Land Appraisal 101
We recently interviewed Nick Pease, chief appraiser with Horizon Farm Credit. As the fifth podcast in the series The Country Life: Buying Land, Nick discussed appraisals and their role in the land buying process.
First, could you help us understand about appraisals? Why are they important, and why are they needed for a loan?
Before I answer that question I think it’s important to know what an appraisal is. By definition, an appraisal is an opinion of value that is credible and worthy of belief. Appraisals are completed by a state-certified appraiser, either generally- or residentially-certified, meaning they fulfilled the proper certification requirements that have been set by the state and appraisal qualifications board.
Appraisals can have many different uses, with the most common being for mortgage lending, tax appeal, estate settlement and personal knowledge. At Horizon, we have a team of appraisers and they primarily focus on mortgage appraisals to help our borrowers. However, we can also complete appraisals for individuals like you listening to this podcast for your appraisal needs as well.
Appraisals are an integral part of the lending process, whether for Horizon Farm Credit or any other financial institution. The appraiser tells the lender the market value of the property that can be lended against. Lending institutions then lend up to a certain percentage of the appraised value to ensure they are adequately collateralized.
The appraisal can also be a safety net for the borrower and/or the lender when a higher-than-market value sale occurs and the buyer is unaware of the discrepancy. This allows the borrower to renegotiate the sale price and allows the lender to not take on undue risk. Most sales agreements have a clause for financing and that an appraisal will at least equal the sale price. That does not happen very often in the market, but every so often we do see sales agreements that are higher than what we do on the appraisals.
Now that we know a bit more about appraisals and how they are used in the lending process, could you explain your process for conducting an appraisal?
Sure, there’s a lot that goes into an appraisal that most people might not realize.
First, appraisers do a lot of legwork collecting basic public records and documents to describe the property. We go out to public courthouses, whether they are online or the actual brick-and-mortar courthouse, to collect tax cards, tax maps and legal descriptions. We also obtain other documentation including sales agreements because as part of our report we must reconcile why we appraised the property higher or lower than the sales price per the Uniform Standards of Professional Appraisal Practices (USPAP). USPAP is the rule book that certified appraisers have to follow.
Once we start the appraisal inspection, an appraiser goes to the property and obtains any other necessary information. Things like new additions, improvements, contracts and plans for the property are discussed. We will also take a lot of photos to capture the property and any structures on it.
Following the inspection, we bring all of the information back and do a full analysis of the property. Outside of just the basic description of the property, we look at the property and valuation from three different approaches:
- The Sales Comparison approach uses verified sales from the local market to compare them to the property you’re looking to purchase. Some factors that impact the value of the property would be the location, access to the property, ownership rights and school district.
- Second is the Cost approach where we look at the price of the land and price of the buildings, less depreciation. You add those two numbers together and it gives you a cost approach value. Typically, this approach is used on new construction, maybe a new home or a new building on a farm.
- The third approach is the Income approach and is typically not used on land tracts or residential properties, but we also understand there could be rental income or timber income off a bare land track. The income approach is more typically used on commercial agricultural properties, retail appraisals and commercial properties.
An appraiser may use one, two or all three of these approaches to come up with a final determination of value.
Is there anything else potential land buyers should know about appraisals?
Potential buyers should remember that not all land is created equal. Land and country properties can be special investments and very complex.
While appraisals are an important part of the loan process, it’s important to know that there are many appraisal independence requirements that allow for an unbiased opinion of value. Appraisers follow the guidance of the Uniform Standards of Professional Appraisal Practices (USPAP) and are subject to review for accuracy and technical errors.
Our team of in-house appraisers at Horizon are skilled in many areas of appraisals, and rural properties are our specialty. If you live or are looking for property in central, western or northern Pennsylvania, contact Horizon about how we can help… not just with your loan, but also your appraisal needs.