Insights From an Agricultural Lender
Land appraisals are standard in the agricultural lending process because they determine current market value of land pledged as loan collateral. In most cases, a new land appraisal will be conducted as part of agricultural loan approval. Valuations protect both the lender and the borrower by ensuring the loan is based on the accurate value of the property, minimizing financial risks, and facilitating informed decision making on both ends.
While an appraisal is a common requirement, there may be exceptions depending on the loan type, amount, and specific lender policies. In some cases, lenders might waive a valuation if the most current version is recent enough.
“A thorough land appraisal not only determines the current market value but also highlights any potential issues, providing a clear and unbiased valuation that aids in informed decision making for both parties,” shares Joe Erickson, Conterra Midwest relationship manager.
The appraisal process typically takes several weeks, depending on the complexity of the property and the availability of the appraiser. Costs vary based on factors such as property size, location, and number of improvements.
Appraisers should be licensed or certified professionals with experience in appraising agricultural properties. They should be impartial and have a good understanding of local market conditions.
Why Do I Need a Land Appraisal?
The appraisal determines the current market value of your farmland, which helps the lender determine the loan amount you are eligible for. This ensures that the loan amount does not exceed the value of the collateral land parcels. An accurate valuation provides an estimate of the property’s current market value, based on factors such as size, location, soil quality, improvements, and comparable sales in the area. Understanding the valuation ensures the loan amount requested is appropriate for the actual value of the land.
Ag lenders use the appraised value to calculate the loan-to-value (LTV) ratio. This is the ratio of the loan amount to the appraised value of the property. A lower LTV indicates lower risk for the lender. For secured loans, that value of the collateral (land) must be sufficient to cover the loan amount in case of default.
“For lenders, land appraisals are a valuable tool when calculating the loan-to-value ratio, assessing risk, verifying balance sheet rations and assessing the loan collateral coverage,” continued Erickson.
A valuation helps the lender assess the risk associated with the loan and provides an element of the financial health and viability of the borrower. It ensures that the land has sufficient value to cover the loan in case of default.
Most lenders are required to obtain an appraisal for secured loans, especially those agricultural properties. Adhering to these industry standards and best practices helps maintain the integrity and reliability of the overall lending process.
Also, the valuation provides both the lender and borrower with a transparent and unbiased valuation of the property. This allows for more informed decision making and negotiations between lenders and borrowers regarding loan terms and conditions.
As an additional benefit, borrowers will have a better understanding of the value of their assets, which is useful for future financial planning, expansion, or sale. “With real estate holding a large amount of value, having an accurate appraisal is more than putting on a price tag. It is a steppingstone to understanding your operation’s financial health,” added Erickson.
Since appraisals take the emotion out of family-owned land, farmers and ranchers can make strategic decisions about their operations based on the true value of their land.
What is the Land Appraisal Process?
The appraisal process involves various steps, including the selection of a qualified appraiser, scheduling the visit, preparing for the appraisal, property inspection, comparative market analysis, and submission of the valuation report to the lender.
Loan Application: First, a loan application is completed with a lender, such as a bank, credit union, or agricultural lender. As part of the application process, the lender will inform you that an appraisal is required to determine the land’s market value.
Appraiser Selection: Your lender will select a qualified, licensed appraiser to conduct the valuation. Appraisers should be licensed or certified professionals with experience in appraising agricultural properties. They play a key role in providing an unbiased valuation of the property based on local market conditions.
Scheduling the Land Appraisal: Either the lender or the appraiser will contact you to schedule a time to visit your property. It’s important that the appraiser has access to the land and any relevant information about the property.
Prepare for the Appraisal: Prepare for the appraisal by providing any relevant requested documents to the appraiser, such as recent surveys, soil tests, environmental reports, and information about any improvements made to the property. Ensure that the appraiser has easy access to the property and any structures on it. Present your land in the best possible condition, as the appraiser will take note of the property’s overall upkeep.
Property Inspection: The appraiser will visit your land to conduct a thorough inspection. During this visit, the appraiser will:
- Evaluate the Land: This includes assessing the size, shape, topography, soil properties.
- Document Features and Improvements: The appraiser will take notes and photographs to document the property’s features, such as fencing, irrigation systems, and access roads.
- Review Zoning Laws and Land Use: The appraiser will check the zoning regulations, land use restrictions, and any environmental considerations that may affect the land’s value.
Comparative Market Analysis: The appraiser will conduct a market analysis, comparing your land to equivalent properties that have recently been sold in the area. This comparative analysis helps determine the fair market value of your land. The appraiser will consider factors such as location, size, usage, and any unique attributes of your property.
Appraisal Report: After completing the inspection and market analysis, the appraiser will compile their findings into a detailed valuation report. This report typically includes:
- Property Description: A comprehensive description of the land and its features.
- Valuation Methodology: An explanation of the methods used to determine the land’s value (e.g., sales comparison approach, income approach).
- Market Analysis: Data on comparable land sales and how they compare to your property.
- Final Appraised Value: The appraiser’s conclusion on the fair market value of the land.
Lender Review: The completed appraisal report is submitted to the lender for review. The lender will use the appraised value to determine if the borrower qualifies for the loan amount requested. The maximum loan amount is typically based on a percentage of the appraised value (known as the loan-to-value ratio).
Loan Approval Process: With the land appraisal in hand, the lender will finalize the loan approval process. This may include additional underwriting steps to assess your creditworthiness and overall financial situation. When the loan application is approved, your lender will provide loan terms and conditions.
Loan Closing: Once the loan is approved, you will proceed to the closing process. During closing, you will sign the loan agreement and any other necessary documentation. The lender will then disburse the loan funds, which you can use as needed (e.g., for purchasing additional land, making improvements, or covering operational expenses).
What Happens if the Appraised Value is Lower than Expected?
Occasionally, a land appraisal will come in lower than expected. This can have several implications since lenders typically base the loan amount on a percentage of the appraised value, known as the loan-to-value ratio. A lower appraised value often means a lower loan amount.
Borrowers may need to reassess their financing options if the appraised value is lower than expected. They may need to explore alternative lenders or financing structures to bridge the gap between the desired loan amount and the appraised value.
Lenders may require additional collateral to compensate for the lower appraised value. Or borrowers might need to provide additional assets or land collateral to meet the lender’s requirements for loan approval.
“Having a contingency plan when a valuation comes in lower than expected can keep the loan process moving forward. Whether it comes from additional acres, lower loan proceeds, or other avenues, being prepared for all scenarios will greatly benefit the borrower,” summarized Erickson.
In cases where the land is being purchased, a lower appraised value may necessitate negotiation with the seller. Buyers may try to renegotiate the purchase price based on the appraised value to align it with market realities.
A lower-than-expected appraised value can impact the borrower’s overall financial plan. It may require adjustments to budgeting, cash flow projections, and long-term financial goals to accommodate the reduced loan amount.
Borrowers may consider making improvements to the property to increase its value before seeking financing again. This could involve investing in infrastructure, land improvements, or other enhancements to raise the appraised value.
A land appraisal is a standard and essential part of securing an agricultural loan, as it helps establish the value of your farmland and ensures that the lender can assess and mitigate risk effectively. By preparing for the appraisal and understanding these steps, you can help ensure a smooth land appraisal process, facilitating your ability to secure the necessary loan for your agricultural or land-related needs.
While a valuation is a common requirement, exceptions may be allowed based on loan type, amount, and lender policies. However, farmland appraisals remain a standard and essential part of securing an agricultural loan to ensure effective risk assessment and informed decision making.
Conterra is dedicated to financing American agriculture, offering specialized agricultural loan products tailored to meet the specific needs of farmers and ranchers nationwide. With a team of experienced relationship managers strategically located across the country, we provide regional expertise and personalized service to our clients. Whether you’re a seasoned producer or new to the industry, Conterra is committed to supporting your agricultural endeavors. Our people, products, and process-driven approach to lending makes us unique.
Midwest Relationship Manager Joe Erickson has a background in land appraisals. He is familiar with the process from an appraiser’s point of view and understands the importance of current land value from a lender’s perspective. Joe’s expertise allows him to provide his clients a unique outlook on the lending process.
Disclaimer: Please note that the information provided in this article is for educational and informational purposes only, and should not be construed as financial or investment advice. While we have made every effort to ensure the accuracy and reliability of the information presented, Conterra Ag Capital and its affiliates make no representation or warranty as to the completeness, correctness, timeliness, suitability, or validity of any information contained in this article. You should always consult a qualified financial advisor, tax professional, or other qualified professional for advice on your specific financial situation.
