I was recently at our location in southeast Iowa discussing a transitional farm with our team. Hopefully, we’ll get a shot at selling it someday. The seller has received two recent appraisals, and as part of our due diligence, our promise is always to tell people what’s going to happen before it happens. Price expectations are part of that discussion.
It always helps when a farm real estate appraiser has already analyzed a prospective property. Their work helps us set expectations. With that said, the results of the appraisals on this particular property caught my eye. One was done within the last two years for $64,000 per acre. Another, within the past year, came in at $24,000 per acre. The property is listed somewhere in between with a local real estate broker.
So, what is it worth? First, let’s define transitional land.
What is transitional land?
Transitional land, as I call it, is property that is presently used for agricultural purposes but has some appeal or future appeal for development. That development might be a few years away or decades down the road. It could be residential, retail or commercial in nature.
So, what’s it worth? As much as we can get, right? Have an auction. That’s the hope, anyway. But it brings up a good point of contention: Why such a big range in value? I’ve always told prospective sellers that we’ve sold land for 60% of appraised value and for over 200% of appraised value.
Both appraisals were completed within a few months of our auction sales. In the latter example, the appraiser actually called me afterward and apologized for being so far off. I told him I thought his number was high to begin with. The market just disagreed with both of us.
When land is transitional in nature, it becomes incredibly difficult to determine what a tract is worth. If there are two people in the market actively seeking development tracts in the area, and they both think they can do something with it — either now or later — you have a recipe for a premium over agricultural values.
If those developers aren’t in the market or they believe the property won’t be developable for some reason, the land quickly reverts to being valued from an agricultural or ranching perspective — or whatever its highest and best use is today.
That’s why I don’t envy my appraiser friends. It’s tough to get inside the heads of a few developers who often keep their cards close to their chest, and for good reason. Is it worth an additional $5,000 per acre or $10,000 per acre over ag values? Make up your own story.
In our world, we think the auction route is the best way to determine that. As an auction company, we try hard to under-promise and over-deliver. These factors are typically unknown until the rubber meets the road on auction day. But we believe that letting the market decide is the best bet.
In the traditional private treaty world, you might price it too high and scare everyone away. It becomes like that house down the road that’s been listed too long. Price it too low, and you’ll wonder if you left money on the table. Both paths involve time and money. At the end of the day, an auction is the most honest form of price discovery there is.
Let the bidders talk, and the market will sort it out. In the end, the market always tells the truth. That’s why we trust it: the auction way.