1. Income Approach

2. Data Source www.extension.iastate.edu/agdm/ DO NOT FORGET:
Ag Decision Maker

3. Income Approach
This is the approach where we compare the subject property value to the income produced by similar properties in the neighborhood.
If we are looking at a value for ourselves then this would be the approach that looked at the value of the income for us; we still need other sales but it is a slightly different way to look at the problem

4. Appraisal Principles Behind Income Approach
Anticipation –
Expectation of benefits
-PV of future benefits to be derived from owning the property
Supply and Demand
You need to think about S&D when forecasting future benefits and rates of return
What are prices, yields, and costs going to do?

5. Appraisal Principles Behind Income Approach
Substitution
Types of rent, prices, returns and other factors tend to be set by the conditions in the neighborhood
Relatively easy substitutions between properties
Balance
When there is so sort of equilibrium between the number of farms for rent and people willing to rent them
Buyers? auctions

6. Data
Income estimates
Cash lease
Crop share
Owner/operator
What’s customary in the area? Needed for comparables

15. Data
Income estimates
Cash lease
Crop share
Owner/operator
What’s customary in the area? Needed for comparables

16. Data; income Cash rent;
Amount
Conditions for example; when is it paid, how many payments, fixed or variable
32% of cash rent acres have a single payment with 49% before planting and 41% after harvest
58% are two payment with 74% having first payment due before planting and 69% having second payment due after harvest

17. Data; income Crop share;
Participation
Yields, prices, costs,…. for the area
Who pays what? How are the costs and returns divided?

18. Data; income Owner/operator Crops Application rates and practices
Yields
Prices

19. Data; Expenses
Taxes
Insurance
Maintenance
Management
Utilities
Crop

20. Data Sources; Capitalization Rate
Similar sales
Consistency estimating rate and application

21. Data Sources Ag Decision Maker Extension Farmers in the area Dealers
Lenders
NASS and other state and Federal govt.
Owner

22. Income estimate Cash rent Crop share rent Owner-operator;
Owner operator is the hardest but it is probably the one that you will be the most familiar with using

23. Procedure This uses the direct capitalization procedure Step 1:
Converting a single year income into a value
Step 1:
Determine how the property is being operated considering what’s typical for the area
If you are going to change; ie, from it being cash
to owner/operated then that has to be determined

24. Procedure
Step 2;
Verify all the information; be sure that what you know is so
Step 3;
Get all the expense data necessary for the type of operation or expected operation

25. Procedure Step 4; Step 5; Obtain and verify comparable sales
Construct an operating statement for each one
Estimate the capitalization rate for each one
Capitalization rate = net operating income/sales price
Pg 265
Step 5;
Estimate the appropriate capitalization rate and determine the subject property value using the income approach