RURAL APPRAISAL – AGENCY
david hornby
In this unit we can only touch upon the methods of appraising the value of a rural property. The most important factors of value are briefly covered.

Rural tenures
The nature of the tenure of the subject property is an important variable of market value or expected selling price. There are 3 broad classes of rural tenure:
Freehold

Most land in the states and territories come under the Torrens Title system. Torrens Title is created by an act of parliament that sets out the registration and ownership system. The act is the Real Property Act. Torrens title is the most valuable land whenever everything else is equal.

The agent may still come across freehold land under Old System title. This is freehold land where proof of ownership requires a search and proof of title back to what is known as “a good root of title”. Therefore, the conveyancing costs are higher than for Torrens title and takes longer. Therefore, Old System land is worth than Torrens Title land if everything else is equal.

The notion of tenure and land ownership is often described as a “bundle of rights”. The freehold owner has the largest bundle of rights than any other occupier such as a lessee. Freehold land is the most valuable of crown tenures particularly as there is a segment of the market that will only buy freehold land.

Crown leasehold100

Crown leaseholds are very common in rural areas. It is common to find large farms with a mixture of freehold, crown leaseholds and licences. Crown tenures are generally of three types: Leases in perpetuity are what the name states, a lease forever. It is not what a number of people think, a lease for 99 years. Because it is in perpetuity it is the corwn lease most like freehold and depending on the amount of rent being paid approximates freehold value.

Leases for years on the other hand are typically a crown lease for 21 or 42 years. These have much less value than a lease in perpetuity as rights to ownership and whether or not the Crown will roll the lease over is less certain. The value of leases for years depends largely on how many years are left in the lease, the amount of rent being paid and the conditions and terms of the lease.

Licences

Licences off the Crown have the least value, in fact no value. This is because they are granted for 1 year only and can be revoked at will by the Crown. They generally are rights to occupy crown roads (map roads) and watercourses. Therefore, the agent cannot include the area of a licence when advertising the area of the property.

The State Government has embarked on a program of increasing the rents of crown leaseholds but at the same time, streamlining and encouraging conversion to freehold. This means that Crown leasehold is less valuable and the agent should enquire of the seller whether or not he/she has started on conversion to freehold.

External factors of value

External factors are those factors affecting farm value that are outside the control of the owner. Location is a most important part of the value of a rural property. The closer to a country town or city, then the higher the value, if everything else is equal. This is because of: Other external factors include overseas markets for wool, sheep, cattle, and other farm produce. Government and council laws and regulations.

Internal factors

The agent must be careful when appraising a property on behalf of the owner because he/she is not a valuer and legally cannot carry out a market valuation. The agent is safer in advising the seller that his/her opinion is not a valuation but only “an estimate of the likely selling price”.

It is recommended that an agent use a range of values instead of a single figure. This will not only offer some protection against a wrong appraisal but also underlines to the seller that the market is volatile and that the expected selling price can easily change during the selling period.

Ratio of rural values

For an efficient rural property of say, 400ha, the ratio of the value of manmade improvements to total value is much less than for a house in the nearest twon. The homestead is only a small part of total value but that ratio increases as the size of the property decreases and is closer town. For example, the house on a hobby farm 10kms out of town is an important part of the total value.
For efficient farms 50-60kms from town and 400+ha, typical ratios of value to total value are as follows:
  1. land value: 60-70%
  2. clearing: 20-30%
  3. fencing, dams, silos, yards: 5-8%
  4. pasture improvement, residual value of fertilizer/liming: 10-20%
  5. homestead, woolshed, machinery shed: 10-20%
Land value

Land value is a function of soil type, topography and materials. Generally, basaltic soils such as red and black basalts are the most fertile while sandy soils such a granite and sedimentary based soils are less fertile.

Topography refers to the slopes of the land. Generally, level to undulating country is the most valuable as it is more easily worked while hilly to steep country is better suited to grazing. Mountainous and rocky country may be suitable as relief grazing only.
On of the best ways to determine the productivity of the soil is ask the seller what he/she has cropped over the last 4-5 years. If the yield is reasonably high, they kept fields fallow and/or recently limed, then is can be assumed that the soils are in good condition. Generally, if the owner is a grazier and has not been active in cash crops such as wheat and canola, the soil is probably in good condition. The agent will find that local knowledge is a reliable indicator of soil fertility.

Clearing

Most farms in established areas (eastern and central divisions) are overcleared and therefore it is usually safe to say that the subject farm is “fully cleared”. There should be at least “camps” of timber for shade and shelter and wind breaks at strategic locations.

Manmade improvements

The value rural manmade improvements is determined by whether or not they are functional rather than “good looking”. Fencing may not look good because it has been repaired over a number of years will still have substantial value if it effectively keeps stock in or out.

Another important rule is “value cannot exceed cost”. This rile is illustrated by technological change. For example, trenches used to dip sheep by submerging in the 1960s have no value today as they have been replaced my more efficient and cheaper methods such stripe paint. Similarly old shearing sheds are inefficiently designed compared to new sheds. Therefore, the value of old sheds should be heavily depreciated. The same applies to yards.

Pasture improvement, fertilizer applications etc

In good seasons the quality and extent of pasture improvement can be seen on inspection. However, in a dry season there may be good seed and residue fertilizer in the ground which is difficult to determine by visual inspection. In this case it is best to ask the seller for a history of pasture improvement, fertilizer and lime applications. Liming is an important soil improver in cropping districts, the recent addition of lime may add about $100/ha value to the farm.

Homestead, woolshed, machinery shed, etc

Other manmade improvements also depend on function and design for value rather than looks. The homestead should be comfortable, have power and telephone attached. An attractive homestead is not as important as it would be in an urban area.
The woolshed should be measured by the number of stands eg a 2 stand shed as this is the most useful information for a potential buyer. Old sheds will have a great deal of wasted space and are poorly designed by modern day standards. However, the wasted space may be used for storage and/or office.

The cost of building new sheds is becoming cheaper (in real terms) because of strong competition between shed supplies and better building technology so that the value of all sheds should be tempered by the low cost of building new ones.

Management

Local knowledge is usually sufficient for the stock and station agent to know how well a farm has been managed. With experience the agent will know a well managed farm compared to one that has been badly managed. Evidence of a badly managed farm includes signs of erosion, pests, weeds and poorly maintained improvements. A tidy and neat farm is evidence of good management. If the local community considers that a farm has been well managed then that is how the market will see it.

Use of sales to determine the expected selling price

The agent should supply the seller with a number of sales as comparable as possible to the seller's property. The more sales the agent has in the immediate area, the more reliable is the agent's appraisal. The agent should be aware that market value is determined by sales between a willing seller and willing buyer with all parties fully aware of those factors that affect value. Other sales should be rejected as being “out of line”.

Methods of valuation100

The agent will only need to know two of the most common methods of valuation: When comparing small properties direct comparison method is the best. If the subject property is very comparable to the sales properties then the agent can determine the expected selling price by simple comparison. If there is a significant difference in size and improvements of the subject property it is better to analyse the sales to a cleared hectare basis by deducting the value of the improvements. The cleared hectare value is then applied to the subject property and the subject's improvements are added on.
If this becomes too technical it is better to employ a valuer.

EXAMPLE OF A VALUATION USING DIRECT COMPARISON

Sales of similar hobby farms 5 kms further out show a value of $5000/ha cleared and with good quality boundary fencing only.

VALUATION OF SUBJECT PROPERTY

40HA @ $5500/ha = (value/ha increased because the subject hobby farm is closer to town) 220 000
Less for inferior fencing (10 000)
Add for good quality dam
5 000
(both variations are based on the agent’s experience of value, not cost)

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TOTAL $215 000


Recommended selling price to owner: $210 000 – 220 000

The cleared hectare method of valuation is the most used method for the valuation of rural lands and is generally, the most reliable method medium-large farms. A cleared hectare of land is land which is "fully" cleared only. Therefore, it excludes all physical improvements such as fencing, water Improvements, buildings and yards and "invisible" improvements such as pasture improvement. The cleared hectare method is a summation valuation as a number of components of value are required to be added to the Cleared Hectare value:

MV = CH + F + W + PI + B

Where:

MV = market value
CH = cleared hectare value
F = fencing
W = water improvements
PI = pasture improvement
B = buildings and yards

EXAMPLE OF VALUATION – CLEARED HECTARE

Land value: 500 ha * 650/ha =
325 000
PLUS:
Pasture improvement: 500 ha * 400/ha =
200 000
Fencing: 7 500 m * 10 = 75 000
Water: 5 dams * 2 000 average =
10 000
Yards: lump sum 5 000
Sheds: lump sum
10 000
Shearing Shed: 3 stands * 8 000 =
24 000
Homestead: lump sum
50 000

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TOTAL:
699 000

Recommended selling price to owner $690 000 - 710 000