Imagine this: You found your perfect property in the perfect location at a great price. Your offer was accepted, and your loan’s been approved. Soon the place will be yours. Then you get to the closing table and—too late—you learn that your lender failed to do his due diligence, and was not aware of endangered species habitat on the property.
Could this actually happen?
According to land brokers who specialize in rural real estate, situations like this are not uncommon when the lender is unfamiliar with rural property.
“Finding the right lender is critical to the success of the transaction,” says rural land broker Deitra Robertson of Hempstead, Texas. “You don’t want to get to closing and find out that there’s a problem because the lender didn’t understand agricultural property.”
As an accredited land consultant with years of experience buying and selling rural real estate, Robertson cautions that buying rural property is different than buying a house inside the city limits.
“Having a lender who specializes in financing rural land makes all the difference,” she maintains. “I’m a huge advocate of finding the rural lender for my buyers. Part of our job is to counsel our clients.”
Take your broker’s advice
Tyler Jacobs, president of the Texas Land Brokers Network, agrees. That’s why he often refers clients to lenders who are experienced in agricultural and rural real estate financing.
“It’s in my best interest to make sure that the customer has the best loan product available,” Jacobs says. It’s also in the customer’s best interest.
“There’s more pressure on the lender to do a good job for the client, because they know that if it doesn’t go well, I won’t send them more business,” says Jacobs, who’s from College Station, Texas.
Indeed, finding the right lender is a key business decision that can impact the success of a land transaction or an agricultural operation. Because of the high capital needs and the cyclical nature of agriculture, farmers and ranchers are best served when they find a lender they can work with over the long term.
Kenneth Hooper, senior vice president with Panhandle-Plains Land Bank in Plainview, Texas, recommends that borrowers begin the conversation with their lender as soon as they determine how to pay for the property, even before starting to look for real estate. A local lender might be able to recommend properties for sale. Following are some essential aspects of building a strong lender relationship.
“The lender needs to understand the nuances that go with rural land. They have to understand everything that we as rural brokers understand. They need to know the loan products, be familiar with rural land values and understand rural appraisals, mineral rights, water rights, animal stocking rates, crop yields and all the other factors that are different with agricultural land,” Robertson says.
If you’re purchasing a working farm or ranch where you intend to grow crops or raise livestock, your lending institution should be experienced in financing and appraising this type of property, so they will understand the cyclical nature of the business. Loan officers who are experienced with this type of operation may be able to offer useful advice.
Loan products, rates and services
Look for a lender that offers a range of products and terms that suit the type of property being financed, and will take the time to explain the differences.
“Some customers shop interest rates instead of loan products and service, but there’s a lot more to it than rate. They need to consider term, collateral, encumbrances, release clauses and a lot of other factors,” Jacobs says.
He also suggests that when financing through a Farm Credit cooperative, a customer should consider how its patronage payments could effectively reduce the cost of borrowing from the co-op.
“A lot of people think that patronage is like a prize at the county fair. They don’t always weight it heavily enough when considering interest rate,” he says.
It’s advantageous to work with a lending institution that employs in-house certified rural appraisers or lending staff who are certi-fied to appraise rural property. For example, many loan officers with Farm Credit lending cooperatives can appraise property up to a certain value, “and can do it faster than lenders that have to use outside fee appraisers,” says Hooper. Although first-time rural land buyers may be apprehensive about appraisals, which are normally required for land financing, “a good lender should be able to explain how the appraisal is a function of the credit decision,” Jacobs points out.
Agriculture has its ups and downs, and a situation that benefits one sector of the economy might challenge another. Farmers and ranchers should look for a lender that will stand by them even during a difficult or challenging economic environment. Farm Credit lenders, for example, have been financing agriculture and rural land for nearly a century.
“My focus is agriculture, not pizza restaurants. Our loan officers are single-focused; this is all we do,” says Hooper, who specializes in financing West Texas farmland and ranchland. “At Farm Credit, we’re not only profit-driven; our goal as a cooperative is to be reli-able, consistent and strong, so we can continue financing farmers and ranchers for another century.”
The right lender will treat customers consistently through changing economic times. For example, underwriting standards shouldn’t constantly change because the land market goes up or down, corn prices become volatile, or cattle prices rise or fall.
In this vein, Panhandle-Plains Land Bank “tries to reflect, not lead, the market,” Hooper says. “We generally will lend on 75 to 80 percent of the market-based value of a property. That keeps us conservative, so we can consistently provide credit in the future.”
A lender needs to specify what loan information is needed and when, and clearly explain financial expectations. The customer, meanwhile, should feel comfortable sharing long-term goals, so the lender can work to help the customer achieve them.
“We help our customers understand titles and know what to watch for. For instance, if there’s a wind farm across the road, how might that impact them?” Hooper says. “We also do due diligence. We want to make sure the customer has a good, clear title, because then we as the lender will have a good, clear lien.”
Working with a lender that is committed to the customer’s success makes the financing process easier. The lender should:
- Present ideas that will benefit the customer, such as refinancing when interest rates drop
- Flag areas of potential concern on the balance sheet
- Set loan terms that the customer will be able to meet, such as matching payments to anticipated cash flow
- Occasionally challenge their customers, helping them to think differently about what might be possible
When both the lender and the borrower display the characteristics outlined above, they’ll build the most important feature of any strong relationship: trust.