Timberland appraisals adhere to the same basic principles as any other real estate appraisal. That said, some details and considerations of appraising timberland are unique.
A timberland appraisal is an accurate valuation of a property’s saleable and pre-sales timber. The most common reason you’ll need an appraisal is to obtain the value of timberland that you’re either planning to purchase or sell. In some cases, though, you may need an appraisal done for insurance, tax, financing, or litigation purposes.
Appraisals done for different purposes may differ in their final valuation. For example, an appraisal conducted to calculate the value of a partial partnership interest will come back with a different final value than an appraisal conducted to calculate the value of a full ownership interest.
Regardless of the purpose of the appraisal, the process will be mostly the same. Here’s what to expect.
Identifying the Property, Ownership Interest, Effective Date, and Objectives
An appraiser needs to know precisely what he or she is looking at to come up with an accurate value of your timberland. They also may inquire as to the purpose of the appraisal—what you plan to use it for, etc. If you’re having an appraisal done for insurance purposes, your insurance company may only be ensuring a portion of the property. If that’s the case, the appraiser may evaluate one portion of your property—for example, the buildings—separately from other parts, such as the land and the timber.
The appraiser will need to identify exactly where the property begins and ends, what’s on the property, and the effective date of the appraisal. Once they’ve identified the characteristics of the property—including the quantity, type, and age of timber—as well as access, acreage, and prior uses of the land, they’ll move on to the valuation of the property.
Timber Appraisals and the Three Methods of Valuation
When it comes to timberland appraisals, there are three generally accepted methods of valuation. The three methods are:
- The Sales Comparison Approach
- The Cost Approach
- The Income Capitalization Approach
All three methods have limitations depending on the characteristics of the subject property and existing market conditions. Generally, real estate appraisals (including timber appraisals) use a combination of all three valuation methods.
In order to execute these approaches, your appraiser will evaluate recent timber and timberland sales. They’ll also calculate the hypothetical cost of producing a substitute property. Finally, using a timber appraisal, the appraiser will estimate the potential future income provided by the amount, age, and quality of saleable timber.
Arriving at a Final Value
Once the appraiser has evaluated all the factors mentioned above, they will prepare a final appraisal. As mentioned earlier, the appraiser will use some combination of the three valuation methods. But, they will more heavily weigh one or two of the valuation methods to come up with a final value.
Which method the appraiser places the most weight on depends on the purpose of the appraisal, market conditions, and property characteristics. For example, if you’re trying to sell timberland, the appraiser will likely weigh the value derived from the Income Capitalization Approach most heavily. Alternatively, if you’re buying timberland, they’ll heavily consider the Sales Comparison Approach. And for a timber-only sale, either approach may be preferred.
Need a Timber Appraisal Done by a Trusted Expert?
There’s no substitute for knowing the true value of a piece of timberland. Whether you’re buying or selling, having a figure in mind will make you a far more effective negotiator. And for timber management companies, in particular, accurate valuation of timberland is critical for long-term investment success.
Contact DDK Forestry & Real Estate today by calling (501) 219-8600 to get started.