Licensed Appraisers And Farms

[Pam Wyant]

I have to agree with Terrell here - excess acreage does not make a farm. Our area is loaded with small "family" or "hobby" farms and there are usually plenty of comparable sales. If we considered every piece of property a farm that had a few cattle, a couple of horses, or a few chickens on it a "commercial" farm, there would be very few non-commercial properties in our area. This would be the same as considering the home of the "party plan" dealer, the artist making a few crafts to sell at the local craft show, or the appraiser running a business out of their home (quite a few of those aren't there) as a commercial property.

Yes, many of them make a small profit (although a good many show a tax loss), but is it enough to truly support them without an outside job? If not, I consider it residential with a personal recreational use. If they make a little money selling a few cows, that's no different than someone making a little money breeding a couple of dogs a year, and we don't consider that commercial use do we?

I do have a relatively standard blurb I use for such properties to analyze the highest and best use: "THE HISTORICAL AND CONTINUED HIGHEST AND BEST USE FOR THE SUBJECT PROPERTY IS
RESIDENTIAL AND HOBBY OR "RECREATIONAL" FARM, BASED UPON ANALYSIS OF THE PHYSICAL
FEATURES OF THE SUBJECT SITE, LEGALLY PERMITTED USE, AND ECONOMIC TRENDS IN THE
AREA. ALTHOUGH THERE ARE OLDER BARNS, SHEDS, OR OTHER FARM BUILDINGS, AND FENCED
PASTURES, THE PROPERTY WOULD NOT APPEAR TO SUPPORT "COMMERCIAL" TYPE FARMING DUE
TO LOCATION, TERRAIN, AND PROFITABILITY FACTORS."

The ultimate test - will the buyer looking for a piece of property just to enjoy for hunting, fishing, keeping a couple of stable horses (not for breeding purposes), or just plain privacy, be willing to pay the same price? Are the buildings suitable for that use? Non commercial in that case. A commercial operation would likely have numerous feed buildings, calving buildings, or other buildings built for a specific purpose that would not easily convert to multi-purpose use.

The lenders in the area are in agreement with me that such "hobby" use does not constitute a commercial farm. It could, however, depending on price range and comparable sales at the time, be considered complex, and would therefore require at least a certified residential appraiser to sign the report.

 

[Chris Colston]

I find it fascinating the number of "complex" answers for a simple 1 sentance question that used the word "FARM".

Mr. Ness never has defined the problem, we keep trying to define it for him. I don't believe any of us can adequately answer the original question until we know what Mr. Ness means by the word "FARM".

 

[Austin]

One of the founding fathers of the science of appraising stated that it was totally idiotic to assume that an appraiser could perform a highest and best use analysis within any assignment he could envision due to the complexity of the procedure. To make the determination that Terrell and Pam just made presupposes a highest and best use conclusion, which in and of itself is a complex assignment within the overall appraisal assignment. They keep saying that acreage does not define a farm, which may be true, but that conclusion is the result of a fairly complex highest and best use conclusion that must be applied to each assignment. The question was: is the complexity of this analysis within the area of expertise of an entry-level appraiser’s scope of knowledge? Sure hobby farms exists but is the H & BU one hobby one farm, two hobby farms, ten acreage tracts or what?

 

[Paul Ness MAI]

My original question had to do with discovering an enforceable definition of complex resi -vs- non-complex resi -vs- commercial (and which category a farm fits into), as these are the descriptive terms used in defining what types of appraisals a licensed appraiser can perform. My home state has no licensed appraisers, only certified, and I am not familiar with their limitations. I typically use a general cert appraiser who does farms exclusively. But my questions stems from an issue in an adjacent state where there are licensed appraisers. I placed a call to the Appraisal Foundation on Friday, but someone else here mentioned that they made a similar request and never got an answer. Perhaps if there is no definitive answer, it just goes back to competency. By the way, the property is 110 acres with a house, barn, modular home and tillable acreage.

 

[George Hatch]

Paul,

"Enforcement" is an interesting word that in this case will mean different things to the different participants in this saga. For instance, to a federally regulated institution or its employees, the definition of "complex appraisal" is an enforceable standard and the feds are the enforcing entity. However, to an individual fee appraiser the enforceable word probably will not be "complex', but rather "competency"; and the enforcing entity will be the state board. With respect to your institution's requirements, the federal definitions will apply and the state's definitions and policies will be, at best, a secondary consideration. With respect to the appraiser, their state's policies and regulations and the effective level of enforcement will be the primary consideration, while what happens to their client is of secondary concern.

So if you want to know how this assignment relates to your employer and by extension to you, the feds have made it clear that a regulated institution is required to ensure their appraisals are performed by qualified appraisers, which includes not only the appropriate level of licensure but also competency. If you want to know how this assignment relates to the appraiser's licensure, their state board has the final say on that. I'd ask them before I'd ask The Appraisal Foundation.

But you already know all that.

I would venture to say that there is no part of the nation wherein the property you just described would not fall under a reasonable interpretation of "Complex". As Terrel stated, the feds hold lenders responsible for making that type of determination, while appraisers are held to the standard of competency. Nevertheless, an appraiser who accepts assignments they know might cause a problem for their clients with their regulatory agencies because of their licensure or competency is being either very stupid or very arrogant. I don't know which is worse, but I suspect it's the latter. IMO, it's not enough to simply interpret an appraisal engagement as the only criterion that determines whether the appraiser is qualified to perform the appraisal. A little common sense is necessary, too.

At any rate, the burden of proof on competency rests with the appraiser. So in your case, I'd say its very fair to question their competency and make them demonstrate it, both in the appraisal and appraisal report, and also by disclosing what their qualifications are. Is your appraiser a farm specialist? Do they have any niche-specific training or experience? Or is this simply a case of an underqualified appraiser taking on a fee because it came their way?

Making a mistake in an appraisal is one thing, and we're all guilty of that from time to time. Jumping in too far over your head goes beyond the pale, and there's no excuse for it. It's like Clint says: "A man has got to know his limitations."

 

[Paul Ness MAI]

Thanks George. A lot of wisdom in your last post.

 

[Oregon Doug]

Paul - The regulations on this vary from state to state (you wonder why uniform enforcement is difficult). In my state we have 3 categories: Licensed, Certified Residential and Certified General Appraisers.

There is nothing that prevents the Licensed Appraiser from performing non residential appraisal other than Competancy, the complex - non complex debate and the "transaction" value. There is no statutory limitation that I'm aware of.

If you do come up with an enforcable deffinition of "complex" and a clearer deffinition of "transaction" amount, it would go a long way towards clearing up this somewhat hazy issue.

Thanx, Oregon Doug

 

[Frank Bertrand]

Paul, as a cert general here in pa, the first question I ask, "do you file a schedule F?" Yes: its a farm. let the IRS solve the problem.

the horsey set usually just play and don't file sch F's.

As a former farmer for 20+ years, i can probably define a farm with some certainity, but not totally.

 

[Pam Wyant]

I agree with George that competency is required. Being a "farm specialist" isn't necessarily required, as long as you have adequate experience in the area. In our rural areas, we appraise numerous types of properties. There are only 5 appraisers in my county, only 1 in two of the other counties I regularly appraise property in, and none in one adjacent county. Doesn't give us a lot of opportunity to specialize in any particular area, but I do "hobby" farms on a regular basis, receiving training on these properties during my apprenticeship under a certified residential appraiser.

As far as the highest and best use analysis being "complex" as Austin suggests, that would depend on location of the property. There are 4 considerations of highest and best use. First, legally permitted (yes - no zoning outside of corporation limits in any of the counties I regularly appraise in) - that doesn't take a complex analysis. Second, reasonably probable and appropriately supported. A little more difficult, but in 4 of 5 counties, the local economy is barely holding its own with very limited employment and very minimal growth in housing, which is usually the parents giving the kids an acre or two for a manufactured double or single wide. Kind of a no-brainer there too - if there aren't consumers waiting to buy parcels of land, it isn't likely a developer will be buying the property up and subdividing it. The expertise and time (or cost to hire a professional) needed to develop a property including analyzing how best to divide the property, lay out roads, provide access to activities, and pay for all the equipment or professionals needed to do so is beyond what most individual (non-developer) owners would be willing to do. Developers aren't waiting in line to snap up acreage to convert to subdivisions. Again, it is therefore not probable the highest and best use is a subdivision. The highest and best use analysis can usually end right there, remaining as the current use of single family residential and "hobby" farm or personal recreation. Doesn't seem complex to me. In my own county there is some moderate growth. Perhaps here this second step would require a subdivision analysis method, so it would be complex. However, let's go on. Next step - financially feasible. Again, complex, suited to a subdivision development method. Fourth step - maximally productive (results in highest value). Aha! Is a developer willing to pay more for the property than someone who wants a large privacy tract. No evidence of that in this market area. In fact the individual with $$$ will often outbid the developer wanting to make a profit. Probably mainly because the growth in the area is limited - no large influx of new businesses, a mainly stable population base with the original owners often living in the same home for decades, no great demand for housing. Most of the local "developers" have additional businesses, because developing property in the area won't provide a living wage. So even the county with the best chance of the highest and best use being a subdivision fails the fourth requirement for subdividing being the highest and best use in a manner that doesn't require a complex analysis.

Of course, this doesn't hold for all areas of the country. We are back to the old "depends" answer again, aren't we?

 

[Austin]

Pam just stated that farm appraising is not complex in areas where farm or hobby farms are not complex because of a lack of market demand or feasibility, but some one has to make the decision of what is legal (can the zoning laws be changed and how have they been applied and interpreted in the past?), know what is physically possible (what does the subdivision ordinance allow or will the land support sewerage systems and what is the historical trend for the area like the master development plan), is it financially feasible (requires a detailed knowledge of general property values and market conditions, and maximally productive (requires a detailed knowledge of a wide range of property values in the market area). We do H & BU analyses so much in our head that we forget what a complex process it is and we completely forget the huge volume of basic knowledge of the market that is necessary to do an H & BU analysis.
George seems to be saying that the regulated institution should decide if the assignment is complex. George must have a very sophisticated clientele because the LO's from around these parts don't know H & BU from Boston Beans. H & BU analysis is a very complex enterprise and that is what separates the appraisers from the form filler outers.