A Step-by-Step Guide to Large Rural Land Appraisals

By Jennifer Hunt (Content Writer) and Gary Bratton (Managing Director, Appraisal Services)

When a home is appraised, the property’s market value is determined through a professional assessment by an appraiser. This individual looks at factors like the home’s exterior and interior, size, location, and more, and compares them to the sale of recent properties with similar factors to develop a value. While the process of appraising rural properties is comparable to some extent, a rural property often has other factors that require additional valuation techniques, and the person performing the appraisal should have a unique set of qualifications that prepare them to appraise more complex property types. Let’s take a closer look at how rural land is appraised, step by step.

Before we explore the appraisal process of rural properties, it’s important to reiterate that landowners should engage with an appraiser who is qualified for the assignment. The IRS defines a qualified appraiser as someone who is:

• Licensed or certified in the state in which the property is located
• Regularly preparing appraisals for which they are paid
• Demonstrating verifiable education and experience in valuing the type of property being appraised
• Not prohibited from appraising by the IRS
• Not interested in the property or transaction

These are good guidelines to follow when engaging an appraiser for any assignment. Most rural properties will require that the appraiser be “Certified,” meaning that they have experience and education in complex property valuation. Appraisers with a designation from the Appraisal Institute, the American Society of Farm Managers and Rural Appraisers, or other bodies have completed additional education and experience that prepare them to appraise even more complex property types. Once you’ve selected a qualified appraiser, it’s time to get to work!

Step 1: Determine the Type of Value

Value is value, right? Not exactly. There are several types of value (market value, investment value, use value, etc.) that are reflective of reasons to own the property. For instance, appraisals for lending, sales, charitable gifts, or estate purposes involve an opinion of market value, which is the price at which the property would change hands between an informed and willing buyer and seller who are under no requirement to act.

Another important consideration is the date of value (or effective date), and for most appraisals, it’s a date on or near the transaction. For estate purposes, it is generally near the date of death. Occasionally, a tax advisor may need to weigh in on the date of value and the timing of the appraisal report.

Once the type of value is established, the next step is to understand the property’s physical characteristics.

Step 2: Collect Property Characteristics

Rural properties are broken down into components that form the basis of the analysis. There are several common components that your appraiser will look for, including:

• Land Types: How much acreage is in cropland, pastureland, productive woodland, and swampland? The appraiser may use aerial imagery, Geographical Information System (GIS) data, or other sources to estimate the acreage in each class.
• Timber: What are the merchantable timber volumes? This is timber that may be harvested immediately for use in a wood processing facility, such as a paper mill or a sawmill. A professional forester may determine the timber volume, which is commonly measured in cords, board feet, or tons. Also, is there young timber with potential value present? Although the timber does not have a current harvest value, it may be assigned a value premium based on age, site productivity (for growing trees), and prevailing timber prices.
• Improvements: Are there human-made structures that contribute to the value? The appraiser will consider the physical dimension, quality, condition, and functionality of each structure as part of the valuation process.
• Mineral Reserves: Are there proven reserves that affect the highest and best use? These may require valuation by a specialist in the field.
• Encumbrances: Are there easements or long-term agreements that affect the use of the property? This may include deeded access, conservation easements, land leases, or other legal agreements.

After evaluating these components, the appraiser will collect information on regional market characteristics, like economic trends, land use trends, and land sales transactions.

Step 3: Perform a Highest and Best Use Analysis

In order to determine the highest and best use of a property, an appraiser will conduct a series of tests to ascertain the potential or probable uses of a property. Here’s what they look for: legal uses, physically possible uses, and financially feasible uses. The potential use that passes muster on all three tests and is most productive is determined to be the highest and best use. Not only does this analysis help determine how the property should be used, but it also drives the selection of comparable sales. Since the highest and best use is driven by market participants and their view of a property, the current use may not be its highest and best use. For instance, a property on the edge of town operating as a farm may have a highest and best use as a commercial site instead, depending on what the surrounding area and market conditions dictate.

Another important note about the highest and best use analysis: the test is performed as if the property is vacant (no improvements) and again including improvements. If the improvements contribute positively to the overall value of the property and result in its highest value, it should remain under its current use.

Step 4: Determine the Best Approach to Value:

There are three common approaches to value that an appraiser might use in the appraisal process: the Cost Approach, the Sales Comparison Approach, and the Income Approach. Here are the details for each.

• Cost Approach: An analysis of the individual components common to a property type that contribute to the value under its highest and best use. It is typically applied as a value indicator of improvements, where building materials, labor, and desired profit may be directly related to a sale price and value. In a rural property appraisal, applying stumpage prices to merchantable timber volumes is a Cost Approach technique.
• Sales Comparison Approach: An analysis and comparison of property sales with similar physical, locational, and highest and best use characteristics to the subject property. Property sale prices are “adjusted” for these characteristics to derive a likely value for the subject property based on its characteristics. This is the same process as using “comps” in the housing market.
• Income Approach: An analysis of potential future cash flows that are possible when the property is correctly classified under its highest and best use. In this approach, the appraiser applies a market-derived discount rate to derive an estimate of value. On a rural property, it could involve cash flows derived from timber harvests, farm leases, mineral royalties, or other sources of income. It also includes expenses such as property taxes and property management costs.

How does an appraiser know which approach to value to use? Some approaches are more relevant than others in different situations, so it depends on the property characteristics. A Sales Comparison Approach is almost always applied, as transactions of similar properties are a good indicator of how the market values such properties. A true Cost Approach is difficult to apply in a theoretical sense. However, component values (the property characteristics in Step 2) are almost always developed and used as a basis for adjustments in the Sales Comparison Approach. Lastly, the Income Approach is most frequently used in larger properties that are income-intensive, such as large tree farms.

What’s Next?

Rural property appraisal isn’t a one-size-fits-all process, but a specialized practice that requires a deep understanding of land use, natural resources, and market forces. The appraisal team at AFM brings over 120 years of combined experience to the table, ensuring our clients receive accurate, expert evaluations. Our Managing Director, Gary Bratton, is a Certified General Appraiser in several Southeastern states and holds the Accredited Rural Appraiser (ARA) designation from the American Society of Farm Managers and Rural Appraisers. Whether you're planning a sale, considering a land investment, or managing an estate, our team is here to help you understand your land’s value with confidence.