APPRAISING THE APPRAISAL PROCESS
FORESTLAND APPRAISALS CAN BE COSTLY AND TIME-CONSUMING. BUT WHETHER FOR A SALE, PURCHASE, OR ESTATE PLAN, A GOOD APPRAISAL IS WELL WORTH THE EFFORT.
BY JASON LITTLE
Photo: Getty Images
What exactly is an appraisal, and when do I need one? Where do I start, and how much should it cost? If you own or manage forestland, you have probably asked yourself one or more of these questions. They can be challenging to answer, given that most landowners have limited knowledge of and exposure to the appraisal process. Consequently, many tend to avoid and delay ordering appraisals to their detriment.
However, doing research and working with a competent professional can simplify the process and eliminate the frustration and stress of appraising your property. This article should help you navigate the appraisal process for your family or business. We will first give an overview of the appraisal process and then highlight some of the challenges associated with forestland appraisals.
APPRAISAL PROCESS
Accurately determining the value of a forestland property involves several steps.
Determine the Purpose of the Appraisal: Appraisals are required for various reasons, such as sale, purchase, taxation, or estate planning. The purpose of the appraisal will determine the type of appraisal needed and the methods used.
Gather Information: This step includes gathering information on the size of the property, location, type of timber, age of the timber, topography, soil type, access, and any other relevant information.
Conduct a Field Inspection: The appraiser will conduct a field inspection after gathering information. This involves physically inspecting the forestland property to determine its condition, quality, and quantity of timber. The appraiser will also evaluate the access, boundaries, and other factors affecting the property’s value.
Determine the Timber Volume: The next step involves determining the timber volume/tonnage on the property, which requires measuring the trees and estimating the amount of timber.
Determine the Timber Value: Once the timber volume is determined, the appraiser will evaluate the timber’s value. This is usually based on the current market price for the type of timber and the volume of timber available.
Determine the Land Value: In addition to the timber value, the appraiser will also determine the value of the land. This involves evaluating location, topography, access, and other property value factors.
Calculate the Total Value: Finally, the appraiser will calculate the total value of the forestland property by combining the value of the timber and the value of the land.
Forestland assets are challenging to value, and the timber component creates additional complexity. However, accurate timber values are crucial in determining total property value because timber can carry a significant portion of the overall asset value, as much as 50 percent.
TIMBER VALUATION
Valuing timber can be complicated because it depends on several factors, such as the type and quality of the timber, the size of the trees, the accessibility of the land, and the market demand for wood products. We have highlighted some of the challenges associated with valuing timber; these are just a few factors that can affect the value of timber on your property.
Timber quality: Timber that is straight, tall, and has few knots is typically worth more than timber that is shorter,
crooked, or has knots. Timber quality varies significantly within a stand of trees, especially if the stand was naturally regenerated.
Species: Some species are more valuable than others because they can be used for high-value products.
Market demand: The demand for wood products, such as lumber and paper, can fluctuate over time, affecting the value of timber. A host of economic factors and environmental concerns influence market demand.
Logging costs: If the trees are difficult to access or the terrain is challenging, the logging costs may be higher, reducing the timber’s value.
Volume Estimation: Information on individual trees collected in the woods during the timber inventory is used to predict merchantable tons or board feet by timber product using higher-level mathematics and statistics. It requires a working knowledge of species-specific weight or board feet equations.
Confused? Don’t be discouraged. Hiring a competent appraiser with experience in forestland appraisals and timber valuation can help you accomplish your goals. So, how does one determine if an appraiser has the requisite competency to value forestland ownership appropriately?
APPRAISAL COMPETENCY
What makes a competent appraiser? An appraiser is a trained and licensed professional. Each state has a process whereby appraisers must attain qualifying education and experience requirements and pass a final certification exam.
There are three primary levels of certification: State Licensed Appraiser, State Certified Residential Appraiser, and State Certified General Appraiser. The initial two certifications are for appraisers working on residential homes, apartments, duplexes, etc.
States require a Certified General (CG) License when working on more complex assignments such as commercial real estate and forestland. CG Appraiser requirements include a bachelor’s education or higher, 300 qualifying education hours, and 3,000 hours of acceptable appraisal experience in no less than 18 months.
Once these are met, the appraiser must pass a national certification exam. The first step in selecting a competent appraiser is confirming that the appraiser is a licensed Certified General Appraiser in the State where the property resides.
This is where it gets tricky. Are all CG appraisers qualified to value any asset class (forestland, commercial real estate, golf courses, etc.)? The answer is an emphatic no. Unfortunately, CG status does not certify an appraiser’s competency in any particular asset class. The key word is general; “general” certification does not signify expertise on all appraisal assignments.
Appraisers should all adhere to the Competency Rule. This rule states that an appraiser must be competent to perform the assignment, acquire the necessary competency to complete the task or decline or withdraw from the job. You must exercise caution here because some appraisers do not take this rule seriously or oversimply the appraisal
problem and asset class. In our experience, we have seen many forestland properties and appraisals fall victim to the latter.
We highly recommend selecting an appraiser with the following attributes: active certified general license, expertise/training in measuring and valuing timber, and experience valuing regional forestland. As we previously noted, valuing timber presents unique challenges and requires additional competency.
We highly recommend that a registered forester be involved in any timber inventory and analyses. What is a registered Forester? Most states have a process where you can become a registered forester. Requirements include a bachelor’s degree or higher from a forestry school accredited by the Society of American Foresters. It also requires significant experience hours under a Registered Forester, letters of recommendation, etc. After meeting all the education and experience requirements, foresters must pass a national certification exam. It is very comparable to the CG certification discussed earlier. We have highlighted the complexity of the forestland asset and the requirements of a certified general appraiser and registered forester. Meeting the CG and RF requirements alone takes an individual approximately 3 to 5 years of training (1,800 hours) and 300 hours of additional appraisal coursework after obtaining a 4-year degree in forestry. It is a significant investment of time and money. Not surprisingly, timber inventories and appraisals take time and are costly.
TIMBER INVENTORY AND APPRAISAL FEES
On average, a standard timber inventory fee ranges from $2 to $6 per acre. However, the per-acre price increases as the property gets smaller due to fixed costs, and charges can be outside this range. Completion time on the timber inventory varies widely and is difficult to estimate. It depends on staffing, weather, access, size, etc., but on average, it should take two weeks on properties less than 500 acres. Appraisal fees vary widely based on the property size, location, improvements, highest and best use, encumbrances, etc. On average, appraisal fees range from $4,000 to $20,000. This fee range above does not include the timber inventory fee. Costs can be even higher for the more complicated assignments, and size does not necessarily drive the level of complexity. Conservation easements, leases, improvements, and locations can all increase the difficulty and fee. Assuming the timber inventory is finalized, appraisals generally take four to eight weeks.
SUMMARY
Management of the appraisal process can be a daunting task for you, your family, your business, etc. The key to successful management is engaging a competent CG appraiser experienced in forestland valuation. Appraisals can be invaluable tools in the planning process for estates, families, generational transfers, businesses, investments, etc. In FRC’s 40-plus years of completing forestland appraisals, we have witnessed families, businesses, and investors reap significant returns on investment after completing a quality mapping, timber inventory, and appraisal project. It is an excellent investment. Hopefully, this article clarifies the appraisal process and will be a resource for you as you manage your forestland property.