive "investors" buying chicken farms. Farmers buy farms to buy a job. The BEV (Business Enterprise Value) is zip.

The appraiser did and USDA encourages using a Cap Rate Calculation form which applied a 50% discount to the gross income to a column labeled "landlord's return." Whatta crock of crap! There are no LANDLORDS in this business..none, period. End of story. This is a fabrication of USDA and the appraiser as fanciful as flying pigs. This left a net income reported at $53,000 on a gross income of $137,600. Out of that $53,000 you are suppose to service a debt on $600,000 worth of barns!!! (don't even think about a house or land) At current cheapo rates of say 7%, that's $42,000 for interest alone! OK OK, so it is the landlord who services the debt right? His 50% (as calculated by our studly appraiser) was $68,000. The Internal Rate of Return is so dismal only a moron would "invest" and every chicken farmer in the country ought to be completely broke inside of 3 years. With the comparbles selling for minimum $750,000, 10% down, annual debt service (interest 7% for 20 yr) is $62,435. Appraiser genius has a typical comparable cap rate calculated at 7%.

I have looked at a many a schedule F including my own. There is not a chicken farm that can remain solvent that has expenses exceeding 50% of the gross. The net return must be the debt service plus a contribution for the owner's labor and management...generally what he expects to make in a town job with comparable hours. His hope might be that when he goes to sell the property has accrued some increase in value. That is not always the case but can be.

The appraiser also guessimated things like taxes and insurance. Taxes on one comp est. at $3,000 (actual $1800) another $5000 (actual $2200).

This is something besides a competence issue. I seriously believe that the appraiser does not really understand the way these barns operate. This is another case where this appraiser (whom I know) is sincere, strong bank and appraisal background, ASFMRA member, and degree in Ag Economics.

You could turn this report in. I am willing to bet, however, you could not get a ruling that it fails to comply with USPAP or state law no matter how many errors you point out. His credentials are too impeccible. He uses all the USDA buzz words. He has a banking and appraisal background. But he killed a deal that, in my opinion, is arm's length and market value. Since his report the following are prices similar barns have sold for - $900,000, $900,000, $825,000, and 2 are pending $950,000 and $1,050,000.
 

Austin

Elite Member
Joined
Jan 16, 2002
Professional Status
Certified General Appraiser
State
Virginia
Terrel: It sounds like the moral of the story is that he spent his time filling out the forms as his client requested, which is a typical practice and one reason I don’t do government work and use forms. One of the reasons I have been critical of state appraisal boards and USPAP is that these agencies are attempting to correct the problems of the world by regulating the appraisers, when the problem is not with the appraisers, it is with the clients. It is much easier this way because the appraisers don’t have the clout to fight back. I am sure the government agency in question is perfectly happy with the forms as presented.
About 25 years ago, I was asked by the Farmers Home Administration if I was willing to do their local residential appraisal work. They said it was easy work, houses were all new, lot values were $5,000, and houses were $40 per square foot. All I had to do was fill out the form. At the time, around 1974, you couldn’t give a lot a way and the market for new houses was as dead as four o’clock. That didn’t bother Farmers Home Admn though. These people have a government mind set, if the government says lots are worth $5,000, then lots are worth $5,000. The government is their god from whence forth cometh their daily sustenance and rocking chair money. Just another example of the fact that you can’t cure this type problem by going after the appraiser because the appraiser ain’t the problem.
Had a really good buddy once that worked for a commercial bank I appraise for. He left and went to work for a mortgage company. Called me one day and said: “Austin, do you want to make some easy money. All I want you do is fill out the FNMA forms at the contract price. We sell these loans in packages and could not care less what the appraised prices are. You won’t be doing anything dishonest because we are your client and we know you are not deceiving us so how could this be out of line. Just fill the forms out.” Easy money.
 

Terrel L. Shields

Thread Starter
Elite Member
Gold Supporting Member
Joined
May 2, 2002
Professional Status
Certified General Appraiser
State
Arkansas
I am sure the government agency in question is perfectly happy with the forms as presented.

amen / my report was the one reviewed, barbequed, etc. Not a word about his.

I recall an FmHA subdivision in the early 70's where they repo EVERY single house (about 20) Seems there was no insulation requirement, all were all electric. The owners paid more per mo. for electricity that the house payment was. They all defaulted. FmHA couldn't figure it out so they hired an........architect. At least he did figure it out.[/quote]
 

Frank Bertrand

Junior Member
Joined
Aug 21, 2002
Professional Status
Certified General Appraiser
State
Pennsylvania
All it proves is that college degrees, membership in professiional socities, degree of honesty and sincerity still doesn't make one an appraiser.

And an import no less from out of state.

I don't do FmHA farms anymore for the same reasons. They push the numbers to get the loan to work, nothing based in reality. typical
government

so it goes...
 
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