Rural Land Improvement Financing: What to know before starting a project
Improving rural land isn’t quite like remodeling a suburban kitchen. The projects can be more substantial, and more importantly, the financing can be more complex. Understanding how a proposed land improvement may affect a property’s value can help guide stronger financial decisions before the work begins.
At AgTrust, it starts with understanding the land, the goal and the financing needed to move it forward.
If you’re considering financing a land improvement project, whether it’s constructing a pond, replacing a fence or adding road access to your property, it’s important to think about what the market will pay for that upgrade down the road.
Step 1: Talk with appraisal and lending experts early in the planning process.
The first step in any land improvement project requires appraisal and lending experts to help structure the best financial strategy. Find trusted resources to help evaluate the project, understand its potential impact on value, and determine the best financing approach.
Step 2: Understand project cost versus value added.
Cost is what you pay the contractor while value is what a future buyer is willing to pay for the extra amenity you added. Site improvements often do not provide a “one-for-one” return.
Many times, there is a delta between a project’s cost and its appraised value. Adding a $60,000 recreational fishing pond, for example, might only increase the property’s appraisal by a fraction of that amount. The same principle can apply to other improvements, including fencing, barns, and road access: The cost of the project may not translate dollar-for-dollar into added appraised value.
Lenders consider the value an improvement is expected to add to the property when determining how a project can be financed.
Step 3: Consider how existing equity may support the project.
When the cost of the improvements doesn’t equal the added value, other financing strategies can help. The existing equity in your property can enable your vision of a new fence or fishing pond to still become a reality. Lenders can use that existing value to offset the gap created by the enhancement to loan against for land improvement projects.
For example, to build a barn, the lender will order an appraisal “subject to completion” based on your plans and specs. They appraise the property as if the barn is already there.
Projects that protect property value
Water features: If your property has a creek or a natural spring, you are sitting on a highly desirable amenity. When evaluating a pond or tank, appraisers will look at sales of comparable properties with similar water features and how those features influence the current market.
Land clearing: Land choked with invasive cedar or mesquite trees can be worth more when cleared and seeded for grass. It becomes more productive for cattle and more attractive for hunters. However, keep your goals in mind, some buyers prefer thick cover for specific types of hunting. Knowing your “end user” helps determine the value of clearing.
Barns and ag structures: Barns can support a variety of agricultural and recreational uses, from housing livestock and equipment to providing workshop and storage space. Size, materials, intended use, site preparation, can influence both project cost and how the structure contributes to the property.
For landowners looking to combine functional space with living quarters, Barndominiums continue to be an efficient, cost-effective way to build a home base on rural property.
Set up for a smooth loan process
- Get construction bids early. Detailed bids, plans, and specifications give the appraiser a clearer understanding of what is being built and can help support the valuation process.
- Work with a lender experience in rural property. Rural improvements can involve considerations that differ from traditional residential projects. Work with a lender who knows those variables.
- Solicit more than one bid. Requesting multiple bids or amending your plans slightly can save thousands in costs.
- Plan for the long term. Build for your needs but keep an eye on what makes the land marketable for the next generation. Rural property typically appreciates over time and can help you hedge against inflation.1