10 Factors That Affect a Farm’s Value
March 1, 2019
For a farmer or landowner, making sense of the vast amount of information out there on land values can be overwhelming. Perspectives and opinions are everywhere, and it can be difficult to decide what pertains to how much your property’s worth and what doesn’t. Real estate professionals such as appraisers and brokers are highly skilled at interpreting land markets and applying that general knowledge to a specific property, and if you are making an important decision regarding a property (e.g., buying, selling, gifting) it’s important to hire an expert to do the appraisal or valuation work. But what if you’re just curious? What if you simply want to “stay educated” on what makes land valuable or what might detract from its value? What can we learn from folks who are valuing farmland all the time? Here are 10 factors that land professionals often consider when determining the price per acre of a property.
Different crops thrive in certain types of soils. For example, the soil characteristics required for growing corn and soybeans in Iowa are different than those best suited to growing wine grapes in California — row crops require soils high in organic matter and fertility, while wine grapes can tolerate poor, even alkaline soils. Potatoes prefer naturally loose soils with good aeration and drainage. For buildings, the physical properties of certain soils offer better strength and stability for foundations. Soil types are less important for acreages used for hunting or recreation. The value of an acre of land is higher when the soils are optimal for the land uses (or crop types) that are in highest demand in the local market.
The surface features of land also influence its potential use and hence its value per acre. For example, whether farmland is flat or more rolling can influence both its drainage and farmability — and farms that are poorly drained or more difficult to farm (e.g., steep slopes, depressions subject to ponding, irregularly-shaped fields due to waterways) are less attractive. Land with significant elevation changes or low-lying, swampy areas could be ideal for hunting and recreation but not suitable for development. Interesting features such as a pond, ravine, or bluff can contribute significantly to value for recreation or residential development if the property is located in an area where these non-farm or complementary uses are in demand.
3. Size and Shape
The relationship between size and value varies depending on the region or neighborhood. Larger properties often bring lower per acre prices than smaller ones with the same use because there are fewer market participants with the financial resources to purchase them, but this is not always the case. For example, institutional investors often prefer larger, contiguous properties to smaller ones and will pay a higher price per acre for them. Shape can also influence the average cost of land. Agricultural parcels that are square or rectangular are often worth more because they’re easier to farm than irregularly-shaped tracts. If a property is intended for development, the shape can also be important. For example, it may be difficult to construct buildings on a particularly narrow property.
Location can have the most significant influence on price per acre. Is the land located in an area where all the neighboring properties have the same land use? If so, land value will be maximized — the economic principle of conformity states that similarity or compatibility among land uses (or consistency among architectural styles for residential properties) in a neighborhood tends to establish and maintain value. If land is located close to a city, it may have a higher per acre value due to development potential. In contrast, land used for timber production would be worth more if located in a rural area and in close proximity to a timber mill.
Property owners need to be able to legally access their land for its intended use. Access can be provided by public road, private road, easement, deeded strip, etc. But all access is not alike. For example, a farm may have county road frontage along one side, but if the road is not hard surface, it will make access with large equipment difficult in some weather conditions. On the other hand, for a hunting or recreational property, seclusion and privacy may enhance the property’s value. And keep in mind that the market has different access “tolerances” depending on the neighborhood or region. For example, buyers looking for a country estate (say 20 acres with an attractive home) located an hour outside of Chicago will want ample, hard surface public road frontage. However, potential buyers of the same type of property in central Missouri may not discount a property’s value, even if access is provided only by deeded strip or easement.
Depending on where you are in the country, land ownership involves gaining access to or getting rid of water. And if a parcel has either too much or too little water to support its highest and best use, it will be less valuable. In regions like the Corn Belt which see ample precipitation, farmland must be well-drained by natural surface drainage or subsurface drainage tile to provide for optimal row crop production. And sometimes regulations may prevent a landowner from draining an area. In other regions, like drought-prone California, access to a reliable irrigation water supply is required for successful crop production. In these regions, water rights can significantly influence farmland value. Residential properties with ponds, lakes or water views often bring a premium, as do farms with existing water wells or center pivots. And consider land subject to flooding — it may be ideal for recreational and hunting use, but inappropriate for development or farming unless levee-protected.
Farmland is more costly in areas with good weather patterns. Two farms may be identical in all other respects (e.g., size, shape, drainage, soil productivity), but one may be worth significantly less per acre because it’s located in an area with unreliable rainfall.
How much do buildings on a property add to its value? It depends on how they contribute to the use of the property and on the local market. For example, on-farm grain storage (even in good condition) may contribute little – if any – value per acre if the farm is located in an area with a good network of local grain markets, since there’s less need to store grain on-farm. Buyers of hunting properties in certain markets may pay more for an acreage with an attractive lodge, while in other markets a lodge is not necessary to sell for top dollar.
9. Management Practices
Land values are also affected by management practices. Buildings that are well-maintained contribute more to overall property value than those that are not. Farms that have been operated with a focus on good fertility and conservation practices can command a higher price per acre. A parcel that hasn’t had its crops rotated may go for a lower price due to depleted soil nutrients.
Land in certain neighborhoods is more valuable than land located elsewhere. In locales where land comes on the market infrequently, demand exceeds available supply, resulting in higher land values. Additionally, certain neighborhoods are characterized by farmers or landowners with greater financial strength and resources, so there is more competition for land, again driving up prices. And there are variations among states and counties. AcreValue, our land intelligence platform, can provide unique insight into farmland values in various states using cutting-edge data science and analytics. Take a look at those counties (in several key states) which have the highest estimated farmland value on average, taken from AcreValue.
|State||County with Highest Average Farmland Value Estimate||Average Farmland Value Estimate|
|California’s Central Valley||Stanislaus||$25,807|
In summary, real estate values continue to be influenced by a number of factors and price per acre can vary significantly across the country. To explore farmland value estimates in Iowa, Illinois, Indiana, Ohio, Nebraska, Minnesota, Wisconsin, Michigan and California’s Central Valley, visit AcreValue.
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