Episode 19 Appraising and Land Values
The crew talks with Ag Credit's Chief Risk Officer Shane Turner and Staff Appraiser Bud Burdette about the appraisal process, evaluating land, and current market trends.
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[00:00:01.210] - Caleb Sadler
Welcome to Beyond Agriculture, the podcast that takes you beyond the scope of AG and into the real life stories, conversations and events taking place in our community. Who we are and what we do is Beyond Agriculture. Hello, and welcome in to Beyond Agriculture. Caleb Sadler back with you today. Also joined with Tom Zack Evans. How are you doing, Tom Zach?[00:00:31.070] - Tom Zack Evans
Good.[00:00:32.790] - Caleb Sadler
We're also joined with a few special guests from the association that work for us as well, Mr. Shane Turner and Mr. Bud Burdette. How are you all doing today?[00:00:41.330] - Bud Burdette
Doing well, doing well.[00:00:42.740] - Shane Turner
Thanks for having us.[00:00:43.680] - Caleb Sadler
Good. So we'll get started here. Shane, how about you tell us a little bit about yourself and then Tom Zach and I'll ask you a few questions and see what we can come up with.[00:00:52.820] - Shane Turner
Sure. Well, I grew up in Garrard county in the big metropolis of Paint Lick. Went to Garrard County High School and then went on to Eastern Kentucky University and majored in marketing and went back in '06 and finished up my MBA there. Been with the association for nearly 34 years, full time, started back as a student intern in 1987. Our former CEO, Jim Caldwell came to AG finance class, Dr. Lindsay Horn, and asked if there was anybody that wanted to do any summer work at the time, and Dr. Horn recommended me. So I worked two years as a student intern, started full time in 1990, and the rest is history.[00:01:44.370] - Caleb Sadler
So, 1990.[00:01:46.130] - Tom Zack Evans
tell us a little bit.[00:01:46.950] - Tom Zack Evans
About your family and your farming operation, Shane[00:01:49.320] - Shane Turner
Sure. I farm with my brother. He's a full time farmer in Garrett Madison County. His name is Heath Turner. I go down on the weekends and get in his hair and tell him what he needs to do, straighten him out for the week. But he does a really good job. We have a cow calf operation and a bread heifer operation. We farm approximately together about 350 acres in Madison and Garrard County.[00:02:17.450] - Tom Zack Evans
Okay, and how many kids?[00:02:19.570] - Shane Turner
We have three kids. I have a 20 year old at UK, a 19 year old who is at BCTC, and I have a 16 year old at Frederick Douglas who is heavily involved in volleyball right now. And we do a lot of traveling with that.[00:02:35.600] - Tom Zack Evans
Good deal.[00:02:36.600] - Caleb Sadler
So over the years from the association that you've been here since you've been here a long time and a lot of valuable information you've passed on to us as the younger loan officers, but kind of tell us a little bit about the positions that you served in since you started with the association.[00:02:50.990] - Shane Turner
Sure. Well, I started out as a loan officer in the Richmond branch office with working with Rob Anderson and then John Thomas. After that, I moved over to the Stanford branch office as a loan officer working with Paul Weiler. Back in the 1990s, the savings and loan crisis created a need to have certified appraisers and so that's when I went over into got my appraisal certification, came state certified, general certified, and then started working for the association internally, doing farm appraisals and rural homes, stuff like that. And I did that for several years. Then I was pulled back into the credit side as branch manager for the Lexington branch office. Then I became the regional manager for Georgetown at the time, Lexington and Paris. And then later on, I became Vice President of Credit over Lexington, Paris, and Richmond, as well as a Frankfort office, which is a new office that we had opened up. And then in 2017, I became the Chief Risk Officer for the association.[00:04:11.430] - Caleb Sadler
So, needless to say, over the past 34 years, you've worn several hats across the association.[00:04:17.270] - Shane Turner
That's putting it lightly.[00:04:19.410] - Caleb Sadler
So the last position you're in right now, the Chief Risk Officers, what is that position? Tell us a little bit about that and the role that you do in that position for the association.[00:04:29.100] - Shane Turner
Sure. The Chief risk Officer position was a new position that Jim Caldwell, our former CEO, created. Nobody had that role when I took it 2017. But because we had grown so much, he felt the need to kind of help Jonathan Noe, who was a Chief Credit Officer at the time, with some of the duties that he had and kind of shift maybe the risk piece of the association off of him and kind of let me take over. I also serve right now as the audit Coordinator for the association. I serve as the CEC, the Collateral Evaluation Coordinator and the compliance officer. And the safe act officer. So I've got a few roles that.[00:05:15.880] - Caleb Sadler
I was going to say a Chief Risk Officer really encompasses a lot more.[00:05:19.210] - Tom Zack Evans
Than what in addition to working with the appraisals yes.[00:05:23.910] - Shane Turner
That falls under the purview of the collateral valuation coordinator. I basically handle all of the appraisals that are requested by the lending staff come through me. That is one of the things that our regulator wants, is to have that buffer so that there's no undue influence. So when an appraisal request comes in, I will look at the assignment and then I'll send the appraisal request out to the appraiser who I think best feels that need it's competent to do the assignment.[00:05:59.650] - Tom Zack Evans
Okay.[00:06:01.090] - Tom Zack Evans
So now we can lead into kind of how the loan process works and how all this ties together with the appraisers. So when someone inquires about a loan, they might be doing that online, in person, over the phone, and they generally start with a loan application. Depending on the size of the loan, we'll determine if just an application and driver's license coupled with a field visit to see the collateral will suffice for some of the small cattle and equipment loans. Or obviously, if it's a larger real estate loan, it's more complex. Then we will get three years of tax returns, a balance sheet or financial statement to analyze the loan. And then once the loan is approved by the appropriate employee or executive loan committee or even approved by the loan officer at that point, then we will request an appraisal of the property. So that's where Shane comes in and of course, Bud and whoever the appraiser is going to be on the assignment.[00:07:12.650] - Caleb Sadler
And that's a good way to transition here, too. Bud, I want you to introduce yourself a little bit and tell a little bit about how long you've been with the association and what your roles are here as well.[00:07:23.620] - Bud Burdette
Okay. I started with AG Credit in August of 2005, and prior to that, I had done some appraisal education and done some fee work with a residential group out of Harrodsburg. And I took the job kind of as a retirement job.[00:07:48.230] - Caleb Sadler
It's turned into more than that. Right.[00:07:49.990] - Bud Burdette
We had about 30 years in the dairy business, so farming is near and dear to my heart, and this was a great fit has been to the to this day.[00:08:00.460] - Caleb Sadler
Good deal. Now, you are the association appraiser. Yes. Tell us a little bit about what that role entails and I guess some of the things that you've seen over the years.[00:08:12.620] - Bud Burdette
Okay, well, my job description basically is to do appraisal assignments that qualify under a general state certification, which I got in 2008, I think it was. But it also includes keeping data on current sales data throughout the association. It also includes being available to council loan guys on values in the area and information they may require that way. And currently it involves training a young lady, Blair Rainey from Washington County, as she begins her appraisal training and in lieu of her certification down the pike. It's a good job. I enjoy it very much and it's a lot of interaction. I get opportunity to visit and to work with every loan office, which is kind of unusual. I get to know people very well.[00:09:14.550] - Shane Turner
One of the things that I would interject here and say is that Bud being our staff appraiser, he typically gets assigned some of the more complex properties, the horse farms or the large acreage. A lot of people ask us, why do we have a staff Appraiser or appraisers rather than just hiring a normal Appraiser that's in the open market that works independently? Our appraisers go through specialized training through the American Society of Farm Managers and Rural Appraisers, and that is a professional organization that specializes in rural properties. And not every Appraiser out there, even though they may have a state certified general designation, may not have had this type of specialized training. And so I will send these complex, highly important appraisals over to Bud and eventually over to Blair because they've had this training that we seek.[00:10:21.910] - Caleb Sadler
Got you. I'm going to ask both of you all this one because it's going to kind of circle back here, but both of you all been with the association for several years now and you've seen a lot of trends over the years, I guess. Tell us a little bit about those trends. What have you all witnessed and do you see any of those trends repeating themselves?[00:10:44.270] - Bud Burdette
I'll start I was fairly new here when in 2008 and 9, and some things that I noted that were very obvious was on the residential side, lot sales stopped even in the more active markets. Scott County, Madison County, it's dried on the vine and land sales really slowed to a trickle. Some counties different than others, but we really didn't start seeing a significant amount of land sales till maybe the end of 2010 into 2011. So the market, there are some sales that will have to happen just based on life event. Yes, so these will happen. But an active market, you're going to have multiple buyers and this thing, when you're going through changes, the market sends you signals that things are slowing or speeding up either way.[00:12:00.950] - Caleb Sadler
I'll even relate to that too, because you brought up a really good point. It wasn't necessarily some of the AG side the housing market in 2008, but we had a really bad drought in 2010. I'm just going back to my memory and then we saw elevated grain prices right after that, which kind of fueled.[00:12:19.460] - Tom Zack Evans
Created a grain boom there of 2012 for sure, and folks seeking more land to raise grain and obviously more equipment followed with that.[00:12:32.270] - Caleb Sadler
So basically when you get an assignment for an appraisal, tell us a little bit about the process that you go through and some of the steps that you do in that. And I guess, Shane, you could feed into that too.[00:12:43.080] - Shane Turner
Well, I'll kind of start out since I'm kind of the front end of the process. Again, once I get an assignment that's sent to me from a loan officer requesting an appraisal, I will look at the material that they provided for me aerial photographs, construction plans, PVA cards, soul maps, etc. And make a determination out of the list of appraisers that I normally use. Who's the most qualified to do this assignment? And so let's take a complicated property that's highly improved, a working farm, large acreage. I would normally send that to Bud. I have a couple of more appraisers fee appraisers that we use, but I would send that to Bud or one of the qualified fee appraisers to basically, I'll send an engagement letter to them and kind of give them some instructions as to what's going on with the deal along with the attachments that were sent to me by the loan officer. And then within a 30 day period, something reasonable. These things can't be turned around in a week like a home appraisal can be because there's a lot of inspection work that goes on and courthouse work and things behind the scene analysis and things like that with the comp sales that you just don't have with a home appraisal.[00:14:09.470] - Shane Turner
But Bud, we'll take it from there and kind of tell them the process that you go through.[00:14:15.590] - Bud Burdette
Well, I think probably the first thing that I'd like to say is that when a person gets an appraisal, at least through us, they can rest assured that we put enough work into it so that they're getting an accurate product, something that is reliable in the market as of the date we do it. Okay. The other thing is we really attempt, no matter the scale of the appraisal, they all are done exactly the same way the same steps are done. It's our intent that they're getting information that correctly defines their property from acreage to ownership records to whatever. All those steps are taken immediately. And then we have a process through which we gather sales data, weed through it, analyze it. We have a word we call extract break down sales. And we compare apples to apples. And it really is, from an analysis standpoint, that simple. The trick is figuring out what are apples and what are oranges.[00:15:30.910] - Caleb Sadler
Yeah, that's exactly right.[00:15:32.640] - Bud Burdette
And the other thing, and I'll just make this statement because people I wouldn't have understood it, but now I do. You never know what is complex when it hits the door. You have no clue. I've seen ten acre tracks be harder than a horse farm. It all depends on the shape and just all kinds of things. On the legal description, it can be anything. But just rest assured when the work is done that you're getting our best effort up front. And we do the same analysis for every single piece. Doesn't matter who the borrower is.[00:16:10.310] - Shane Turner
And we ask our appraisers, whether it's Bud or Blair or our fee appraisers. We have an expectation of a level of independence and we want them to feel free and to be able to put an assignment together and not have fear that if they don't hit the mark, that they don't get another job. We have a fiduciary responsibility to our customer who's come in and place their trust in us to basically give them a fair estimate of what we believe the property is worth.[00:16:50.710] - Bud Burdette
Exactly.[00:16:51.400] - Caleb Sadler
The worst thing we can do is get them in a position to where they're either upside down on the property right away or what? I mean, that's just not our intention.[00:16:59.950] - Shane Turner
It is not. And it is not our job or intent to kill deals either. We have a lot of very good realtors out there who are perfectly capable of advising their buyer, their seller upfront. And we typically work really well with the real estate side of it, the realtors. But we also have a level of independence too, and a responsibility to our customer and to the association to be independent and honest about the values that are put on these properties.[00:17:35.320] - Caleb Sadler
So in terms of value in a property, I know there's a couple of different ways that we look at that. Can you all kind of explain the difference there? I know there's a cost approach side and some of that when I'm dealing.[00:17:47.600] - Bud Burdette
With a heavily AG property, property that you can make money from the production of the land, I will typically break the soils down by their land classes, by their productivity, and compare my comps exactly the same way. And we call that a cost approach. The buildings are done the same way, and then we sum differences in value based on our comparables. And then the other approach that we most commonly use is a sales comparison approach. And that simply is comparing one sale to the next and making adjustments that reflect what the subject looks like. Okay. So that when I get my values, I'm actually changing the sales in the grid that I use my comparable sales so that they look like the subject.[00:18:44.080] - Caleb Sadler
Got you.[00:18:44.630] - Bud Burdette
And I weigh them accordingly so that we balance the sales so that we have a picture of the subject property, and then we compare that back to the cost approach. And if I've got a farm that is in heavy production that's making money from the land, we can insert an income approach and make estimates on cash rents and this type of thing and net income and back out of value that way, too. And so we end up basically reconciling three approaches to value to get a value that we feel comfortable with.[00:19:22.740] - Caleb Sadler
Got you.[00:19:23.360] - Tom Zack Evans
And Bud, too. If you could explain a little bit about how the sales need to be relative in location, in time. What are some of those that you look at? The relativity.[00:19:38.080] - Bud Burdette
Yes, every county that we work in is different, but every county also has similarities. There are certain areas within a county that are comparable based on location access, soils, land use. Okay. And these can vary significantly, but every county has them. And I would encourage the folks that hear this if they have a Sunday afternoon, just get in their car in their county and drive around to the different areas and just notice the differences in different parts of the county. Terrain, access, land use, all these things come to play. And I go back to apples to apples. But we have to balance land use, location access when we select our comparables. Yeah.[00:20:34.700] - Tom Zack Evans
25 acres that's wooded with a hillside would have a value versus 25 acres that's prime crop land would also have another value. So I think that's a lot for people to think about when they're looking at buying properties. What you're after there?[00:20:53.380] - Bud Burdette
Well, one thing, and this might simplify it, we use a term called buyer pool. When I select comparables, I'm looking for land that has the same group of buyers interested in it. And if I select out of that pool, I'm inaccurate.[00:21:14.250] - Caleb Sadler
I'll go back and say, this what you were talking about there bud with getting in the car and driving around one Sunday afternoon. It's amazing how fast the topography in a county will change. I mean, you can go from one road and go a mile down the road and it's totally different real estate than where you were before. So just keep that in mind too.[00:21:34.420] - Bud Burdette
Yes.[00:21:35.180] - Shane Turner
And another aspect of the appraisal process too early on in the assignment is determining highest and best use. That's an exercise that all appraisers go through because if you miss highest and best use up front, then it will throw the whole report off. And basically what I mean by highest and best use is the property may be farmed right now, they may have row crops, they may have cattle on it, but if it's setting in downtown Lexington on Man O War, farming may not be the highest and best use of that property. And so the appraiser has to make that determination. And sometimes those nuances aren't as clear as the example I just gave. And it can be tough trying to determine what the highest and best use of a property is because it determines your comps, it determines the approaches to value that you use. So if you don't get that right, then the whole report may not be credible.[00:22:43.330] - Caleb Sadler
So we'll circle back up here from a lending standpoint and what Tom Zach and I do as loan officers. Shane, tell us a little bit about why we do the appraisals and why we need that.[00:22:56.410] - Shane Turner
Well, the appraisal function is a critical part of the total credit package. It basically lets us know what security position we are in on that credit package in the event of default. And we try everything that we can to avoid default. Sometimes it happens, but it lets us know as an association, it lets our regulators know how well secured a credit package is going into the deal. And we use the term loan to value. And so we have underwriting standards based on whatever the appraised value comes back to determine what acceptable loan to values that we can have. If it exceeds a certain threshold, we may have to go a certain route outside of our normal. Underwriting standards such as an FSA guarantee, there's a lot of options that we can do even if it's a very high loan to value. So we try to present several options to the customer rather than just having a hard 80% or 75% loan to value because not a lot of people, especially on a big farm, have 25% cash to infuse into a deal.[00:24:15.760] - Caleb Sadler
You start talking about a lot of money really quick when you get up those sizable properties of 100 acres or so.[00:24:21.240] - Shane Turner
That's right.[00:24:23.250] - Caleb Sadler
So as we wrap up a little bit, what are some things that I guess you could say if you were going to list a property or even you were looking to maintain value, what are some of those things on the property you can do to keep up the value where it's not going to decrease over time?[00:24:40.170] - Bud Burdette
Well, I think maintenance is a big thing. Maintenance of buildings that have good use, good utility. Just keeping up a small storage building or something may not be. And I think you have to realize that curb appeal comes into play in more residential type properties and for farm buildings. I think when we look at a complex farm with a lot of improvements, if you're a buyer, when you look to purchase property and it's got additional buildings on top of the land, what's it going to cost to keep this place in shape, to keep it up? Very simply, the way you would look at anybody would look at a piece of property, what is the best value for my dollar? So if he's buying buildings that have good utility and are well maintained and they contribute to the use of the land, then they're going to contribute more to the farm. If the soils are well maintained and fertile and cared for, he can walk in the door tomorrow and get good use of the land. And I think all these things contribute from our personal standpoint. I think good maintenance and good production are signals of management.[00:26:10.470] - Caleb Sadler
I would equate that back over on our side too, when we're determining the credit. I mean, a farm that's well maintained and manicured properly, the man factor is there in terms of a maintenance standpoint. I agree with that. So discussing like, future value here, where do you all see trends going in terms of real estate prices? I mean, obviously right now our interest rates seem to be affecting things just from the standpoint that they're elevated. But do you all see that affecting things? And what trends are we seeing there?[00:26:45.490] - Shane Turner
We've seen farm real estate spike up pretty significantly here over the past several years. We had a lot of government infusion of money and people buying things when interest rates were extremely low, which really put pressure on the market and drove values up. I haven't seen a lot of softening just yet in that we've seen the market slow down. But historically speaking, real estate investment has has been a pretty safe investment when you're looking at a longer time horizon. Now, if you're trying just like stocks, if you're trying to time the market, get in and get out, you can get burned. But over time, real estate has probably returned 7% to 10% appreciation over a long time horizon. So I like farm real estate. I own farm real estate and we lend on it. So I'm pretty bullish on it.[00:27:46.600] - Caleb Sadler
It's probably consistent too, when you start equating that back over to like a return on investment, like a 401K little more consistent, you don't have the ups and downs that you would.[00:27:55.780] - Shane Turner
And I like, I can go out and see my farm. That's exactly right. Go out and walk on.[00:28:02.410] - Caleb Sadler
It the days where the market drops 300 points, that makes you glad you got a farm. That's exactly right.[00:28:11.630] - Bud Burdette
The only thing I would add to that it's impossible to predict the future, but COVID I think taught us something that people buy real estate for reasons that we sometimes don't track. And a lot of times in this business, we try to take a very fluctuating market and make it average so that the loan process makes sense. I don't really know what the future brings, but I think it depends a lot on the other markets, what's going on. Like you said, in any kind of your investment market or we still have a high cattle market, we have commodity markets are high, we're seeing drop offs, input cost and fertilizers and things like that. As long as the balance is there and folks can make payments, I think the demand for good land is going to be strong. Recreational land, residential land, those are going to depend more on your interest rate fluctuations, your disposable income, things like that, that are they're a little more tied into that. So yeah, I mean, over time I think it is fairly steady. But boy, there's some bumps in the middle.[00:29:52.510] - Shane Turner
We're very lucky where we live here in central Kentucky. Because unlike in the corn belt in the middle of Illinois or Iowa, places like that, where farmland values are driven strictly by commodity prices, in most cases you have a lot of influences that push values here in central Kentucky. Just with the non farm employment that we have and our capital right here in central Kentucky and industry and things like that. So you have a lot of things that help maintain value and even push value up as far as demand because of the place that we live, Central Kentucky.[00:30:41.770] - Caleb Sadler
I always say if you drive down Paris Pike or from Paris to Lexington, it's one of the most beautiful drives in the state of Kentucky, I think. So this was all the horse farms and everything else that's going on there. Well, as we wrap up today, I really appreciate Shane and Bud, you all taking the time out of your all schedule to come on and be on Beyond Agriculture. And we also want to thank our listeners today for tuning in and listening. So be sure to go out and like subscribe and share our podcast and we look forward to hearing or seeing you back on Beyond Agriculture in the future.[00:31:16.090]
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