Agricultural Comparative Sales Analysis

Agricultural Comparative Sales Analysis


Introduction and Background
Utilizing the Comparable Sales Analysis Valuation Methodology in determining the value of Real Estate has become the most commonly used method, and also the most acceptable method to the general market. The application of the Comparable Sales Analysis Methodology seems fairly uncomplicated and boils down in utilizing averages in determining the market related factors. After all market indicators of real transactions that took place is utilized.

This narrative is however based on two critical assumptions, firstly that the data base of information used in the identification of comparable sales transactions is factually correct and secondly that the real estate under investigation is similar or in layman terms comparing apples with apples.

The selection of comparable sales transactions tend also to be the factor where the initiative of the Professional Valuator prevails, to the extent that the same property could be valued at vastly different values by different individuals, based on the Valuators selection of comparable sales transactions to be utilized.

The application of Comparable Sales Transaction Methodology is therefor much more complicated than anticipated by most, and also the single only factor resulting in vast different values determined by different individuals. This statement is even more critical in utilizing this methodology in the Agricultural Real Estate Domain as no two properties will comprise of the same type of commodities, quantities of such commodities and the extend of such commodities (Land Component Sizes).

Analysis of the Data Base
All Real Estate Sales information made available to the market in South Africa is based on the information supplied by the Registrar of Deeds of South Africa. Various Companies interpret and analyze this information and make it available as web based platforms to the market. Each and every supplier of such data basis info has therefor already applied certain criteria to the factual information of the Registrar of Deeds. The Registrar of Deeds information is based on the facts as enclosed in the Property Purchase Transaction and in many cases comprises of more than one property in a single transaction, (comprising of different farm numbers and portions) thus for the information not being homogenized for direct utilization as a comparable transaction.

The first and most crucial step in identifying comparable sales transactions to be applied is thus for to dissect the data base information. The most commonly made error is to devised the purchase price in the Hectare and then apply the average price per hectare to the subject property. You might get away with such arithmetic’s in residential properties, but will be easily exposed in applying that on Agricultural Properties. The following factors could be utilized in identifying comparable sales transactions during Agricultural Real Estate Valuations:

  • Location – In the Agricultural Domain location is crucial in the sense that environmental and terrain factors have a direct influence on the value of such a property. A general norm will be to only utilize transactions within a radius of not more than 50 km or closer to the subject property. If further apart the terrain and environmental factors could differ vastly.
  • Size – The extent of an Agricultural Property has a direct influence on the value. The general norm being the smaller the property the larger the monetary value purely based on the affordability for more people. The size will also have a direct influence on the type of Agricultural Application and value. A Game farm of 100 Hectares will have a different value that a game farm of 5000 Ha.
  • Composition – The Agricultural Composition is also crucial in determining the comparability of Agricultural properties. As no two farms will comprise of the same extent of different land types the comparable sales transaction must be dissected as to get specific prices for each land compartment. In the evaluation of the usability of a comparable sales transaction within the Agricultural Domain the following land division should be applied:
    • Irrigation Land & Water Rights and Irrigation Method
    • Dry Land
    • Permanent Crop & Forrest Land
    • Portion of farm zoned for lodge purposes
    • Grazing Land; Fencing; Camps and Water Reticulation Network
    • Waste Land
  • Type of Farming – The type of farming is also a crucial factor in comparing transactions. A stock farm will have a vastly different value that a Citrus Farm.
  • Fixed Improvements – Although not the most crucial factor, certain fixed improvements such as broiler houses, pack houses etc. could have a huge influence on the value of a property. Ensure that fixed improvements are evaluated before properties are compared.
  • Fixed Improvements – Although not the most crucial factor, certain fixed improvements such as broiler houses etc. could have a huge influence on the value of a property.  Ensure that fixed improvements are evaluated before properties arecompared.  Also farmes located close to a town could have a higher improvement value attached.
  • The Jokey – In any valuation methodology the jokey – Farmer- is never taken in considerations in determining the market value of a property. Not true in respect of Agricultural Properties. A farmer who utilizes precision farming instruments for instance on irrigation land Ph balances increases the value of such land, as will the stock farmer with effective fencing camping and water reticulation etc. This indicates indirect evaluating of the jokey.
  • The Comparable Transaction – The inherent nature of the comparable transaction must be verified as best as possible. Always try to determine if it was an arm length transaction. If the buyer was for instance a Mining group it should be investigated because a premium would have been paid on the mineral value. The same applies on Land Reform Transactions being outside of the general market value norm. In many cases adjacent property transactions would also result in a premium being paid. Where ever a transaction with out of the norm pops up it should not be utilized without thorough investigation on why.

The selection of comparable transactions has a direct influence on the end result of utilizing the Comparable Sales Analysis Methodology and should be approached with great care, specifically within the Agricultural Domain. Thorough investigation and analysis should be applied and any property selected as a comparable transaction should be inspected. It always helps during inspection of the subject property to ask informed questions regarding any previous transactions. Our vast exposure to Agricultural Valuations proofed that up to 80% of all Agricultural Real Estate Transactions included stock and or movable assets as part of the fixed property transaction. This is mainly done due to tax benefits and the difficulty in securing finance for movable assets and or stock and no sub division is made in the Registrar of Deeds Data providing for an artificial increase in land values and higher risk for financiers.

Sample of Market Data Report
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