Farm - Land Appraisal Summation or

[Terrel L. Shields]

I know there are two ways appraisers may look at property in rural setting.

Using 40 acres with a house and two soils or two land types (woods vs pasture say) one method is to simply say the 40 acres is valued as if vacant (say $5000 an acre) then add the improvements and an allowance for the "as is" site improvements in use - septic, wells, driveway and landscaping. The mix of woods/pasture or soil type will impact the value per acre.

So you get something like
land as if vacant - $5,000 x 40 = 200,000
Improvements - $100,000 = 100,000
Site improvements = 15,000
TOTAL $315,000

The other method would be like our assessors here do. We used to call it the old "land summation" method. The USDA seems to prefer this- and then again the call land summation of vacant parcels the "cost approach." ?? The improvements are completely separate and the land is divided into 1 acre for the House Lot (regardless the size be it half acre or 3 acres) and the balance as land according to soil type when treated as value per agri classification (soil type, land class etc.)

Or, say,
Land 39 acres x 5,000 = $195,000
House Lot = 20,000
Improvements = 100,000
TOTAL $315,000

I prefer the former. The house lot to me is rather artificial. In our area it is hard to sell a lot of only 1 acre and get county approval especially if your septic lines are 200' long- it simply encroaches off the one acre usually.

 

[Mark K]

As far as overall value, it depends on the value of the land vs. the value of the improvements. An old farmhouse on 40 ac. is little more than contributory value to the land. OTOH, a McMansion on 40 ac. is a different story and may result in the excess land being a contributory value item.

As far as your two methods, our Assessors use your second approach. One acre home site, $40,000; balance of 39 acres is assessed at the ag welfare rate of $1,280/acre (for land that sells for $8-$10K/acre) so their assessed value on large tracts has zero credibility. As an appraiser, I can use their method and calculate using numbers based in reality and come closer to MV, however the most reliable approach is to use your first example.

 

[Alamo Cowboy]

Over the years appraising equestrian properties that had sfrs & other improvements I always went with your 1st example. This approach was easier for lenders to understand in my area. An explanation of the AG exemption/taxes can be noted in the narrative section of report.

 

[Terrel L. Shields]

so their assessed value on large tracts has zero credibility.

Our constitution requires the state to value ag land based upon income (rents) not market. Therefore, if pasture rents for $40 an acre (about the going rate here) then the land assessment value is $400. If you valued a typical farm for "market" then at least 50% of farms would pay more in taxes than they have in income. My taxes would be $10,000 and I grossed less than that last year and haven't netted $10k except one year in the last 10.

An explanation of the AG exemption/taxes can be noted

It's not a factor in the appraisal, but the method I see USDA and assessors prefer is creating an artificial one acre house lot.

 

[Mark K]

Our constitution requires the state to value ag land based upon income (rents) not market. Therefore, if pasture rents for $40 an acre (about the going rate here) then the land assessment value is $400. If you valued a typical farm for "market" then at least 50% of farms would pay more in taxes than they have in income. My taxes would be $10,000 and I grossed less than that last year and haven't netted $10k except one year in the last 10.

It appears that you're not using your land to its HBU unless your land is actually worth $400/acre.

If its worth more than that, why should your neighbors continue to subsidize your bad business model/decisions?

If these subsidies and ag welfare programs weren't so rampant, maybe the price of ag land would drop to a realistic level. A 40 ac. tract just sold last week for $14K/acre. $560K. Total taxes were just under $1,000/year. The taxes on a $560K tract of industrial or commercial land are just over $15,000/year.

Yeah, that seems fair. One business gets to pay 15X the taxes of another business for the same land value.

 

[Terrel L. Shields]

It appears that you're not using your land to its HBU unless your land is actually worth $400/acre.

A- that is ignorant statement

why should your neighbors continue to subsidize your bad business model

B- Ditto. So far as I know, my land has never needed a fire truck, a school, a cop doesn't come check on its welfare. It doesn't use the road system, and it gives the county free space to build roads to the houses around. Show me a single deed or easement to my property giving the state the right to create that road. No. It is not on a statutory line road. My improvements need that protection and they pay their fair share of taxes. The land, doesn't need those things and pays their fair share of taxes accordingly.

Few farms could afford to exist if taxed out of existence. So all that green space and all the woodlots would have to sell to large corporations for a song, reducing the tax, and eventually these corporations would drive down the value of same to where the taxes were cheap...again. Further, since we couldn't compete internationally with all the countries in the world who also tax land at sensible rates, you'd be paying $15 for a loaf of bread and $10 for a glass of milk. Pretending that these taxes do not force the price of food to go up is nonsense.

One business gets to pay 15X the taxes of another business for the same land value.

That is because that business is almost certainly going to be making 15x what the land does as agriculture. And probably doesn't create very many value-added jobs. Further, that farm land creates both jobs on the farm and jobs off the farm. Where I live is poultry country and there are undoubtedly 20 jobs or more for every person employed on a chicken farm. The chicken farmer pays dearly in taxes for the buildings, but environmental/biosecurity rules force most farms to have a minimum of 40 acres as a buffer. Building intensive agriculture (dairy, poultry, hog, feedlots, etc.) are a huge part of the economy. Low tax rates means a person can own some land. Farmers don't compete with other farmers for land so much as they compete with the non-farmers who buy into the country lifestyle, hunters who seek a place to pursue game, and environmentalist who are trying to preserve land for conservation purposes. Imagine a woodlot worth $3k/acre to a hunter having to pay in my state 3,000 x .20 x 0.055 x 40 = $33 per year per acre just to hunt. You can't afford it unless you are wealthy. What you imagine is the mass transfer of real estate into the wealth class in America to only have them buy enough politicians to roll back the taxes anyway.

So in Colorado for instance, the assessment ratio for a house is 7.2% of its value. Commercial property is valued at 29% of its value - same as the land. Mineral rights? It's assessed at 87.5% of its value. And it's value is based upon production, not its value in exchange. And it is not only subject to the ad valorem but pays a conservation tax and a severance tax....what besides timber, minerals and oil pays a severance tax? (usually 4-9% depending upon state.) What did they ever do to earn that? In fact, if valued only at the commercial rate, mineral rights would reduce the tax take in Colorado by 2/3rds. There are roughly 600,000 mineral owners in Colorado and they paid half a billion in taxes in 2019 in Colorado. That's not including the taxes the oil companies pay for pipelines, refineries, pump jacks, the severance and ad valorem taxes the company pays.

You don't understand the unintended consequences of over-taxing something.

 

[Mark K]

You don't understand the unintended consequences of over-taxing something.

I understand that massive subsidies to any industry removes the incentive for it to be accountable for bad business decisions, overproduction, and in the ag business, overpaying for land.

I'm simply of the opinion that the ag industry should be treated like most other businesses. Farmers have this idea that they're 'special' and deserve special treatment, and unfortunately, they've convinced a lot of politicians of this entitled mentality. Corporate welfare at its worst.

 

[Terrel L. Shields]

I understand that massive subsidies to any industry removes the incentive for it to be accountable for bad business decisions, overproduction, and in the ag business, overpaying for land.

I'm simply of the opinion that the ag industry should be treated like most other businesses. Farmers have this idea that they're 'special' and deserve special treatment, and unfortunately, they've convinced a lot of politicians of this entitled mentality. Corporate welfare at its worst.

I couldn't agree less with everything you wrote. There was not one single subsidy paid to me when we grew soybeans, green beans, and wheat here. My renter got nothing but crop insurance that he paid for. How different is that from an FHA backed loan? That's all it is. The insurer is backed by the FmHA if they lose any money. Do you propose ending the GSEs and FHA. How about the VA? Name one industry not benefiting for tax policy. Today they are howling about oil and gas "subsidies". Depletion allowance is supposed to be a subsidy. What a crock. Your building has depreciation. Your tractor has depreciation. Your business equipment has depreciation. So why a wasting asset like oil and gas isn't supposed to be depreciated??? And 20% depletion allowance doesn't mean you recoup the allowance in 5 years. It is compounded DOWN. It only means you get taxed on 80%...zero other deductions for the mineral owner. The average life of the oil wells in the SCOOPS or in the Permian Basin is a mere 3-5 years for the oil with natural gas dribbling around perhaps another 10 years...at gas prices that were considered "low" in 1980. Natural gas is as close to being free as any product can be.

I have got not one red cent from the USDA to restore my land to pasture. In fact, they charged me $15/acre to rent the county no-till drill to plant grass. I don't know anyone who has got more than some pittance during a drought over the 50+ years I've farmed. And again, the farmer isn't competing with farmers for land. They are mostly competing with non-farmers moving to the country with the notion that they can live a country lifestyle and ultimately sell their investment for even more. Look at the Rockies. It used to be cattlemen and sheep herders or miners and timberjacks. You are hard pressed to find a real working ranch. Just a few tourist ranches and the rest of the mountains are chopped up into second homes and private show ranches. Several years ago I read in the paper while I was out there of some joker who built a new house in a valley next to an alfalfa field. It is dry there so you cut in the day and bale it that night after the temperature drops and humidity increases enough to keep from knocking the leaf off the alfalfa plant. So this guy calls the cops because they were baling hay after 10pm. He was told so? He then went to the county commissioners and they laughed him out the door. I bet by now or soon, the county will have a noise ordinance preventing farming after dark.

 

[Mark K]

I couldn't agree less with everything you wrote. There was not one single subsidy paid to me when we grew soybeans, green beans, and wheat here. My renter got nothing but crop insurance that he paid for. How different is that from an FHA backed loan? That's all it is. The insurer is backed by the FmHA if they lose any money. Do you propose ending the GSEs and FHA. How about the VA? Name one industry not benefiting for tax policy. Today they are howling about oil and gas "subsidies". Depletion allowance is supposed to be a subsidy. What a crock. Your building has depreciation. Your tractor has depreciation. Your business equipment has depreciation. So why a wasting asset like oil and gas isn't supposed to be depreciated??? And 20% depletion allowance doesn't mean you recoup the allowance in 5 years. It is compounded DOWN. It only means you get taxed on 80%...zero other deductions for the mineral owner. The average life of the oil wells in the SCOOPS or in the Permian Basin is a mere 3-5 years for the oil with natural gas dribbling around perhaps another 10 years...at gas prices that were considered "low" in 1980. Natural gas is as close to being free as any product can be.

I have got not one red cent from the USDA to restore my land to pasture. In fact, they charged me $15/acre to rent the county no-till drill to plant grass. I don't know anyone who has got more than some pittance during a drought over the 50+ years I've farmed. And again, the farmer isn't competing with farmers for land. They are mostly competing with non-farmers moving to the country with the notion that they can live a country lifestyle and ultimately sell their investment for even more. Look at the Rockies. It used to be cattlemen and sheep herders or miners and timberjacks. You are hard pressed to find a real working ranch. Just a few tourist ranches and the rest of the mountains are chopped up into second homes and private show ranches. Several years ago I read in the paper while I was out there of some joker who built a new house in a valley next to an alfalfa field. It is dry there so you cut in the day and bale it that night after the temperature drops and humidity increases enough to keep from knocking the leaf off the alfalfa plant. So this guy calls the cops because they were baling hay after 10pm. He was told so? He then went to the county commissioners and they laughed him out the door. I bet by now or soon, the county will have a noise ordinance preventing farming after dark.

I would expect nothing less! LOL!

 

[IlliniApp]

I know there are two ways appraisers may look at property in rural setting.

Using 40 acres with a house and two soils or two land types (woods vs pasture say) one method is to simply say the 40 acres is valued as if vacant (say $5000 an acre) then add the improvements and an allowance for the "as is" site improvements in use - septic, wells, driveway and landscaping. The mix of woods/pasture or soil type will impact the value per acre.

So you get something like
land as if vacant - $5,000 x 40 = 200,000
Improvements - $100,000 = 100,000
Site improvements = 15,000
TOTAL $315,000

The other method would be like our assessors here do. We used to call it the old "land summation" method. The USDA seems to prefer this- and then again the call land summation of vacant parcels the "cost approach." ?? The improvements are completely separate and the land is divided into 1 acre for the House Lot (regardless the size be it half acre or 3 acres) and the balance as land according to soil type when treated as value per agri classification (soil type, land class etc.)

Or, say,
Land 39 acres x 5,000 = $195,000
House Lot = 20,000
Improvements = 100,000
TOTAL $315,000

I prefer the former. The house lot to me is rather artificial. In our area it is hard to sell a lot of only 1 acre and get county approval especially if your septic lines are 200' long- it simply encroaches off the one acre usually.

In NW Illinois building improvements add little value to farmland that is sold. That's why it is rare to see farmland w/improvements selling, usually the house and outbuildings are sold off separately. I've seen a decent house and outbuildings sell at zero contributory value at auction when combined with a larger acreage. The only farm buildings that have value are grain bins, large machine sheds, and confinement buildings in good shape.