Appraisal Principles USPAP Perspective. Determining Fair Market Value Appraisal is an estimate of...

Appraisal PrinciplesAppraisal PrinciplesUSPAP PerspectiveUSPAP Perspective

Determining Fair Market ValueDetermining Fair Market Value

Appraisal is an estimate of fair Appraisal is an estimate of fair market valuemarket value Fair market value is known with Fair market value is known with

certainty only at time of salecertainty only at time of sale

Appraisal is an artAppraisal is an art

However, the science of appraisal However, the science of appraisal is its methodology for is its methodology for turning turning subjective reasoning into subjective reasoning into objective reasoningobjective reasoning which which minimizes valuation differences minimizes valuation differences among professional appraisersamong professional appraisers

Definition of Fair Market Value Definition of Fair Market Value

““The price at which The price at which property would change property would change hands between a willing hands between a willing buyer and a willing seller, buyer and a willing seller, neither being under any neither being under any compulsion to buy or sell compulsion to buy or sell and both having and both having reasonable knowledge of reasonable knowledge of relevant facts.”relevant facts.” Internal Revenue Section Internal Revenue Section

1.170A-1(c)(2)1.170A-1(c)(2)

Methods for Determining Fair Methods for Determining Fair Market ValueMarket Value

Sales Comparison ApproachSales Comparison Approach

Income (Net Present Value) ApproachIncome (Net Present Value) Approach

Cost-of-Replacement (Production) Cost-of-Replacement (Production) ApproachApproach


Similar or comparable properties that have Similar or comparable properties that have been recently sold in an arms-length-been recently sold in an arms-length-transaction and in a relevant market give transaction and in a relevant market give an indication of probable value of the an indication of probable value of the subject property to which they are being subject property to which they are being compared when proper adjustments are compared when proper adjustments are made that minimize the differences in made that minimize the differences in characteristics between the subject characteristics between the subject property and comparable properties.property and comparable properties.


Subject Property: The property for which Subject Property: The property for which value is being determinedvalue is being determinedComparable Property: Has similar Comparable Property: Has similar characteristics of the subject property for characteristics of the subject property for which a transaction (sale) price is knownwhich a transaction (sale) price is known Also, similar useAlso, similar use

Registered beef cow used to produce feeder steers Registered beef cow used to produce feeder steers should be valued as brood cowshould be valued as brood cow

4-H club calve & lamb sales and 4-H fair sales are 4-H club calve & lamb sales and 4-H fair sales are not the same as commercial salesnot the same as commercial sales

Being able to adequately judge the quality of Being able to adequately judge the quality of the subject property and find good the subject property and find good comparables is at the heart of the sales comparables is at the heart of the sales comparison approachcomparison approach


Arms-Length-Transaction: A sale Arms-Length-Transaction: A sale conducted in an open market conducted in an open market between a willing buyer and a between a willing buyer and a willing seller and both have willing seller and both have reasonable knowledge about the reasonable knowledge about the propertypropertyDon’t use quick forced sale dataDon’t use quick forced sale dataAdvertized liquidation sales are OK Advertized liquidation sales are OK

Sales Comparison ApproachSales Comparison ApproachRelevant Market: The market or place where the Relevant Market: The market or place where the subject property is most commonly sold at the subject property is most commonly sold at the level of value being sought.level of value being sought. High value replacement breeding stock are often sold in High value replacement breeding stock are often sold in

special disposal sales or specialized breeding sales, special disposal sales or specialized breeding sales, e.g.e.g.

Whitetail Extravaganza Top 30 Breeder Sale & ShowWhitetail Extravaganza Top 30 Breeder Sale & Show Pride of Washington and Best of the Northwest (dairy)Pride of Washington and Best of the Northwest (dairy)

If an owner is claiming high value, then should be able If an owner is claiming high value, then should be able to document previous sales at an elite breeding saleto document previous sales at an elite breeding sale

Being registered doesn’t mean superior genetics; it just Being registered doesn’t mean superior genetics; it just means pure genetics, can have “poor” pure geneticsmeans pure genetics, can have “poor” pure genetics

Being breed registered is not sufficient documentation for Being breed registered is not sufficient documentation for higher prices, it must be demonstrated in actual sale data higher prices, it must be demonstrated in actual sale data or documentation of breeding merchandisingor documentation of breeding merchandising


Adjustment-in-Value: The characteristics of Adjustment-in-Value: The characteristics of comparables will not always be the same as the comparables will not always be the same as the subject property and consequently the value of subject property and consequently the value of the comparables are adjusted so that the the comparables are adjusted so that the comparables have the same characteristics as the comparables have the same characteristics as the subject property.subject property. Making proper adjustments is also at the heart of Making proper adjustments is also at the heart of

generating good appraisal valuegenerating good appraisal value

Income ApproachIncome Approach

The Income Approach estimates the The Income Approach estimates the present (discounted) worth of anticipated present (discounted) worth of anticipated future stream of net income from owning future stream of net income from owning income producing assets. income producing assets.


Basic MethodologyBasic MethodologyDetermine retained earnings for each time Determine retained earnings for each time

periodperiodRetained Earnings = Gross Revenue – Operating Retained Earnings = Gross Revenue – Operating

Expenses – Depreciation – Income Taxes – Expenses – Depreciation – Income Taxes – Payments to Owners (Dividends)Payments to Owners (Dividends)

Generally involves developing enterprise budgetsGenerally involves developing enterprise budgets Determine number of years the asset will be Determine number of years the asset will be

productiveproductive Select discount rate (cost of capital, i.e. Select discount rate (cost of capital, i.e.

interest rate) interest rate) Value = ∑ (retained earningsValue = ∑ (retained earningstt) / (1 + i)) / (1 + i)tt


Appropriate UseAppropriate UseGeneralGeneral

Businesses, real estate with rental Businesses, real estate with rental leases, financial investmentsleases, financial investments

AgricultureAgricultureBreeding animalsBreeding animals

Method used for poultry calculatorsMethod used for poultry calculators

Cost-of-Replacement ApproachCost-of-Replacement Approach

Valuation with the Valuation with the Cost Approach Cost Approach equals the cost of equals the cost of replacing a subject replacing a subject property with an property with an exact replica, or exact replica, or with an acceptable, with an acceptable, similar, new or used similar, new or used property.property.


Uses in Agricultural Uses in Agricultural AppraisalsAppraisalsReplacement stockReplacement stock

Value equals cost associated Value equals cost associated with raising the animalwith raising the animal

Can be combined with Sales Can be combined with Sales Comparison ApproachComparison Approach

value of young dairy replacement value of young dairy replacement heifer equals the market price of 2 heifer equals the market price of 2 year old springer heifer minus the year old springer heifer minus the costs associated with raising the costs associated with raising the heifer from current age to a 2 year heifer from current age to a 2 year old springerold springer


Uses in Agricultural Uses in Agricultural AppraisalsAppraisalsBuildings, fencesBuildings, fences

Sometimes sheds or chicken Sometimes sheds or chicken coops are destroyed as part of coops are destroyed as part of cleaning and disinfectioncleaning and disinfection

Value can be cost of replacing Value can be cost of replacing destroyed item adjusted for destroyed item adjusted for remaining useful ageremaining useful age

Assume backyard chicken coop Assume backyard chicken coop has 10 year economic life and has 10 year economic life and one destroyed has 2 years left, one destroyed has 2 years left, value would be two-tenths of value would be two-tenths of cost of replacementcost of replacement

Sales Comparison Approach Sales Comparison Approach in Detailin Detail


Know the subject propertyKnow the subject property What are the key characteristics that What are the key characteristics that

will be used to determine value, i.e. will be used to determine value, i.e. adjust comparablesadjust comparablesBreed, sex, age, body condition, productivityBreed, sex, age, body condition, productivityMaybe limited by what is reported in Maybe limited by what is reported in

relevant marketsrelevant markets

Find relevant markets for Find relevant markets for comparablescomparables Market in which the subject property Market in which the subject property

would normally sellwould normally sellMaybe located in another stateMaybe located in another state If using an exclusive (elite) breeding sale as If using an exclusive (elite) breeding sale as

relevant market, then must document that relevant market, then must document that the animal has the quality characteristics to the animal has the quality characteristics to be sold at such a marketbe sold at such a market


Have multiple comparablesHave multiple comparables Prefer to have at least 3Prefer to have at least 3

Make adjustments of comparables to Make adjustments of comparables to match subject propertymatch subject property ALWAYS adjust comparables to subjectALWAYS adjust comparables to subject

If comparable is better than subject, then If comparable is better than subject, then subtract valuesubtract value

If poorer than subject add valueIf poorer than subject add value Make adjustments to each comparable Make adjustments to each comparable

first, then average the comparablesfirst, then average the comparables If a comparable appears to be an outlier, If a comparable appears to be an outlier,

then you may exclude it, especially if it then you may exclude it, especially if it is more different from the subject is more different from the subject property than the other comparablesproperty than the other comparables


Adjustment Example Adjustment Example (with made up numbers) (with made up numbers)

Subject AnimalSubject AnimalAngus Beef Cow, 4 years old, 6 months pregnant, Angus Beef Cow, 4 years old, 6 months pregnant,

1200 pounds1200 poundsComparable AnimalsComparable Animals

Angus Beef Cow, 5 years old, 5 months pregnant, Angus Beef Cow, 5 years old, 5 months pregnant, 1100 pounds, $700 selling price1100 pounds, $700 selling price

Herford Beef Cow, 3 years old, 7 months pregnant, Herford Beef Cow, 3 years old, 7 months pregnant, 1100 pounds, $750 selling price1100 pounds, $750 selling price

Angus-Herford cross Cow, 2 years old, 3 months Angus-Herford cross Cow, 2 years old, 3 months pregnant, 1000 pounds, $750pregnant, 1000 pounds, $750

Angus Beef Cow, 9 years old, 4 months pregnant, Angus Beef Cow, 9 years old, 4 months pregnant, 1400 pounds, $600 selling price 1400 pounds, $600 selling price

Appraisal Adjustment TableAppraisal Adjustment Table

BreedBreed AgeAge PregnancyPregnancy WeightWeight Sales Sales PricePrice

($/head)($/head)

SubjectSubject AngusAngus 4 yrs4 yrs 6 mo6 mo 1200 lbs1200 lbs

Comp 1Comp 1 AngusAngus 5 yrs5 yrs 5 mo5 mo 1100 lbs1100 lbs $700$700

Comp 2Comp 2 HerfordHerford 3 yrs3 yrs 7 mo7 mo 1100 lbs1100 lbs $750$750

Comp 3Comp 3 A – H xA – H x 2 yrs2 yrs 3 mo3 mo 1000 lbs1000 lbs $750$750


Adjustment for BreedAdjustment for Breed

Can be difficult, try to find market value for Can be difficult, try to find market value for the breed in question, especially if the herd is the breed in question, especially if the herd is being used to produce replacement stockbeing used to produce replacement stockCan account for breed size differential Can account for breed size differential through weight adjustment & milk production through weight adjustment & milk production (dairy)(dairy)Most popular cattle breeds: Most popular cattle breeds: beef – Angus, dairy – Holsteinbeef – Angus, dairy – Holstein

In swine and poultry have specialized In swine and poultry have specialized composite breeds from genetic breeding composite breeds from genetic breeding companiescompaniesFoundation breeding stock for these Foundation breeding stock for these companies can be very valuablecompanies can be very valuable Traditional breeds are becoming heirloom breeds Traditional breeds are becoming heirloom breeds

being raised by serious hobbyistbeing raised by serious hobbyist Body confirmation becomes very important in valueBody confirmation becomes very important in value

Adjustment for AgeAdjustment for Age

As breeding & milk As breeding & milk animals age, they decline animals age, they decline in value (depreciate) as in value (depreciate) as offspring are born and offspring are born and milk is producedmilk is produced

The average Holstein The average Holstein upon the birth of her first upon the birth of her first calf has a remaining life calf has a remaining life expectancy of less than expectancy of less than three full lactations three full lactations (based upon DHIA data)(based upon DHIA data)

Adjustment for AgeAdjustment for AgeAge adjustment for our beef cow Age adjustment for our beef cow exampleexample Method 1Method 1

Heiferettes: $65/cwt; cull cows: $45/cwtHeiferettes: $65/cwt; cull cows: $45/cwtAssume 1000 lb animal and 8 calvingsAssume 1000 lb animal and 8 calvings

[10 cwt x ($65/cwt - $45/cwt)] / 8 = $25 per year [10 cwt x ($65/cwt - $45/cwt)] / 8 = $25 per year

Method 2Method 22 yr old bred heifer: $1200; 8 yr old bred cow: 2 yr old bred heifer: $1200; 8 yr old bred cow:

$600$600 ($1200 - $600) / (8 yrs – 2 yrs) = $100 per year($1200 - $600) / (8 yrs – 2 yrs) = $100 per year

Method 3Method 3Statistical analysis of USDA-AMS beef cows Statistical analysis of USDA-AMS beef cows

auction pricesauction prices Beef cows depreciate in value by approximately Beef cows depreciate in value by approximately

$30/year$30/year Differences between the three methods Differences between the three methods

demonstrate part of the “art” of appraisaldemonstrate part of the “art” of appraisal

Adjustment for Pregnancy StatusAdjustment for Pregnancy Status

Most breeding animals are either Most breeding animals are either pregnant or are nursing young (i.e. pregnant or are nursing young (i.e. cow-calf pairs)cow-calf pairs) Breeding animal that don’t get pregnant Breeding animal that don’t get pregnant

are usually culledare usually culled Thus, breeding females are normally Thus, breeding females are normally

traded when they are pregnant (or cow-traded when they are pregnant (or cow-calf pairs) and consequently market calf pairs) and consequently market prices for breeding females are for prices for breeding females are for pregnant femalespregnant females

Discount if not pregnant – not a Discount if not pregnant – not a premium for being pregnantpremium for being pregnant

Adjustment for Pregnancy StatusAdjustment for Pregnancy Status

Pregnancy adjustment for our beef Pregnancy adjustment for our beef cow examplecow example Method 1Method 1

70 lb calf @ $135/cwt x 95% chance of a live 70 lb calf @ $135/cwt x 95% chance of a live calf after 24 hours = $90 calf in the womb calf after 24 hours = $90 calf in the womb ÷ 9 ÷ 9 months gestation = $10 per month pregnantmonths gestation = $10 per month pregnant

Method 2 Method 2 Cost of insemination plus variable (cash) cost Cost of insemination plus variable (cash) cost

associated with caring for the breeding animalassociated with caring for the breeding animal

Method 3Method 3Statistical analysis of USD-AMS auction pricesStatistical analysis of USD-AMS auction prices

Approximately $20/monthApproximately $20/month

Adjustment for WeightAdjustment for WeightWeightWeight Use relevant market prices for cull Use relevant market prices for cull

values of breeding animalsvalues of breeding animals USDA-NASS national cow priceUSDA-NASS national cow price

Nov ’08: $43.10/cwtNov ’08: $43.10/cwtDec ’08: $40.40/cwtDec ’08: $40.40/cwtJan ’09: $42.20/cwtJan ’09: $42.20/cwt

Statistical analysis of USDA-AMS Statistical analysis of USDA-AMS beef cow auction pricesbeef cow auction pricesCows: approximately $43/cwtCows: approximately $43/cwtHeifers: approximately $71/cwtHeifers: approximately $71/cwt

$45/cwt for our beef cow example$45/cwt for our beef cow example

Adjustment for Breed RegistrationAdjustment for Breed RegistrationBeing breed registered doesn’t Being breed registered doesn’t automatically add value automatically add value Could increase value at little by the Could increase value at little by the cost of registering due to owner cost of registering due to owner prejudiceprejudiceMust have evidence of Must have evidence of merchandizing breeding stock to merchandizing breeding stock to have breeding premiumhave breeding premium If a herd or flock of registered animals is If a herd or flock of registered animals is

used primarily to produce meat animals used primarily to produce meat animals or milk, then it is a commercial herd and or milk, then it is a commercial herd and the breeding stock is of commercial valuethe breeding stock is of commercial value

Owner must provide documentation Owner must provide documentation of additional value being realized for of additional value being realized for his/her animalshis/her animalsIt’s performance, not pedigree that It’s performance, not pedigree that counts counts


AdjustmentAdjustmentBreedBreed

($50 if not($50 if not

Angus)Angus)

AgeAge($25/yr)($25/yr)

PregnancyPregnancy($10/mo)($10/mo)

WeightWeight($45/cwt)($45/cwt)

Sales Sales PricePrice

($/head)($/head)


Comp 1Comp 1 AngusAngus

$0$0

5 yrs5 yrs

+$25+$25

5 mo5 mo

+$10+$10

1100 lbs1100 lbs

+$45+$45

$700$700

+$80+$80

$780$780

Comp 2Comp 2 HerfordHerford

+$50+$50

3 yrs3 yrs

-$25-$25

7 mo7 mo

-$10-$10

1100 lbs1100 lbs

+$45+$45

$750$750

+$60+$60

$810$810

Comp 3Comp 3 A – H xA – H x

$0$0

2 yrs2 yrs

-$50-$50

3 mo3 mo

+$30+$30

1000 lbs1000 lbs

+$90+$90

$750$750

+$70+$70

$820$820

Comp 4Comp 4 AngusAngus

$0$0

9 yrs9 yrs

+$125+$125

4 mo4 mo

+$20+$20

1400 lbs1400 lbs

-$90-$90

$600$600

+$55+$55

$655$655


AdjustmentAdjustmentBreedBreed

($50 if not($50 if not

Angus)Angus)

AgeAge($25/yr)($25/yr)

PregnancyPregnancy($10/mo)($10/mo)

WeightWeight($45/cwt)($45/cwt)

AdjustedAdjusted

ValueValue

($/head)($/head)



Comp 2Comp 2 HerfordHerford 3 yrs3 yrs 7 mo7 mo 1100 lbs1100 lbs $810$810

Comp 3Comp 3 A – H xA – H x 2 yrs2 yrs 3 mo3 mo 1000 lbs1000 lbs $820$820


Subject value: ($780 + $810 + $820 + $655) Subject value: ($780 + $810 + $820 + $655) ÷ 4 = $766.25 ► $750÷ 4 = $766.25 ► $750

Subject value: ($780 + $810 + $820) Subject value: ($780 + $810 + $820) ÷ 3 = $803.33 ► $800÷ 3 = $803.33 ► $800

If no breed adjustment: If no breed adjustment:

Subject value: ($780 + $760 + $820) ÷ 3 = $786.67 ► $800Subject value: ($780 + $760 + $820) ÷ 3 = $786.67 ► $800

Additional Appraisal ExercisesAdditional Appraisal Exercises

SummarySummarySales Comparison AdjustmentsSales Comparison Adjustments

Adjustments are at the heart of any Adjustments are at the heart of any appraisal, must be done rightappraisal, must be done right

Need data to determine & support Need data to determine & support adjustmentsadjustments

Requires constant surveillance of the Requires constant surveillance of the market and data collection effortsmarket and data collection efforts

Questions?Questions?

Appraisal PrinciplesAppraisal PrinciplesAPHIS PerspectiveAPHIS Perspective

Animal Health Protection Act of Animal Health Protection Act of 20022002

“…“…compensation shall be based on the fair compensation shall be based on the fair market value, as determined by the Secretary, market value, as determined by the Secretary, of the destroyed animal, article, facility, or of the destroyed animal, article, facility, or means of conveyance.”means of conveyance.”

Animal Health Protection Act of Animal Health Protection Act of 20022002

“…“…the amount to be paid under this subsection the amount to be paid under this subsection shall be final and not subject to judicial review shall be final and not subject to judicial review or review of longer than 60 days by any officer or review of longer than 60 days by any officer or employee of the Federal Government other or employee of the Federal Government other than the Secretary or the designee of the than the Secretary or the designee of the Secretary.”Secretary.”

Factors Affecting Fair Market ValueFactors Affecting Fair Market Value

Animal characteristicsAnimal characteristics Breed, Age, Weight, Breed, Age, Weight,

UseUse

Animal ProfitabilityAnimal Profitability Breeding, Milk, Egg Breeding, Milk, Egg

ProductionProductionBreeding, milk or egg Breeding, milk or egg

producing animals producing animals depreciate with agedepreciate with age


Health StatusHealth Status Free of disease, exposed to Free of disease, exposed to

disease or infected with disease or infected with diseasediseaseUSDA assumes healthy animals, USDA assumes healthy animals,

i.e. as if they are not diseased or i.e. as if they are not diseased or exposed to the disease in exposed to the disease in questionquestion

Thus, APHIS appraisal value may Thus, APHIS appraisal value may be greater than true fair market be greater than true fair market valuevalue


What others are willing to What others are willing to paypay Demand & supply situationDemand & supply situation

Rare/unique breeds: valuable Rare/unique breeds: valuable because few suppliers or because few suppliers or worthless because nobody worthless because nobody wants them.wants them.

Be careful of minor breed Be careful of minor breed hypehype

Sometimes for minor breeds Sometimes for minor breeds add a slight premium (or don’t add a slight premium (or don’t discount) to satisfy owner discount) to satisfy owner prejudiceprejudice

Often expressed in auction Often expressed in auction marketsmarkets

Factors Not Included in Fair Market ValueFactors Not Included in Fair Market Value

The animals are familyThe animals are family

Family financial needsFamily financial needs

Bonus for cooperationBonus for cooperation Need appraisal objectivityNeed appraisal objectivity Not allowedNot allowed Can lead to domino affect where Can lead to domino affect where

future owners won’t cooperate future owners won’t cooperate without bonuswithout bonus

Modified Sales Comparison Modified Sales Comparison ApproachApproach

Use of auction market Use of auction market reports and auctioneer reports and auctioneer (expert) opinion (expert) opinion Are not true comparables and Are not true comparables and

thus don’t qualify for a true thus don’t qualify for a true sales comparison approachsales comparison approach

However, they provide useful However, they provide useful information that can allow us information that can allow us to determine valueto determine value

Using Auction Market Reports to Using Auction Market Reports to Determine ValueDetermine Value

Auction market reports often limited to Auction market reports often limited to summary informationsummary information e.g. fresh Holstein cowse.g. fresh Holstein cows

Sometimes will report very general body Sometimes will report very general body condition, e.g. “good”condition, e.g. “good”

Usually don’t report milk productionUsually don’t report milk production May not report how many were sold in any May not report how many were sold in any

one categoryone categorySale of a few animals may not be Sale of a few animals may not be

representative of fair market valuerepresentative of fair market value May not report average value for any May not report average value for any

categorycategoryRange can be miss leading as an outlier can Range can be miss leading as an outlier can

greatly widen the rangegreatly widen the range

Using Auction Market Reports to Using Auction Market Reports to Determine ValueDetermine Value

Livestock producers claim that auctions under Livestock producers claim that auctions under represent value as lower quality animals represent value as lower quality animals populate auction salespopulate auction sales Somebody is purchasing these animals and taking Somebody is purchasing these animals and taking

them back to their operationthem back to their operation Auction Reports sometime don’t report animals that Auction Reports sometime don’t report animals that

sold at lower pricessold at lower prices

Basing Appraisal Value on Basing Appraisal Value on Auction Market ReportsAuction Market Reports

Reported prices will usually be a range Reported prices will usually be a range of valueof value If subject property matches up with reported If subject property matches up with reported

quality characteristics, then select midpoint quality characteristics, then select midpoint (50(50thth percentile or median) value percentile or median) value Auction prices of fresh cows, 2 - 3 years old: Auction prices of fresh cows, 2 - 3 years old:

$1500 - $2500$1500 - $2500 Midpoint is $2000Midpoint is $2000

Subject: 3 yr old fresh dairy cow with milk Subject: 3 yr old fresh dairy cow with milk production near state average: value = $2000production near state average: value = $2000

If have data on each lot sold, then take If have data on each lot sold, then take average or if have an outlier use median average or if have an outlier use median (middle) value(middle) value If lots are of multiple animals then calculate a If lots are of multiple animals then calculate a

weighted averageweighted average Sum total sales value and divide by total number Sum total sales value and divide by total number

of animals of animals


If have prices from If have prices from multiple auctions canmultiple auctions can Average their midpointsAverage their midpoints

$900 ($700 - $1100) $900 ($700 - $1100) + $1000 ($800 - $1200)+ $1000 ($800 - $1200)+ $1200 ($1000 - $1400)+ $1200 ($1000 - $1400) + $900 ($600 - $1200) + $900 ($600 - $1200) = $4000 ÷ 4 = $1000= $4000 ÷ 4 = $1000

Take the midpoint of Take the midpoint of highest minimum value highest minimum value and lowest maximum and lowest maximum valuevalue ($1000 + $1100) ($1000 + $1100) ÷ 2 = ÷ 2 =

$1050$1050

MinimumMinimum

ValueValue

MaximumMaximum

ValueValue

Auction 1Auction 1 $700$700 $1100$1100

Auction 2Auction 2 $800$800 $1200$1200

Auction 3Auction 3 $1000$1000 $1400$1400

Auction 4Auction 4 $600$600 $1200$1200


When auctions list average value for top 1, top 5, top 10, top When auctions list average value for top 1, top 5, top 10, top 50, top 100, etc.50, top 100, etc. Can calculate average value for 2-5 top head, 6-10 top head, 11-50 Can calculate average value for 2-5 top head, 6-10 top head, 11-50

top head, 51-100 top head, etctop head, 51-100 top head, etc Example: Top, $1600; Top 5, $1500; Top 10, $1450Example: Top, $1600; Top 5, $1500; Top 10, $1450

Determine total value for top 5, subtract value of top 1, divide by 4 (5 Determine total value for top 5, subtract value of top 1, divide by 4 (5 - 1) to obtain average value of top 2-5 head.- 1) to obtain average value of top 2-5 head.

($1500 x 5 - $1600) ($1500 x 5 - $1600) ÷ (5 -1) = $5900 ÷ 4 = $1475÷ (5 -1) = $5900 ÷ 4 = $1475

Determine total value for top 10, subtract total value for top 5, divide Determine total value for top 10, subtract total value for top 5, divide by 5 (10 - 5) to obtain average value of top 6-10 headby 5 (10 - 5) to obtain average value of top 6-10 head

($1450 x 10 - $1500 x 5) ($1450 x 10 - $1500 x 5) ÷ (10 -5) = $7000 ÷ 5 = $1400÷ (10 -5) = $7000 ÷ 5 = $1400

Repeat processRepeat process For average quality I use the average value for the bottom category For average quality I use the average value for the bottom category

as it generally has the most head and often there are other animals as it generally has the most head and often there are other animals sold at a lower price that are not reportedsold at a lower price that are not reported

Making Adjustments to Auction Market Making Adjustments to Auction Market ReportsReports

Making adjustment for an unreported Making adjustment for an unreported characteristic (e.g. milk production in characteristic (e.g. milk production in dairy cows) dairy cows) What to do when subject animal What to do when subject animal doesn’t match up to reported doesn’t match up to reported characteristicscharacteristics ExampleExample

Auction prices of fresh cows, 2 - 3 years old: Auction prices of fresh cows, 2 - 3 years old: $1500 - $2500$1500 - $2500

Subject cow 1: fresh cow 3 years old milking Subject cow 1: fresh cow 3 years old milking 3000 pounds above state average3000 pounds above state average

Subject cow 2: fresh cow 6 years old milking Subject cow 2: fresh cow 6 years old milking 3000 pounds above state average3000 pounds above state average

Adjustments for Unreported Adjustments for Unreported CharacteristicsCharacteristics

Assuming subject property matches up with Assuming subject property matches up with reported quality characteristics, can move reported quality characteristics, can move towards either the bottom or top of the towards either the bottom or top of the reported pricereported price One option is to select the 25One option is to select the 25thth / 75 / 75thth percentile percentile

(midpoint between 50(midpoint between 50thth percentile and bottom/top) percentile and bottom/top) for poorer/better quality animalsfor poorer/better quality animalsMidpoint (50Midpoint (50thth percentile) of $1500 - $2500 is $2000 percentile) of $1500 - $2500 is $20002525thth percentile: midpoint between $1500 & $2000 or $1750 percentile: midpoint between $1500 & $2000 or $17507575thth percentile: midpoint between $2000 & $2500 or $2250 percentile: midpoint between $2000 & $2500 or $2250Subject dairy cow 1: $2250Subject dairy cow 1: $2250

If extremely better/poorer, then could select If extremely better/poorer, then could select top/bottom of price rangetop/bottom of price range

Adjustments for Characteristics that Adjustments for Characteristics that Don’t Match Market ReportsDon’t Match Market Reports

Determine value of a base animal and Determine value of a base animal and then make adjustments based upon then make adjustments based upon other information you haveother information you have Subject cow 2: 6 yrs old, 3000 lbs above Subject cow 2: 6 yrs old, 3000 lbs above

state milk averagestate milk average Base animal: select 75% percentile to Base animal: select 75% percentile to

account for superior milk production: $2250account for superior milk production: $2250 Based upon assumed previous analysis Based upon assumed previous analysis

depreciation is $200 per year of agedepreciation is $200 per year of age 6 yrs – 3 yrs @ $200/yr = $900 adjustment6 yrs – 3 yrs @ $200/yr = $900 adjustment Appraisal value: $2250 - $900 = $1350Appraisal value: $2250 - $900 = $1350

Remember: You can move within the Remember: You can move within the price range to adjust for a characteristic price range to adjust for a characteristic not reported, but must make an not reported, but must make an adjustment for a characteristic that is adjustment for a characteristic that is different from what is reporteddifferent from what is reported

Obtaining Expert OpinionObtaining Expert Opinion

Describe the subject animal in detailDescribe the subject animal in detailExample: 3-4 year old Angus cow, Example: 3-4 year old Angus cow,

commercial grade, confirmed 5-6 commercial grade, confirmed 5-6 months pregnant, good body condition months pregnant, good body condition

Don’t simply ask, “What are beef cows Don’t simply ask, “What are beef cows selling for?”selling for?”

Once a base animal has been describe, Once a base animal has been describe, then can ask how age, weight, breed, then can ask how age, weight, breed, body condition, breed registration, body condition, breed registration, pregnancy status, etc impact valuepregnancy status, etc impact value

Reporting Expert OpinionReporting Expert Opinion

Expert’s response will become part of the appraisal Expert’s response will become part of the appraisal report, example:report, example: Joe Doe, Top Value Livestock Auction Market, October 9, 2008Joe Doe, Top Value Livestock Auction Market, October 9, 2008 Values for bred Angus cow, 3-4 years of age, commercial grade, Values for bred Angus cow, 3-4 years of age, commercial grade,

good body conditiongood body condition Young cows: $900 to $1300, very top quality $1500Young cows: $900 to $1300, very top quality $1500 Sold mouth cows: $800 to $1000Sold mouth cows: $800 to $1000 Broken mouth cows: $100 over cull valueBroken mouth cows: $100 over cull value Cull price: $45 - $50 per cwtCull price: $45 - $50 per cwt Registered: up to $100 extraRegistered: up to $100 extra Fair body condition: discount $100 - $200Fair body condition: discount $100 - $200 Poor body condition: $100 above cull valuePoor body condition: $100 above cull value Other breeds: generally bring a little lessOther breeds: generally bring a little less Market is generally down $100 to $200 due to poor pasture Market is generally down $100 to $200 due to poor pasture

conditions / hay shortage resulting from summer droughtconditions / hay shortage resulting from summer drought

Using Auction Reports & Using Auction Reports & Expert OpinionExpert Opinion

Can combine information from bothCan combine information from both Start with expert opinionStart with expert opinion

Generally a range of valueGenerally a range of value Use auction prices as supporting Use auction prices as supporting

evidence and for adjustment to final evidence and for adjustment to final appraisal valueappraisal value i.e. specific value within the expert opinion i.e. specific value within the expert opinion

rangerange

Remember to include copies of the Remember to include copies of the auction reports as part of your auction reports as part of your appraisal report as well as the appraisal report as well as the information gained from the expertinformation gained from the expert

Appraising in GroupsAppraising in GroupsWhen appraising a herd one can When appraising a herd one can appraise groups of animals as appraise groups of animals as long as they have similar valuelong as they have similar value Develop a few categories to place Develop a few categories to place

all the animalsall the animalse.g. for dairy cows have 4 levels of e.g. for dairy cows have 4 levels of

lactation and 3 levels of milk lactation and 3 levels of milk production to have 4x3 grid of values production to have 4x3 grid of values with a 13with a 13thth value for animals to be value for animals to be culled due to reproductive, body culled due to reproductive, body condition, mammary problems, poor condition, mammary problems, poor production etc.production etc.

Categories should be relevant and Categories should be relevant and have reasonable percentage of the have reasonable percentage of the herdherd

e.g. in the above example may e.g. in the above example may eliminate the low milk production eliminate the low milk production category as such animals would culled category as such animals would culled by end of lactation by end of lactation

Appraising in GroupsAppraising in GroupsDevelop a few categories to place all Develop a few categories to place all the animalsthe animals Determine value for each category then Determine value for each category then

place the animals into the categoriesplace the animals into the categories Alternatively could have base animal Alternatively could have base animal

with predetermined adjustments for a with predetermined adjustments for a few key parametersfew key parameterse.g. base milk cow: 1e.g. base milk cow: 1stst lactation, milking lactation, milking

18,000 lbs, open & no breed registry with 18,000 lbs, open & no breed registry with adjustments for higher lactation levels, adjustments for higher lactation levels, milking above 21,000 lbs, above 24,000 lbs; milking above 21,000 lbs, above 24,000 lbs; pregnant; bred registeredpregnant; bred registered

Assumes adjustments are independent of Assumes adjustments are independent of one anotherone another

Should there be a breed registration premium Should there be a breed registration premium for an older animal?for an older animal?

Accounting for Differences in TimeAccounting for Differences in Time

Sometimes have very good price Sometimes have very good price information, but it may be datedinformation, but it may be dated Indexing using an established price series Indexing using an established price series

can be an option for updating pricescan be an option for updating prices Example: Have November price Example: Have November price

information for Telemark cattle & subject information for Telemark cattle & subject cow would be worth $1000, however, it is cow would be worth $1000, however, it is now Junenow June

In November, In November, DroversDrovers reported average reported average bred cow worth $700 and in June, $800bred cow worth $700 and in June, $800

Indexing: (current series value / past series Indexing: (current series value / past series value) x value of interestvalue) x value of interest

($800/$700) x $1000 = $1143 ($800/$700) x $1000 = $1143 ►$1150►$1150

Major assumption: that subject animal has Major assumption: that subject animal has changed in value the same percentage as changed in value the same percentage as animals in the price seriesanimals in the price series

If true, then a viable option; if not then don’t If true, then a viable option; if not then don’t index index

Questions?Questions?

Appraisal Principles USPAP Perspective. Determining Fair Market Value Appraisal is an estimate of...

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