2.  Income approach  Value is determined by estimating the income for the property  Sales approach  Value is determined by comparing the subject property to comparable sales and determining value  Cost approach  Value is determined by estimating the cost for reconstructing the property

3.  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

4.  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?

5.  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

6.  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  What’s customary in the area? Needed for comparables

15.  This uses the direct capitalization procedure  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

16.  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

17.  Step 4;  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  Step 5;  Estimate the appropriate capitalization rate and determine the subject property value using the income approach

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

19.  Remember to base these estimates on the potential and not the current operator  Costs per bushel varied by over $1.50 and $4 in 2008 for farms in the Iowa Farm Business Association

20.  Owner/operator  Crops  Application rates and practices  Yields  Prices

21.  Taxes  Insurance  Maintenance  Management  Utilities  Crop

22.  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

23.  Crop share;  Crops  Participation  Yields, prices, costs,…. for the area  Who pays what? How are the costs and returns divided?

24.  Remember the rent on buildings or the farmstead. Are they worth anything or are they a detraction?  Income estimate will vary depending on the method used. In general the cash rent should provide the lowest net operating income, followed by the crop share, followed by owner/operator. Why?

25.  Income approach says:  Value = Net operating income/Capitalization Rate  The capitalization rate is  Capitalization rate = Net operating income/Sales price  NOI = Sales* Capitalization Rate  Comparable sales provide estimates of the current capitalization rate

36.  Why would capitalization rates vary?  Would you expect them to be the same?

37.  Income approach is one approach to estimating value in appraising land.  With this approach we assume that income from different properties in the neighborhood will be similar.  Estimating income as cash rent, crop share, or owner/operator  Comparisons must generate income in the same way

38.  Capitalization rate estimate is a key to this approach