But we don’t sell homes very often. And we don’t really care if you are “pre-qualified” or not. Why not, when everyone else cares?
Think of it this way: buying agricultural property is more like buying commercial property than buying a home. It is expected that you will try to earn income from it; that it will be more than just a residence. Therefore, unless the lender sees you as a slam dunk, he may not want much to do with such sales. Unless of course, he understands and handles agricultural property. But the vast majority of banks and nearly every mortgage company don’t have that expertise and understanding.
Say your buddy who sells city homes tells you go see so and so and get pre-qualified. You have $50,000 cash, a good job, and good credit and you feel pretty confidant. You take his advice, and after a talk, the mortgage broker tells you you can afford up to, say, $400,000 and you will qualify for a 4% loan with 10% down (or whatever). You then come out with us, and find a place you like and settle on a price of, say, $375000 for an absolutely great place with 125 acres. Now, you go back to that lender and you start getting surprises. “It’s a farm?”, he says. “Like with animals? We don’t do farms.” Never mind that you told him exactly that right in the beginning. They either don’t listen well or are blindly hopeful.
Or maybe he gets you further along in the process and you get to the point of hiring an appraiser. The appraiser comes out and even if he knows enough to fairly appraise a farm, he may have instructions to only appraise the home and 5 acres. Maybe they will let him also appraise the barns too. The figures are in and since 120 acres are ignored in the appraisal, counted as ZERO, the property comes up short. Say it is appraised at $250,000. You can still buy it, but now instead of having to put down 10% ($37500), you have to buy the additional land outright, so to speak. Your downpayment just shot up to $150,000, the 10% ($25000) down payment on the appraised price + the difference you have to pay in cash between the agreed-upon sales price and the appraisal (remember, it fell $125,000 short because they would not mortgage the land beyond 5 acres). That can be extremely discouraging.
I once had two nearly identical places: precisely the same acreage and same amount tillable, comparable soils, a 60 and a 70 cow barn, 3 bedroom homes, and private settings. The prices were different and I found someone for the cheapest place first, then the other owner lowered his. I found a buyer for it then and when the appraiser came out, she admitted she didn’t know the first thing about farms and asked for some help about the barns, land and some “comps” (comparable property recently sold in the area, to help determine value). I was delighted to have the perfect comp for her and gave her additional ones that were less than perfect, but were not bad either. A week later, she called me: the bank would not allow her to consider any of the barns or the land beyond 2 acres in her appraisal, so she no longer needed my help. And the buyer did not get the loan.
Enter the ag lender. You go to him now with some trepidation - once burned, twice shy. And he gives you some confidence you badly needed. Yes, they do loan on land, no problem. But they say you can only afford a $225,000 place.That’s a comedown you may not be ready to accept, having geared your thinking toward much nicer, larger and more valuable property. Then you hear they want to give you a 6% loan. Having been promised a 4%er (by someone who couldn’t deliver, not that you will remember that at this time), you are not about to lower your standards and pay 6%! ....Not unless of course you really and truly are committed to finding a farm for you and your family.
So, what’s going on here? The big home lenders have a tendency to fit square pegs on round holes. Their bean counters go by the numbers and try to turn an art into a science - and you didn’t fit. The ag lenders look at things closer and are willing to accommodate the square pegs, but they are awfully conservative and, because the risk is perceived greater and their administrative costs higher, they need a greater return, hence the 6%. Why they regard lending on land as risky, I cannot fathom. It does not burn down, blow down, or depreciate in the manner that homes can. And no new land is ever made; we are stuck with what we have.
Here’s an extreme example. Don came to us from Massachusetts where he farmed extensively on rented land only he had insufficient facilities to do what he really wanted to do - milk cows. He talked with a mortgage broker (who actually charged him several thousand dollars, cash, ahead of time - non-refundable, too), told him his plans, what he wanted to do, what he did for a living, what his background was. The broker told him to go ahead, go to NY and find that farm. So he did, and went back to the broker, purchase contract in hand. Things went along for some weeks and he didn’t seem to be making real progress toward getting the loan he expected. So, Don went to the broker again and found out the horrible truth: the broker either never listened or didn’t believe him when he initially told him he wanted to get a farm. He also didn’t read the contract he’d had in his hands for 6 weeks. It clearly specified that there were 214 acres, that he was getting all the equipment to milk, feed and clean cattle, that he was buying 250 head of cattle and a full line of farm machinery and tractors, each one clearly enumerated separately in the contract. The farm was $325.000 and the cattle and machinery $425,000. And he was shocked, just shocked to find this out - but not as shocked as Don was.
But the broker didn’t give up. After some research, he announced that he’d figured out a way to handle this. Don was hit up for $2000 to hire an appraiser so they could continue with the sale. This is no big deal; he’d have to pay an appraiser with whatever lender he went with, only the going rate at he time as $500, not $2000. I found about the cost only later.
So on the appointed day, I met the appraiser and showed him the place. It was immediately obvious that his knowledge of farming was about equal to my understanding of quantum physics (I’ve heard of it and knew how to spell it). And then I found out what he was doing; he turned in a figure of $750000 like we wanted, but on the farm alone. The stock and equipment were ignored, despite what the contract stipulated. On a lucky day I might have got $400,000 for the farm if I could have found a rich and dumb buyer (that never happens: rich buyers are NOT dumb). The $750000 figure was totally bogus. And that explained, I figured, the high price of the appraisal. He had a price for which he’d put both his license and his livelihood on the line. A cheap price too.
So, asking anyone if they are pre-qualified is not something that we do. But we do attempt to find out about their particular situation, what assets they have, if they need to sell anything before buying, what their farming plans are, what their experience is. DO they have cattle now? Machinery? What do they owe on it? Ages of cattle and machinery? What kind of milk production? These sort of things we want to find out about, if the buyer will not be offended by our prying (some will be, you can’t ask these things crassly), and then we form our own opinion about what they can afford and try to steer them in that direction if we can. And I have a little lecture I sometimes give them about over-zealous and over-optimistic mortgage brokers and the crazy fear that some have about lending on land.