Quick, what is one of a farmer’s most valuable assets? The answer for most farmers would be their land.
Whether it’s been in the family for generations or you’re beginning a legacy of your own, your land is the heart of everything it means to be a farmer, rancher, or forest owner. It can also represent a prime piece of collateral when you apply for an agricultural land loan.
I recently sat down with a lending team from AgAmerica, a lender based in Central Florida, to learn more about the process of using land—in this case farmland—as loan collateral for everything from purchasing more land to paying for operating expenses as you ramp up for harvest. Many farmers take loans to secure funds for purchases that may come in the future.
As the nation’s premier land lender, AgAmerica specializes in assisting those who work the land with custom loan products that include lines of credit, fixed-rate term loans, and debt consolidation packages.
Blake Averitt, Senior Underwriter at AgAmerica Lending, notes that the company’s 10-year line of credit is their most popular product.
“No other lender out there offers this type of long-term line of credit,” says Averitt. “Use it now or use it later, it’s designed to be flexible. There are no penalties if it sits, and no penalties if you pay it off early. At the end of ten years, it converts to a 20-year term loan. It’s a very unique interest-only financial tool for borrowers looking for a cushion in case of that ‘what if’ situation.”
What’s It Worth?
When it comes time to apply for an agricultural land loan, Averitt explains that it’s all about two considerations: 1) the financial goals of your operation, and 2) assessing the true value of the land to be used as collateral.
“Valuation involves several steps,” says Averitt. “We use independent appraisers who are experts at researching comparables in your area (including the asking and sale price of similar properties), as well as in evaluating the land’s location, per acre value, and determining its current and future use.”
One of the challenges of appraising land in today’s environment is the encroachment of residential and commercial development on farmland.
“This can create unrealistic expectations on the part of the customer,” says Jim Pruitt, Manager of Commercial Appraisals at A.R.E.A. Real Estate Appraisers, Inc. Pruitt has appraised numerous properties for AgAmerica over the years and knows the Southeastern United States well. He’s also familiar with a common misconception of many borrowers — overvaluing their land. “It’s easy for a farmer to look at how much his neighbor received per acre for a piece of land he sold to a developer. But that valuation is based on a very different set of criteria.”
Pruitt explains that all appraisals are based on a concept called ‘highest and best use’ which is defined as ‘the reasonable, probable, and legal use; which is physically possible, appropriately supported, financially feasible, and that results in the highest value.’
For AgAmerica’s purposes, agricultural land must be appraised as agricultural land; regardless of whether it has other zoning options, it must be valued at ag land-level prices if it is to be used as collateral for an agricultural land loan.
Pruitt notes, “Often, the highest and best use is agricultural use, however it is not always the case. When the property being appraised is located in an area with development (residential, commercial, or otherwise) encroaching into the traditionally agricultural areas, the agricultural use of the property may be significantly lower than the value at its highest and best use.”
Appraise & Assess
An appraiser plays a key role in collecting all the pertinent information regarding a piece of property being considered as collateral. Lenders like AgAmerica rely on impartial, independent experts like Jim Pruitt to provide accurate valuations so financial experts like Blake Averitt can make informed underwriting decisions.
“I consider many variables in estimating the market value of property,” explains Pruitt. “For example, there may not be sales of comparable properties in the immediate area, so I may have to expand the geographic perimeters of my search to other similar areas. I also analyze the marketplace as a whole and look at usage and land characteristics that might impact future productivity and potential income from the property.”
Armed with this information, the next responsibility belongs to the lending agent. Averitt conducts a thorough evaluation of an individual’s financial profile, and also looks at current commodity prices, past and predicted yields, and the general economic outlook.
“My job is to create a global financial picture at the current moment — and another one that reflects predicted future conditions,” says Averitt. “Once the picture is clear, I can customize and suggest the best product(s) to fit a customer’s individual needs and goals.”
Be Prepared, Do Your Homework, & Be Responsive
Averitt adds that there’s no reason to feel overwhelmed by the prospect of partnering with a lender applying for a loan using your property as collateral. The key is to be prepared and responsive throughout the process—and to keep an open line of communication with your lender.
One final piece of advice from the experts: do your homework before you make the first call.
“Consumers can actually search out comparables on their own,” suggests Pruitt. “In most (though not all) states, land sales, deed transfers, and tax records are public record and can be found online (even your own).”
Pruitt also suggests tapping into resources such as local brokers and real estate agents who are familiar with activity in your area. He says he’s found “ag brokers to be really helpful as far as sharing information, so don’t be afraid to ask.”
In addition, Pruitt suggests taking a look at USDA databases. Here, you can review land values based on surveys from landowners, which can give you some perspective on what your own property may be worth.
Last, but far from least, both Pruitt and Averitt suggest just simply talking to other landowners in your area. Everybody has a story or knows someone who’s selling or has sold property.
“There’s a lot of great insight out there, especially among other community members,” observes Pruitt. “Farmers are smart. I can tell you when I go out and look at ag land, more often than not, the owner already has a good idea of what his property is worth.”
EDITOR’S NOTE: For those looking to secure a loan using an agricultural parcel of land as collateral, AgAmerica can provide expertise, support, and a range of loan products. Their land loan experts can be contacted at 855.214.0328 or visit AgAmerica.com/get-a-loan to schedule a free consultation.