Episode 11 - Understanding Property Appraisals and the Reconsideration of Value Process

In this episode, host Ahlishia Shipley sits down with veteran appraiser Thaddaus Dawson to discuss property valuation, appraisal accuracy, and the Reconsideration of Value (ROV) process. Listeners will learn practical steps for reviewing appraisal reports, identifying potential inaccuracies, and advocating for fair valuation of agricultural assets. Additional resources are available at AgFTAP.org and 10kaf.org.

Transcript

Ahlishia Shipley 0:01

You're listening to the FARM Champion podcast, where we champion farmer and rancher success. In each episode, we sit down with a FARM Champion, a trusted professional committed to helping producers navigate the business side of agriculture. If you're a farmer, rancher, or agriculture professional working to build stronger, more resilient operations, you're in the right place. I'm Dr. Ahlishia Shipley, your host. Today we are discussing a topic that many farmers and ranchers may not think about until they need a loan or they're in the midst of refinancing their property, need to settle an estate, or recover from a disaster. And that topic is property appraisals. And so for many agricultural producers out there, land is often one of the most valuable assets that they own. But the value assigned to that land can affect so much, including borrowing capacity, business decisions, succession planning, and just long-term financial stability. Joining me today to unpack all that goes into appraisals, why they're so significant, is Mr. Thaddaus Dawson, also known as the ROV appraiser. He works to help property owners better understand the appraisal process and the reconsideration of value or ROV process. Thaddaus, welcome to the show.

Thaddaus Dawson 1:33

Well, thank you, Dr. Shipley. It's good to be here. I'm excited about being a FARM champion and growing and being able to help the farmers and rural landowners to be able to articulate their value and make sure that their assets are being valued properly.

Ahlishia Shipley 1:50

Well, it's wonderful to have you here today. I'm also looking forward to this topic and understanding appraisals and the reconsideration of value. I had to look that up and read more about it myself. So before we jump into today's topic, I would love for our listeners to get to know a little bit about you. So could you tell us for a moment about your professional background and what led you to focus your work on property valuation and appraisal education?

Thaddaus Dawson 2:18

Well, Ahlishia, I have been an appraiser for 40 years now. I know it looks like I started when I was 10, but it's been a long, long journey. Actually, I started my sophomore year in college. My freshman year, I got my real estate license in the summer. And my sophomore year, I was able to take some appraisal courses and start my career there. And it's just been a passion of mine since I started in the profession. And unfortunately, the profession has not grown from a technology standpoint. And now there is more advanced technological ways to do valuation. So our goal is to modernize the appraisal process through data science utilizing evidence-based data-driven market analysis. And so the methodology that's currently being used has been used since 1933, which is a paired sales analysis. So when you look at the undervaluation in urban and rural communities, part of the reason is because of that outdated methodology that is being utilized. It is not able to capture the market analysis and velocity and dynamics of the market. The markets are dynamic and always changing. So the inaccuracy is based on not accurately measuring that change.

Ahlishia Shipley 3:38

So there's an opportunity there to kind of implement, integrate the new modern ways to do property appraisal.

Thaddaus Dawson 3:47

Oh, absolutely. And it's really impactful in the rural areas because there's even less data. So typically it's going to be based on the markets and comparable sales. And I talked about the markets being dynamic, but in in rural areas, you're going to have further distances between comparable properties. You're going to have less information to work with. You're going to have less data. So when you have less data, you rely more on the person, increases the level of subjectivity. And you want to move more into analysis. And with the data science, it takes the personality out of it and allows the application for the data to speak for itself and not so much as the interpretation. And there's always been, you know, quantum computing, but it never had the ability like it has now to bring all the information together and be able to effectively analyze the markets. But you can only do that if you have the proper information to start with.

Ahlishia Shipley 4:50

Yes. And so that brings me into the next question. Thank you for explaining that. And I also didn't want to gloss by the fact that you said you got a real estate license when you were a freshman in college. Super impressive, but I'm going to move on. So talking about an appraisal and why does it matter? So let's start with the basics. So many producers have likely gone through an appraisal at some point. Could you explain to us exactly what a property appraisal is and just why it's such an important part of financial decision making for farmers and ranchers and landowners?

Thaddaus Dawson 5:25

So basically, the it is an estimate of the fair market value. Now, I don't get into the many different types of valuations there are, but everything is appraised. Your value goes into financing your asset first and foremost, but it also goes into financing your infrastructure. And what I mean by that is your infrastructure is financed based upon your property taxes. So your property tax appraisals are just as important. And a lot of times they're not necessarily accurate because they're only done every so often. And they actually use data science to do property taxes because they do a mass tax valuation with multiple parcels at a time. But when you get into smaller rural tertiary communities, the data collection may not be up to speed. The frequency in which they assess may not be there as well. So you always want to make sure that you have the most recent and updated information to value your asset, especially when you start to go to get to crop insurance. A lot of times most people only book the value of the property when they pay for it and they never revisit it at all. And so sometimes if you're trying to expand for equipment, a lot of times your valuation has gone up. But but the other thing that is really important is the soil, whether or not your property is irrigated. How close is it to transportation and demand drivers? So these are all types of issues that impact the value of the property that most people don't really think about in their everyday business movement.

Ahlishia Shipley 6:58

Thank you for sharing that. So there are some pretty significant implications on kind of like understanding the value of your land when it comes to decision making.

Thaddaus Dawson 7:10

Oh, absolutely. Everybody's making a decision based on it. But when you're farming, you have a little bit more of a going concern, an active business that can be value. But everything starts with the underlying asset of the real estate. And so once you get that, you could establish your base, and pretty much that can dictate how you move the level of risk or that the bank is exposed to as far as a collateral standpoint. And again, if you are valuing that properly, you should be okay. But let me let me get back to valuing it properly. Now, based on FHFA study 2407, you you want to be able to, everything is not accurately valued. So that's what the issue is and why it's so important. That thing said that only 10% of all appraisals utilize market conditions adjustments. Well, if only 10% are utilizing them, that means 90% are not utilizing them. And therefore, if you felt like your property was improperly valued, you got a 90% chance of being right. Because based on that study, the industry has a 90% failure rate. And it is more impactful in the rural communities where there is less information to begin with.

Ahlishia Shipley 8:22

So that's that's really important for, you know, farmers and ranchers and landowners to understand this accuracy piece and what you're pointing to in terms of, you know, making sure that your appraisals reflect current market conditions. So without getting too technical, why is it important for appraisers to account for the evolving market conditions when determining value of property or land?

Thaddaus Dawson 8:51

Because the markets are dynamic and so they're constantly moving. So imagine driving your car, but you're not looking at the windshield. All you're doing is looking at the rearview mirror. You can't see what's in front of you. First, appraisers are always dealing with historical information. So what we have found and what that study noted, and it was the most comprehensive appraisal study ever done over an eight-year period with 45 million appraisals and 228 million comparable sales. And this is over an extended period of time that those adjustments were being missed. And so when those adjustments are being missed, it's a risk for the lender because they're not getting accurate valuations or collateral of the asset. It's a risk for the borrower or consumer or landowner because they're being robbed of their wealth in a lot of cases because they're not being accurately assessed. So, and what we found is that that's a systemic failure of all across that particular profession and those that are in charge of enforcing that profession and educating. So, long term, we would like to modernize the process. But in the short term, reconsideration of value is the number one tool for risk mitigation to correct that 90% failure. And that's why that's so important. And with the farming community, so it's already a law. Reconsideration is a law with the veterans administration, and they have done it longer than anybody. So they've done it actually since 1944, and they had it codified under the Tidewater Act in 2003. Our goal is to extend that consumer protection to everyone.

Ahlishia Shipley 10:38

What you're sharing, I feel like what I the most important thing that you said was that this is important for both sides of the coin, for borrowers and lenders and landowners to have it right. You know, that accuracy piece that you're talking about. And so, and thank you for kind of like teeing up the conversation around the reconsideration of value, which we're gonna delve into in a moment. I wanted kind of to bring this down to a practical level for the listeners, which is one of the things that we try to do is help them better understand, you know, what they're actually looking at, you know, when we talk about these issues. So when a landowner, a farmer is looking at an appraisal report, you know, what are some of the key sections that they should review carefully to kind of get to this accuracy piece that you're really honing in on?

Thaddaus Dawson 11:29

So the first thing you want to start with is the asset itself. Did they properly record your asset? Meaning, do they have the acreage right? Do they have the building structures properly listed? Because a lot of times they may go from the county records or building an inspection's records, and you may have made some improvements and that you didn't list or you maybe you didn't get a permit for. And that that is very common in a lot of uh rural communities. And if you are working on your own property in most places, you do not have to have a permit. So a lot of times you may have legal or illegal non-conforming uses or legal non-conforming uses. So whatever you have, whatever the asset is, make sure that it is properly listed and categorized. You may have irrigation. So make sure that if you have irrigation, that is listed on the report. And why this is so important is because whatever you have listed, that's gonna determine the the scope of the comparable sales utilized. So to make sure that you're comparing apples to apples, and let's say you've got irrigated land and they're comparing it to land that doesn't have irrigation. Well, that could be as much as a 40% increase for you in value. So you want to make sure that all of that is noted properly. So that's that's the first level. And then the second level, we talked about all markets being dynamic, and so with that, you want to make sure that there is a market conditions adjustment. So those are all really important. And in today's market, the next thing you want to probably make sure of is now because the stress of the economy and the way things are moving, you have a lot of buyers' concessions. So if you're comparing something and the seller contributed a portion of the closing cost, $10,000, you want to make sure that you have a cash equivalency. And again, you're bringing everything back to the basis of comparison to make sure you're comparing apples to apples. But the inventory, you definitely want to make sure that your asset is properly categorized and the appraiser has listed all the assets accurately.

Ahlishia Shipley 13:34

So those are some really valuable tips. So what happens when it's wrong? What does a producer do when the appraisal looks like there's something missing or there's something that's inaccurate? What are some signs that it may be wrong? And then what does a producer do in that situation?

Thaddaus Dawson 13:51

So again, you look for the facts, and most of the time the argument can't be subjective. It can't be, I think, I feel, it can't be an emotional argument. It has to be objective, rooted in things that were actually missed. And then you give those to your lender or you put in a formal request for a reconsideration of value. And most lenders will have a process, but again, that's the process that the the burden comes back on a consumer unless you're with the veterans administration, then they have a three-tier process. But if we're looking at it, the first order is making sure those assets are listed properly. The next order is looking to see if there was a market conditions adjustment made. And thirdly, looking at the cash equivalency. Was there any contribution given to the buyer that changed the value? So individually, the the biggest, the first and foremost is making sure the assets are inventory properly. Secondly, that market conditions adjustments, third, cash equivalency, everything else after that. Now you want to look at what you have and then look at the comparable sales to see how they were handled. But that's starting to get a little bit technical and beyond the scope of where we want to just we want to keep folks at the basics to be able to ask the question to get started.

Ahlishia Shipley 15:10

Thank you so much. And for listeners who want to learn more, we'll tell you more about that toward the end of the episode. So this brings us to the reconsideration of value, which is the focus of much of your work. Could you tell us exactly what that is and when a property owner should consider an ROV?

Thaddaus Dawson 15:31

You should consider it in lots of different instances. You consider it if you've been undervalued, or you should also consider it if you've been overtaxed. So it works both ways. It works for tax appeals, it works for valuation. But again, you want to make sure the inventory is valued correctly first and foremost. And then you want to get into how it was applied. And most people don't have the sophistication to actually get into how the application and methodology was actually applied. But if you look at that paper that I referred to about appraisals being inaccurate, the biggest portion of that inaccuracy is the lack of market conditions adjustments. But the other thing that you want to look at too is your soil, your crop documentation, possibly your yield history. Did the appraisal capture that accurately? If so, what is the methodology and that he's comparing it to? Is your property irrigated, not irrigated? Is he comparing it to properties that are irrigated? Do you have grain bins, pole barns? Do you have fencing? These are all things that can sometimes be missed and definitely impact the value. And sometimes they have different categories. Some of them are not considered fixtures, so they're not considered real estate, they're considered personal property. So a lot of times it depends on how they're actually affixed to the property and what their usages are. But however, they do have some contributory value, it just may not be what we think it is. So you have value and use versus value in exchange. So some of it you may be utilizing for your operation, but it may necessarily contribute to the real estate, but it may contribute to the value of your equipment valuation. So it's a going concern, so you have an ongoing operation. So it's one of those things where you need to be able to look at it and not just assume they are getting it right because as we see, 90% of the time they are getting it wrong. And those are in residential areas. What that study was referring to, I would venture to say it's even worse in urban and rural areas because you have less data, you have a smaller pool of people that are actually qualified to do those types of assignments. Appraisers tend to be offended when you question them, like they just all knowing, but they're human and they make mistakes. So the reconsideration of value even protects them because it's not accusatory, it's we want you to explain your methodology. And that's why, as a consumer protection, it fails because it puts the burden back on the consumer. That's why it works for the veteran administration because they have different levels of being able to do it with the ability to have it escalate. So until that point, most of the time, we want everybody to be able to do it themselves to empower them. But then utilize us as farm champions as a resource if you want to be able to take it to the next level, or you didn't get any resolve from your original reconsideration.

Ahlishia Shipley 18:32

Thank you for that. One of the things that we want to share is that if any of the listeners would like to learn more about Mr. Dawson's work, he has a really, really fascinating presentation called Understanding How Accurate Property Valuation Protects Your Agricultural Operation. And it's going to be available on agftap.org. And this presentation really provides an accurate and a practical overview of the appraisal process. So if today's conversation has sparked any questions about your own property valuation, this will be a great place to continue that learning. And so, Mr. Dustin, this has been a great conversation. And so on the show, before we close, we always like to end with a resilience reflection. And so the question I would like to ask you is throughout your work, you have spent a great deal of time helping people better understand the value of their assets and navigate really tough decisions about their work. So I wanted to just know from you what gives you hope about the future of agriculture producers and landowners and making sure that they have what they need to build successful operations now and into the future.

Thaddaus Dawson 19:48

So let me answer a couple of things. You could also find it on our website, 10KAF.org. We will be publishing it there. We'll be doing that as well. But what really gives me hope is that I'm just doing my best until the best gets here. And we're trying to train the best to be more accurate with the valuations, but to empower the farmers to be able to look at and be able to protect their assets moving forward. And this is really important. I think it'll be, as FARM champions, this is really awesome that we're able to get out and help the folks that are vulnerable. And they shouldn't be responsible for proving their value. That should be based on the industry. But until that mystical magical moment happens, which we're working towards with the codification and reconsideration of value, we can empower them to take a progressive step to protect the asset that they currently have so they don't lose value and they're able to maintain and move forward.

Ahlishia Shipley 21:37

See you next time.