We read almost every day of reports of prime farmland selling well into five figures, with the continual drumbeat of the “value” of the ground.  This goes for commercial real estate, residential real estate, and any other type and kind of real estate that is on the market’s radar at the moment.  Any asset class, for that matter, can be characterized in the same manner.  Anything and everything - - - Livestock (think racehorses, for one), equipment, even various types of personal property - - - gets characterized as having a certain value at different times.  The stock market comes to my mind; it gets a different valuation every day.

 

Wait a minute....

From my old real estate classroom ...... D.U.S.T. 

• Demand — the more popular something is, the more people who are interested in buying.

• Utility — the more useful the property, the higher the value.

• Scarcity — aka Supply – the less of something there is, the higher the demand.  The more of something there is, the lower the demand.

• Transferability — Title – the property can be transferred without restrictions and/or encumbrances unacceptable to a purchaser.  

 

Perhaps a different order will provide another perspective ...... S.T.U.D.

• Scarcity — aka Supply – the less of something there is, the higher the demand.  The more of something there is, the lower the demand.

• Transferability — Title – the property can be transferred without restrictions and/or encumbrances unacceptable to a purchaser.  

• Utility — the more useful the property, the higher the value.

• Demand — the more popular something is, the more people who are interested in buying.

 

Something has to be available at some amount of supply, it must be transferrable in an acceptable manner, and it must have utility to a purchaser.  At that point, demand can be determined and quantified.

 

Of course, nothing is cut and dried when bandying about definitions.  Everyone will have differing opinions and motives.  That’s why it’s a negotiating (horse-trading) process.  Lenders, insurers, investors, and taxing authorities will have differing objectives in a transaction, thus differing opinions, motives and appraisal methodologies.

 

Focusing just on land for the purpose of this article, one would consider location, condition, productivity, access, encumbrances and restrictions (zoning, easements, rights-of-way, neighborhood influences), taxation and any number of other factors that may affect a specific parcel.

 

VALUE:  Traditional valuation methods used to arrive at a Final Opinion of Value (sales comparison, income, and cost) may result in significant differences.  I contend that the income approach to farmland valuations is the only true determinant of VALUE.  No matter the revenues or the expenses (present or anticipated future), the number that means anything to start the calculation is the NET INCOME.  With an appropriately selected capitalization rate, a valid VALUE can be calculated.  Return on Investment has to be met.

 

WORTH:  To me, this term is just an intermediate exercise between negotiating parties.  It may blend into one’s thought process interchangeably with PRICE.  To a buyer, WORTH is “what’s it worth to me to get this asset....How bad do I want it.  Conversely, to a seller, “What’s it worth to me to either hold on to it, or to let go of it.”

 

PRICE:  At the conclusion of the deal, is a buyer buying into a frenzy?  Of course, a seller will take a buyer’s frenzied offer.  Or will he?  Am I selling too low?  If this person is willing to pay this price, surely it’s “Worth” more than that.  

I think of another saying, “Two fools met – One for offering an outrageous price, the other for not taking it.”  Who’s left holding the bag?

 

Other terms that come to mind.......Tulips, Herd Mentality, Greed, Fear, Confirmation Bias

 

VIRTUES:  Keys to Success – Patience, Due Diligence, Foresight, Humility, Temperance

 

“Price is what you pay, Value is what you get..."

 

This article is the personal opinion and perspective of the author and may or may not be consistent with those of other ASAC Members.  ASAC as an organization does not advocate positions on issues.

 

Pete Weisenberger

Weisenberger Agricultural Services, LLC