How Technology & Data Validation Can Fast-Track Land Appraisals

One of the biggest challenges faced by ag lenders today is properly assessing the value of land. As property values skyrocket, this is becoming even harder.

Farm real estate values have increased by more than 70% since 2006. From 2021 to 2022, farmland values nationwide increased by 12.4%, reaching an average value of $3,800 an acre – the highest values on record since 1970. These changes dramatically influence the fair market value of agricultural real estate.

Nationwide professional land appraiser shortages add an additional layer of complexity to the appraisal process. A lack of appraisers can slow down rural real estate transactions. This in turn creates poor customer service through delayed closings and unnecessary risk for financial institutions through extended rate locks.

Over the next 10 years, the industry will also see a sharp increase in land transfers. More than half of American farmers are nearing retirement. Real estate financing will represent a major portion of active loans for agrifinance institutions as the aging farmer population creates increased rates of turnover. “New and beginning producers,” which currently represents 27% of the farming population and is expected to keep rising, now face a high cost of entry. They will need sources of capital.

With all of these challenges ahead, it’s critical that lenders have access to reliable and updated data for farm appraisals.


Understanding the Complex Farmland Appraisal Process


The current process to accurately assess farmland is very complex. Unlike the traditional appraisal process for a home mortgage loan or construction loan generation for residential development, there are additional, critical factors that must be considered to accurately value agricultural land.


For example, one must consider production history, and weather patterns as they relate to farmland production and in turn potential profitability. Currently, timely and standardized processes for gathering and analyzing these metrics don’t exist, so appraisers are left digging for fragmented data, hoping it's accurate and are left to decipher it themselves, sometimes with limited or no knowledge of the working farm industry. This tedious, error prone and overwhelming process can take as long as six weeks at times. 


There are three techniques for evaluating agricultural property in an appraisal:


The most common technique is the sales comparison approach, where an appraiser uses at least three comparable properties in the area. These properties must have sold in the last six months and must be within a 10-to-50-mile radius of the property being appraised. Once comparable properties are identified, the appraiser analyzes differences between the properties, including acreage, agricultural products grown, land improvements, square footage, property age and condition.


Another technique is the cost approach, where an appraiser uses the following valuation formula: land value, plus the cost to reconstruct buildings, minus the accrued depreciation of buildings from when they were new to their current state.


A third technique is the income approach, which estimates the potential net income of the property. When this technique is used, it is alongside other approaches for income-producing properties.


Regardless of which technique is used, the process is manual and requires an enormous amount of time to collect, review and report the information needed to accurately assess the value of land. This lengthy process impacts the borrower experience and creates unnecessary risk for the institution. 


To best manage this risk, lenders generally focus on accurate loan-to-value (LTV) ratios that compare the cost of a loan to a fair market value of a property.


 From Six Days to Six Minutes


To streamline this process, financial institutions must invest in technology and validated data resources.


For example, ag lenders should leverage an automated land classification tool, where data can be inputted into an internal risk model to allow for more reliable land classification information and expedited LTV ratios. This streamlines the traditional manual reporting process that requires validation from the U.S. Department of Agriculture, Farm Service Agency, platt books, county offices and many other decentralized sources.


Rather than running a manual appraisal report that might take up to six weeks, a land classification report can generate accurate acreage and land use through one simple step. With land classification technology, ag lenders can speed up the land appraisal process, reducing the process to just six minutes.


 Unprecedented Times Ahead


The industry is headed into an unprecedented time. Land values are constantly skyrocketing, making it difficult to accurately access. The need for capital is also increasing as farmers retire and new and beginning producers look to start new operations. Meanwhile, a shortage in appraisers has made manual appraisal processes unsustainable. Ag lenders cannot afford to rely on outdated processes where appraisers are required to manually dig for information.


To bring synergy to the ag lending process, lenders should invest in automated land classification tools to shorten the time needed to conduct a land appraisal, while making the appraisal report more accurate through scientifically validated data – creating a better system for risk management and a better experience for borrowers.

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