Working Farm Definition

[hastalavista]

Ted-

Page 37 of Fannie's "Handbook for Appraisers" says-

" Answers to the following questions will assist the lender in evaluating a rural property's eligibility for a Fannie Mae home loan:

What is the property primarily used for?
You must be able to state that the highest and best use of the property is residential and not agricultural or ranching.

Is the total site similar in size to typical residential properties in the market?"
(I did not include Fannie's comments on this)

"Is there significant farming or ranching activity on the property?
The loan should not cover the purchase of income-producing land or buildings. A property may be considered agricultural whether or not the borrower derives an income from farming or ranching activities on it. The property characteristics should determine whether the property is residential or agricultural."

 

[Rick Neighbors]

Farms are residences also.

Agri-business is commercial and requires a different license to appraise.

In our area, anything less than 20 acres can not get a agricultural exemption for their taxes.

Anything over 20 acres can get the exemption.

There are tax breaks for raising livestock or hay crops.

You can not make a decent living on small acreage, if you could, I would not be appraising!

I prefer my cows to most lenders I have met. Even Rosie, who has been know to have an attitude!

Rick

 

[Rick Neighbors]

Besides, didn't the lender get the homeowner's tax records? He should be able to see if there is any declared income or losses ( mostly losses) on the farm/ranch/whatever.

Rick

 

[Terrel L. Shields]

Tell him to go stuff himself vertically and horizontally. Verify it himself. As I just posted about a CPA asked to "verify" this or that, it is only to get you on the string so they can sue the pants off you if the loan goes south. [The appraiser is to blame because he didn't tell us it was a FARM, and then, of course, they will make the case that there is a cow on it, so it is a farm].

In fact, the USDA definition of a farm is pretty broad. It states that a land tract is a farm if is CAN (not that it does) produce $1000 worth of cattle or agricultural commodities. There is no size limit, no use limit. I simply would not respond to such requests. You only add to your liability.

 

[Farm Gal]

Good Job Honey!

See, when I am not there to take the DSUW or DSLO calls
(I _like Rich's restraint...

Ted can do just fine all on his own!!! USUALLY, I take those calls just avoid the inevitable slow down in production which occurs when ANY of us take a call like that... Ted works three times mroe effectively than I do, anyway so better _I_ should stew over one of those calls than him...

Which calls are, as usual, occurring in greater proportion as a direct result of singular stupidity on the part of the slowdowns and the increased lender oversight ...which is as always a double edged sword.

I think we really must draw the line even if the only ones drawing the line are the participants of this forum AND a few lone wolves out there....

Wish we could draw them wolves into the fold... and EAT the sheep.

Goats or whatever you wanna call them that DO just give the lenders what they think they want. <_<

 

[Kathy in FL]

I own 40 acres here in Florida...raise bloodhounds (and last year, probably made about $3,500 selling them)...and maybe most importantly, have an AGRICULTURAL exemption on my property taxes.

Am I a working farm? I do have a horse and a pony...they just walk around and eat. We even have a tractor. (It doesn't run at the moment.)

I think they've changed the definition to a $10,000 per year income, last time I checked.

Kathy in FL

 

[Caterina Platt]

What is the property primarily used for?
You must be able to state that the highest and best use of the property is residential and not agricultural or ranching.

I think Denis' excerpt from Fannie guidelines is most telling. Around here, I'd have to be in the most rural of areas before the highest and best use as vacant would be agricultural. In several rural counties, your land as ranching and grazing property would be more valuable than as a residential/agricultural homesite just because of the minimal populous who'd be in the pool of buyers to live there.

Terrell,

I've never completed an ag. appraisal in my life, but isn't agricultural land value based on the income potential?

The irrigated acreage in my location can and often does produce some beautiful alfalfa. Agriculturally, what would this be worth? Maybe $2,000 to $4,000/acre? This is a rhetorical, I know you couldn't begin to calculate w/o knowing the yield potential, but just making a point. Honestly, the $2,000 figure came from my Ag Econ professor years ago when good horse hay brought about $3/bale. Now it trades for $5 to $6. Development potential on a 40 acre site (minimal amount of these ones left) is enormous, even with our 2 acre minimums. Several years ago, our most recent large plot transaction of one of these traded at about $17K/acre. 2 acre sites in this area have been clocked as high as $85,000.

My point of all this? Well, perhaps I've been making a weaker argument than I could have been as to 'no you silly, it's not a farm!' based on Fannie's definition. Second, if we were to factor in the USDA's definition, we'd be creating a misleading report on many of the homes we suburbanites do in our course of business.

Fannie says highest and best use. I told you highest and best use was residential the first time around. Now, here's my data that proves this analysis and further, there is no commercial agricultural activity apparent.

I appreciate the USDA's standpoint on what classifies as a farm, but that definition would disqualify many of the homes in this area. My daughter's 4-H buddy just earned $1,600 at the county fair selling her 2 champion lambs. They have about 10 lambs total. Their 1-2 acre site is no closer to being a farm than I am to being British Royalty.

You probably understand what constitutes a real farm better than 90% of us. I know you're providing the USDA definition for the sake of liability avoidance, but if we're to take that literally, and apply it to the lending world, we can't honestly tell the lender 'It's not a farm!' on the typical residential/equestrian site. Sell one registered mare and you're well over the $1,000. That's ridiculous! This is a hobby, plain and simple. No different than a city dweller who decided it was time to get rid of the Harley and turned it for a five figure amount- hobby.

I'm not sure what the USDA definition is tied to, and for what purposes that comes into play. I would have to argue that for the purpose of real estate appraisal in the lending arena, what Fannie Mae states as guidelines and definitions would probably have to reign as our 'rules of conduct'.

 

[Ted Martin]

Thanks Denis.

The problem in this area, basically a 150 mile circle around a major metro area which overlaps my little 250,000 population sub market, is that the area is in transition. I don't believe there is any ground within a two hour commute that has a highest and best use as agriculture. If it did the agents and brokers wouldn't break up every piece that comes on the open market. The only large tract sales that are purchased by "farmers" or "ranchers" aren't really arms length transactions. The buyers are either extended family members, long time renters who are considered family by the seller or neighbors who also are treated as family. Technically these transactions are between valid arms length transactions, but the motive of the seller often times is to sell to a buyer who promises to keep farming the land. In essence the seller is discounting the sale price for non monetary reasons which are not in their best interest as defined by the appraisal profession. The valid large tract sales that I see that have been purchased as a true arms length transaction, typically by an agent or an investor, within 30 days splits the tract and starts selling it off in 10 - 20 acre residential sites with seller financing. I'm guessing that the absorption rate on these splits is ten or more years. The investors get to double dip on these deals because of the high foreclosure rate and the possibility that they can sell the same lot two or three times. Regardless of the activity the AG income will only offset the taxes (assuming the tract is still classified by AG by the county), and at most 10 - 25% of the interest on the purchase loan.

From what I can see this is taking place nationally. As a mater of national policy we subsidize agribusiness but not food production in this county we now import more than half of the human food. Private property rights, the right to a Mc Mansion on 3 to 10 acres trumps national self sufficiency in food production.

Based on these policies and trends I don't think any site, regardless of size, meets the Fannie definition and most as Caterina pointed out would meet the USDA definition.

I know it drives my wife nuts but I keep a kitchen timer on my desk which I will occasionally use to limit the time I will devote to a job. If the client only wants to pay for a $50 job and they are aware that the scope is reduced I will set the time and when the bell sounds the job is done. I had to drag out my timer on this job for the "working farm" certification portion of the job. They weren't willing to pay me for this service so they got the fifteen minute freebie fix. The definition that I used in my certification was one I made up, which was what I told them I was doing, which serendipitously apparently mirrors the USDA definition. Either way in terms of liability I was only certifying that the lender certified that the borrower claimed that they didn't meet my definition. (And the wheels on the bus go round and round.)

 

[Terrel L. Shields]

, but isn't agricultural land value based on the income potential?

Actually it is based upon competition. Sure, in the high plains, not many developers want to buy your farm and build Condos. But market sales dictate ag land prices. Farmers buy land that is "too expensive" in terms of cash flowing because it is an investment, not an expense of agriculture.

Most parts of the South, the Ozarks, The Rockies, and the Coasts are competing with people seeking a rural life style. If I valued my farm on income, then the cap rate is - 0.8% (insensibly low), or The property is worth $600 an acre instead of $8,000 an acre...which is what it will bring in our current crazy market.

In SW Colo. irrigated alfalfa ground will bring $10,000/ac. again too high to justify growing crops, but people are buying it for small horse farms, investment, etc. And they may continue to grow alfalfa with the confidence that their investment will turn a profit 5-10 yr. down the road.

The farmer who buys high dollar land does so with the expectation that at the end of his holding period (maybe a 10 yr. outlook) he can expect to sell for a lot more per acre..i.e.- a reversion value. Ag land outside transitional areas might not expect any great increase in land prices, so the value is more closely aligned with its crop potentials.

If crops net $100/ac. and land sells for $2000/ac. the cap rate of 5% is below what $2000 sitting in a bank will do at 6% interest. But if you figure on holding the land 5 years and it will bring $4000/ac., then the overall discounted cap rate is much higher.

 

[Caterina Platt]

Thanks Terrell. That makes sense to me. One way to afford staying in the agricultural business for the time being, but as many, many folks have said long before me, sad for our longterm outlook on food production on some of our most fertile grounds.