We have recently seen many of our borrowers wanting to purchase rural properties with significant acreage. In many cases, these properties are also zoned agricultural. Many people do not realize that properties considered to be agricultural cannot be financed with traditional financing under Fannie Mae and Freddie Mac. However, zoning alone is not the determining factor in whether a property will be considered agricultural. As such, we have been successful in obtaining financing for rural properties with acreage under certain circumstances.
Here are some of the limitations and factors to consider if you are interested in purchasing or refinancing a property with acreage.
Mixed Use, Zoning, and Farming Activities
Many rural properties have mixed use, mixed zoning or other unusual characteristics that can make determining property eligibility difficult. Many believe that Fannie Mae has a restriction on properties greater than 10 acres. This is not the case. The acreage alone does not make the property ineligible. The lender/appraiser will look more at what is the intended use of the property and what is typical for the area where the property is located. They will also look at “outbuildings” such as barns, stables, etc. in determining how the property will be used.
If a property has an agricultural pre-fix in its zoning, the appraiser must determine whether the primary use is residential. A large part of that determination will be what is typical for the area. The existence of an outbuilding does not necessarily render the property ineligible; as long as its value is minimal, it can be determined that the primary use of the property is residential, and the building is not being used for farming activities. The existence of livestock on the property will be a problem, because it’s an indicator of farming activity.
We have seen loans denied, even when the agricultural activity is minimal.
In one instance of a client trying to refinance his property, the appraiser noted a few goats and rabbits, and the borrower’s tax return reflected farming income from the sale of the goats’ milk to a next-door neighbor. As a result, the property was considered to be used for farming activities.
So, even activity that you may not consider to be “farming” can create difficulties under conventional financing. Farms, orchards and ranches are all considered to be ineligible properties under conventional financing.
Appraisal Process
Another challenge in financing properties with acreage relates to the appraisal process. Because most of these properties are in rural areas where comparable sales history is limited, determining a reasonable valuation may be difficult. Appraisers are typically required to determine the market value of a property by utilizing comparable sales of neighboring properties that are within 1 mile and that have sold in the last 90 days. Such sales data may not be available, and the appraiser will have to look for properties that are further in distance or sold less recently. When making comparisons to other properties, appraisers are required to make adjustments to value to account for such differences with the properties. But the allowable percentage adjustment is limited, which can pose further challenges when appraising these properties, since the available sales can vary greatly in location, site, size, age and other features.
Lenders will also consider the ratio of the home value to the value of the land. If the majority of the value is in the land and not the home, there could be a problem with the appraisal. The appraiser will document what is considered typical for the area in these situations.
Multiple Parcels with Different Parcel Identification Numbers
We have also seen many of these properties have multiple parcels with different parcel identification numbers. This is also reviewed on a case-by-case basis. In general, if the parcels meet the following requirements they can be financed:
- Each parcel must be conveyed in its entirety.
- The parcels must be adjoined to each other.
- Each parcel must be zoned residential.
- Only one parcel may have a dwelling unit. Limited nonresidential improvements are acceptable, such as a garage.
Consult Your Lender Before Purchasing a Property with Acreage
Because of the challenges of financing properties with acreage, it’s a good idea to consult your lender if you are planning to purchase a rural property with acreage.
A good lender can educate you on the red flags that could make the property difficult to finance, and give you an idea of properties that are likely to be eligible for conventional financing.
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