Income Approach

Data Source www.extension.iastate.edu/agdm/ DO NOT FORGET: Ag Decision Maker www.extension.iastate.edu/agdm/

Income Approach This is the approach where we compare the subject property value to the income produced by similar properties in the neighborhood. If we are looking at a value for ourselves then this would be the approach that looked at the value of the income for us; we still need other sales but it is a slightly different way to look at the problem

Appraisal Principles Behind Income Approach Anticipation – Expectation of benefits -PV of future benefits to be derived from owning the property Supply and Demand You need to think about S&D when forecasting future benefits and rates of return What are prices, yields, and costs going to do?

Appraisal Principles Behind Income Approach Substitution Types of rent, prices, returns and other factors tend to be set by the conditions in the neighborhood Relatively easy substitutions between properties Balance When there is so sort of equilibrium between the number of farms for rent and people willing to rent them Buyers? auctions

Data Income estimates Cash lease Crop share Owner/operator What’s customary in the area? Needed for comparables

Data Income estimates Cash lease Crop share Owner/operator What’s customary in the area? Needed for comparables

Data; income Cash rent; Amount Conditions for example; when is it paid, how many payments, fixed or variable 32% of cash rent acres have a single payment with 49% before planting and 41% after harvest 58% are two payment with 74% having first payment due before planting and 69% having second payment due after harvest

Data; income Crop share; Participation Yields, prices, costs,…. for the area Who pays what? How are the costs and returns divided?

Data; income Owner/operator Crops Application rates and practices Yields Prices

Data; Expenses Taxes Insurance Maintenance Management Utilities Crop

Data Sources; Capitalization Rate Similar sales Consistency estimating rate and application

Data Sources Ag Decision Maker Extension Farmers in the area Dealers Lenders NASS and other state and Federal govt. Owner

Income estimate Cash rent Crop share rent Owner-operator; Owner operator is the hardest but it is probably the one that you will be the most familiar with using

Procedure This uses the direct capitalization procedure Step 1: Converting a single year income into a value Step 1: Determine how the property is being operated considering what’s typical for the area If you are going to change; ie, from it being cash to owner/operated then that has to be determined

Procedure Step 2; Verify all the information; be sure that what you know is so Step 3; Get all the expense data necessary for the type of operation or expected operation

Procedure Step 4; Step 5; Obtain and verify comparable sales Construct an operating statement for each one Estimate the capitalization rate for each one Capitalization rate = net operating income/sales price Pg 265 Step 5; Estimate the appropriate capitalization rate and determine the subject property value using the income approach