Reconciling a Wide Range on a Dryland Wheat Ranch
You are reviewing a 2,400-acre dryland wheat/fallow ranch appraisal in eastern Washington. The three approaches produced: Cost Approach $1,950,000 (land value from a county assessor schedule plus depreciated improvements); Sales Comparison $2,610,000; Income Approach $2,180,000 (based on a 4.5% cap rate and net operating income derived from a 3-year average of the owner's actual crop receipts). The appraiser reconciled to $2,300,000 with a one-sentence statement that 'greatest weight was given to the income approach as most relevant to a going concern.' The sales grid shows a 1,200-acre sale at $1,050/acre, a 3,000-acre sale at $980/acre, and a 640-acre sale at $1,240/acre. All are dryland wheat/fallow. The subject's soil is predominantly Class III with some Class IV; the 640-acre sale is Class II.
1. Evaluate whether the reconciliation is adequately supported and identify the specific reconciliation defects.
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The reconciliation is not adequately supported. Defects:
No explanation of the range. The appraiser never explains why the approaches diverge by $660,000 (34%) or why $2,300,000 is the right point within the range. A single sentence invoking 'going concern' does not reconcile.
Mischaracterization of relevance. 'Going concern' implies operating business value; the appraisal is of real property. If the income approach is weighted most heavily, the appraiser must demonstrate that the income reflects real-property earning capacity, not owner-specific management or equipment.
Cost approach treatment. The cost approach's low indicator is driven by an assessor land schedule, which is not market evidence and typically lags. The appraiser should either support the land value with market data or explain why the cost approach is given minimal weight.
Sales range ignored. The sales indicate roughly $980–$1,240/acre, i.e., $2.35M–$2.98M for 2,400 acres. The reconciled $2,300,000 sits below the entire adjusted sales range with no bridge.
A proper reconciliation states why each approach is more or less reliable here, addresses the divergence, and locates the conclusion within or explains its position relative to the sales evidence.
2. The income approach uses the owner's actual crop receipts and a 4.5% cap rate. What review questions must be answered before that indicator can be relied upon?
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Before relying on the income indicator, the review must confirm:
- Is the income real-property income? Owner's actual receipts may embed above-market management, favorable forward contracts, or equipment not included in the appraisal. Normalize to market rent or typical operator returns; strip owner-specific factors.
- Is 4.5% supported? Where did the cap rate come from? Dryland wheat ranches with Class III/IV soils and weather/price risk typically warrant a rate that reflects that risk. A 4.5% rate applied to volatile crop income will overstate value. Require extraction from local sales (NOI/price) or a supported band with risk discussion.
- Is the income stabilized? A 3-year average may capture a favorable price cycle. Consider a longer normalization or a typical yield/price assumption.
- Consistency with sales. If the sales-derived cap rates imply a different rate, the appraiser must reconcile.
If these cannot be supported, the income indicator should be discounted in reconciliation, not weighted most heavily by assertion.