Land appraisal is more than another box to check when applying for agricultural loans. It’s one of the most critical steps to determine how much your land is worth.
This number matters because it tells you and the lender exactly how much your land can back up your loan. It ensures the loan amount is commensurate with the actual value of your property to mitigate risks for both you and the lender. How? The appraisal helps you avoid overborrowing and ensures you receive a fair loan based on your property’s value. Meanwhile, the lender can assess the loan risk and determine an appropriate interest rate.
There are cases when agriculture loan lenders don’t require a fresh appraisal. They might skip it depending on the loan type, the amount you want to borrow, and your current valuation. But in most cases, a thorough evaluation is required for agriculture loans, so you need to be ready.
Expect this process to take a few weeks, depending on your property’s complexity and the appraiser’s schedule. Costs will vary depending on your land’s size, location, and any upgrades. The key is to work with a highly experienced and certified appraiser who understands the local agricultural land market. This can make all the difference in your appraisal’s accuracy.
What are the benefits of a land appraisal for agriculture loans?
While an appraisal might seem burdensome and even stressful for agriculture loan borrowers, it benefits you in more ways than one. Here’s how.
Know your land’s true worth.
An appraisal tells you exactly what your land is worth today — its actual market value based on its size, soil quality, location, and recent sales in your area. With this information, you can determine if the loan amount you’re asking for is sensible or adjustments are needed. This lets you hit two birds with one stone: It means you avoid overborrowing or underestimating the worth of your biggest asset.
Get a more apparent loan-to-value ratio.
Your lender will use your land’s appraised value to determine your loan-to-value (LTV) ratio. Why should you care? Because this ratio decides how much you can borrow. A lower LTV means less risk for the lender and a better chance for you to secure favorable terms for your agriculture loan. It shows that your land’s value can cover the loan if things go sideways, giving you and the lender more confidence in the deal.
Boost your odds of getting an agriculture loan.
Consider an accurate land appraisal as a reality check for lenders — they use it to assess the risks involved, confirm financial ratios, and ensure your agricultural land is worth enough to back up the amount you are borrowing. This makes the lender more comfortable lending to you, knowing that your property can cover any potential default. It also strengthens your position and boosts your chances of getting approved.
Ensure a fast and fair process.
Most lenders are required by law to secure an appraisal for agriculture loans, especially when more significant sums are involved. This requirement keeps the process transparent and consistent. A well-conducted appraisal can also help your loan application move smoothly through approval. Moreover, a fair and transparent appraisal can help build trust between you and your lender to create a more positive loan experience overall.
What happens if the appraised value of your land is lower than expected?
Sometimes, a land appraisal might come back with a value that’s lower than you hoped for. This can weaken your loan application because lenders base your loan amount on a percentage of that appraised value (the LTV ratio). And when the value drops, the loan amount often does, too.
If this happens, don’t panic. It simply means that you need to rethink your financing options. Explore other lenders or different financing structures to close the gap between the loan amount you wanted and the lower appraised value.
Some lenders will also ask for more collateral to compensate for the shortfall. This means that you might need to put up additional assets — or even more land, if you have it — to meet the lender’s requirements.
The key is to have a backup plan to help you keep the process on track if this happens. Can you use more acreage? Are you amenable to adjusting the loan proceeds? Are you open to looking at other financing routes? You might have to change your budgeting and cash flow projections — or even your long-term goals — to work with the reduced loan amount. It’s not ideal, but it helps you stay on top of your finances.
Perhaps you can consider improving the property before applying for financing again. Investing in strategic upgrades like infrastructure and better land management can boost your property’s appraised value and give you a more robust position the next time.
If you’re buying agricultural land and the appraisal comes in low, this could be your chance to renegotiate with the seller. You can use that lower value to push for a price higher than the market says the land is worth. Use this opportunity to ensure you’re not paying more than you should.
What happens during the land appraisal process?
There are several steps in the land appraisal process for agriculture loans, starting with choosing a qualified appraiser and ending with the final loan approval.
Here’s a breakdown:
- Submit your agriculture loan application.
You’ll need to complete a loan application with your chosen lender. Depending on your case, they’ll let you know if an appraisal is required.
- Coordinate with the appraiser.
Your lender will likely select a qualified appraiser for you — a licensed or certified professional with plenty of experience in evaluating agricultural properties. These appraisers are bound by law to provide an unbiased and accurate valuation based on local market conditions. Contact the appraiser assigned to you to schedule the inspection and ensure you’re available on that date.
- Prepare for the appraisal.
It’s time to get ready. Gather any documents the appraiser might request, such as recent surveys, soil tests, environmental reports, or records of any improvements you’ve made on your farm or agricultural land. Ensure your property is in top condition, and the appraiser can easily access all areas and structures.
- Let the appraiser inspect your property and prepare a report.
The appraiser will visit you to do the following:
- Assess your land’s size, shape, topography, and soil properties.
- Document features and improvements, taking notes and photos of anything noteworthy, like fencing, irrigation systems, access roads, or any upgrades you’ve made
- Review zoning regulations, land use restrictions, and any environmental factors impacting your land’s value.
After this, the appraiser will conduct a comparative market analysis. They’ll compare your property to similar ones recently sold in your area while considering your property’s location, size, use, and unique features.
Once the inspection and market analysis are complete, the appraiser compiles all their findings into a detailed report that typically includes:
- An explanation of the methods they used to assess your land’s value, like the sales comparison approach or income approach
- A full rundown of your land and its features
- Data on similar land sales and how they stack up against your property
- A conclusion on your land’s fair market value
The appraiser will submit this completed report to your lender.
- Wait for the lender to review the report and your agriculture loan application.
The lender will use the appraised value to decide whether you qualify for the loan amount you’re requesting based on the loan-to-value ratio. They may also conduct additional underwriting steps to assess your creditworthiness and the overall picture of your financial health. Once approved for an agriculture loan, they’ll contact you to present the terms and conditions.
- Review and sign the loan agreement.
Finally, you’ll begin the closing process and sign all applicable contracts and agreements. The lender will then release the funds so you can use them for your intended purpose, whether buying more land or improving your land.
Explore agricultural loans with Private Capital Investors
Our team of private commercial real estate lenders here at Private Capital Investors can help you fuel your agricultural goals. Aside from being commercial real estate lending experts, we’re also direct agriculture loan lenders. We offer financing solutions designed specifically for farmers and ranchers like you, no matter where you are in the country.
Whether you’ve been in the agricultural industry for years or are just starting, you can count on our team to support you with custom loan solutions that consider the nuances of farm and ranch operations. With our people-first mindset and straightforward lending process, you’ll find the backing you need to grow your operation.
