If you’ve ever used real estate as collateral for a loan, you were likely required to have the property appraised. Understanding how a land lender uses an appraisal is important for you since it will influence the loan terms you ultimately receive. You’ve probably heard a lender use terms such as “advance rate” or “loan-to-value”, which are simply the loan amount divided by the appraised value (or if you are purchasing land, usually the lower of the appraised value or purchase price). The loan amount your lender is willing to extend will be based primarily on your financial condition, credit history, repayment ability, and loan structure. But, in addition to these factors, the type and value of collateral you offer to secure the loan can also play a significant role in determining your maximum loan amount. This article focuses on how a property’s characteristics affect the loan advance rate, and highlights five key areas of a land appraisal that lenders consider in making this decision. Many times the lender will be familiar enough with the property and market to make this decision before the actual appraisal is received, but the same logic discussed in this article will be used either way to determine the loan-to-value the lender is comfortable with.

Keep in mind as you read further that the reason a lender requires collateral is to repay the loan in case the borrower is not able to pay according to the loan terms. As you would imagine, the time when a lender acquires a collateral property and has to sell it is usually the absolute worst time to own that particular type of property. Because of this, a lender’s view of the current and potential future value of collateral securing a loan is typically very conservative. Lenders run a low-margin, highly-leveraged operation and if we’re wrong very often we won’t stay in business too long.

Comparable Sales

The sales comparison approach is a primary driver of the value estimate in many real estate appraisals. But in a number of land markets today, comparable sales can be difficult to obtain due to limited recent transactions. Lenders spend a good deal of time reviewing the comparable sales used by the appraiser, and the lack of recent comparable sales is a sign that either the market is slow or the property is very unique. Either cause generally leads to a lower advance rate for the loan. A lack of sales driven by a depressed market could mean that values are still falling, and when sales transactions do return they will be at lower levels than the old comparable sales used by the appraiser. The appraiser will attempt to adjust values down on the comparable sales to account for this (and may use current property listings as a guide), but this is a very difficult task with lots of uncertainty. Concerning unique or high-dollar properties, the loan-to-value offered is usually lower than a “standard” property because only a limited pool of buyers would be interested in or financially able to buy this tract. This is certainly not always the case as some very unique properties hold value in down markets because similar tracts are in short supply. But, as stated before, your lender will take a conservative view and will probably offer to finance a smaller portion of a property perceived to have a limited market.

Another focus of lenders in the comparable sales portion of the appraisal is the variability in values. If the adjusted values determined by the appraiser are in a wide range, the lender will consider where in this range the appraiser’s final value estimate for your property ends up.  If it’s at the high end, expect a larger discount from the appraised value to the loan amount offered. Again, lenders almost exclusively acquire collateral properties when the market for the tract is poor, so the lower end of an estimated value range is the most appropriate for use in determining advance rates.

Sales History

Before the appraisal is even finished, your lender has likely (or should have) investigated the sales history of the property offered as collateral. In general, multiple sales of the property in the last several years or significant price increases not justified by physical property improvements are red flags to a lender of an overheating market. This is not always the case, but if your lender believes the run-up in prices is unsustainable, expect an offer for a lower loan amount. Also, if the collateral tract is a property you already own, many lenders will take into account your original purchase price in setting a loan amount (especially if your purchase was fairly recent). Cashing out equity in land tends to be more difficult than the same practice was for homes several years ago, and we know how that one turned out. This practice was also common in the agricultural land market during the late 1970’s and early 1980’s, and at the risk of beating a dead horse, we know how that one turned out as well.

Physical Access

Lenders typically rely on title searches and surveys for a “legal” review of a property’s physical access, but an appraisal can give some valuable information for a “functional” review. To better explain the difference, consider a property’s access. The title work and plat will identify the legal access to the property, but the appraisal could identify some potentially troubling functional concerns about the means of accessing the tract. For instance, I have seen properties where the only legal access is across a low area prone to flooding. The legal documents would indicate access was available, but a review of the appraisal may show a factor that could severely reduce the marketability of the tract. This should not substitute for a site visit by the loan officer, but you would be surprised how often that doesn’t happen.

Neighborhood Description

A site visit is also the best way for a lender to get a feel for the property’s “neighborhood”, but comments from the appraiser can also help determine what is typical for the area. Similar to the comparable sales review, a more unique and/or special-purpose will oftentimes have a more limited group of potential buyers. This effect is heightened in a downturn of a particular property market. Count on a smaller pool of potential buyers influencing an offer from your lender for a lower advance rate.

Income Approach to Value

This section of a land appraisal is one of the most important for a lender to consider. In many markets, property values are greater than what the tract’s cash flows alone can support. Intangible benefits (recreation, historical significance, etc.) as well as future potential higher and better uses for the land can drive prices above what current cash flows and discount rates would suggest is an appropriate value. Experience has shown that in a depressed market (i.e. the time when collateral values are most important to a lender) property values tend to fall toward their “cash flow value” as the intangible benefits are not valued as highly by potential buyers. The long term cash flow-generating capacity of a tract will typically provide a “floor” under the price, so this base price level is a primary consideration to a lender in determining how much to loan on a particular piece of land. The greater the difference between the purchase price/appraised value and the “cash flow value” of a tract, the lower the advance rate your lender will be willing to offer. You should expect to have a larger down payment requirement for a recreational tract compared to another agricultural tract with reliable and consistent cash flows.

In summary, the dynamics of the lending business require a conservative approach to setting advance rates, and your lender will consider what could happen to a particular property’s value in the tough times before making their decision on how much to lend. Property characteristics and history that indicate lower marketability, speculative appreciation, or limited cash flow capacity will drive down the advance rate offered to you. Being aware of these factors as you have discussions with your lender should serve you well in negotiating the best financing terms for your situation.

This quotation comes from MacKay’s 1841 book that focuses on three speculative bubbles during the 17^th and 18^th centuries. Asset values getting overheated is not a new happening and the herd mentality MacKay describes is still alive and well 170 years later. We’ve seen it with internet stocks and residential housing recently, and both of those bubbles were very easy to identify – at least with the benefit of hindsight. But it is exceedingly difficult to predict the path of asset prices, as differentiating between market values that have increased based on fundamentals and market values that have lost touch with reality is growing more and more difficult. That being said, let’s consider the possible answers to the question, have farmland prices risen too far, too fast?

Asset Bubble vs. Credit Bubble

Speculative bubbles in any asset class are as much a behavioral phenomenon as they are a financial one. Rising values create a positive feedback loop where excess returns lead to more demand for the asset by new investors. When your neighbor doubles his 401(k) in six months from buying Pets.com or ThisCompanyHasNoRevenue.com, it’s hard to resist the temptation to invest. After all, who wants to be left behind? This is a positive feedback loop, and the beginning of an asset bubble. The end of an asset bubble, not surprisingly, is driven by a negative feedback loop. Investment losses lead to fear, which leads to more sellers than buyers, which leads to more investment losses and so on until asset prices fall enough for the market to clear. It’s the same sequence of greed followed by fear that has driven investor behavior since beads were traded for spices.

A related occurrence, and often a much more dangerous one, is a credit bubble. The recent subprime mortgage crisis is a prime example. The debate continues as to the primary causes of the crisis, with the leading candidates being government policies on housing, accommodative monetary policy by the Fed, and lax lending standards by banks. All three played a part in the crisis, and have played a part in pumping an excessive amount of liquidity into the housing market through mortgage loans. This credit bubble was fuel on the fire of unsustainable home price increases. And this is why a credit bubble can be so dangerous – when you add the bank’s money on top of the investor’s money all chasing the same investment, prices are bound to get way out of line. Cleaning up the mess once the bubble bursts is more difficult, as well, because the painful process of deleveraging must occur. The U.S. economy is still nursing this debt hangover three years after the last subprime loan was made.

Unlike the housing market, farmland is likely not in a credit bubble today, but investors and lenders will need to remain prudent to keep it that way. We are hearing from our Farm Credit counterparts in the Midwest (where the most significant land value increases have occurred) that many sales are on a cash basis and the financed transactions meet conservative guidelines for down payments. The lenders have looked at the long-run price of corn and soybeans, and used that to set a land value that would cash flow if commodity prices fall back to “normal” levels. If these practices continue, a credit bubble forming and pushing land values even higher is very unlikely. But, experience shows us that if a few lenders start making poor underwriting decisions and this gains them market share, it becomes increasingly difficult for other lenders to stand idly by while their loan volumes shrink. Let’s hope agricultural lenders learned a lesson from the mistakes residential lenders made leading up to the subprime crisis.

Farm Balance Sheets

On average, the financial position of farmers is as good today as ever in recent history. Producers deleveraged coming out of the 1980s farm crisis, and have maintained low to moderate debt levels since. Balance sheets are further buoyed by higher land values (the primary asset for most farmers) and strong profitability the last several years. Farmers are much better prepared for a decline in land values than they were in the early 1980s. Debt-to-equity percentages have fallen from 29% in 1985 to 13% in 2010. It can be argued that a drop in values would not cause a rush of forced selling and the negative feedback loop mentioned earlier. This is the story we’re hearing today from financial industry regulators and many Federal Reserve Bank economists. Of course, this makes an assumption that farmers are the primary buyers of farmland.

Who’s Buying the Farm?

Investors (i.e. not a farmer) are increasingly the buyers of farmland, particularly highly-productive Midwest cropland. Depending on which researcher you ask, investors make up 30-45% of recent sales. And these levels are on the rise. With opportunities for good investments harder to find these days, the “smart money” is turning to the red-hot agricultural sector. This has no doubt had some influence on the trajectory of prices in recent years. But is investor participation a bad thing for the farmland market? Not necessarily, but it could be a harbinger of bad things to come. While I’m sure that the investment groups new to agricultural investments are very intelligent folks, usually when you see a flood of relatively inexperienced participants in a market you have the beginnings of a bubble. Just think of all the stories you’ve heard of people being wiped out by tech stocks or buying multiple condos at the beach, when they really weren’t prepared to put a significant amount of their net worth toward these investments. If you’re interested in monitoring farmland values, I would recommend keeping an eye on the percentage of farmland purchases by investors. We would have been well-served to monitor this statistic in the housing market leading up to the crash as an indicator of an over-heated sector.

Cash is King

Whether you’re buying farmland as a passive investment or a way to make your living, cash flow from the investment should be the driver of value. Investors are concerned with rental rates, which have increased significantly in recent years although slower than the pace of the land itself. For instance, land rent in Iowa is up over 11% from 2010, but the ratio of rent to land value has steadily declined from 5.9% in 2001 to 3.4% in 2011. This decline is somewhat concerning, but still affords a reasonable return when inflation and a small appreciation factor are added. But, if commodity prices fall back to historical levels, farmers will not be willing or able to pay the higher rents we are seeing today. Obviously, this will have a direct impact on the value of the farmland.

As for farmers, their crop yields have steadily increased due to improved seed varieties, enhanced management practices, and more efficient use of each acre of land. Historically high commodity prices combined with these increased yields have obviously boosted farm incomes. It’s arguable whether the higher income fully supports the significant increases in prices paid for high-quality farmland, but at least there is some financial underpinning of the record value levels.

As mentioned previously, asset bubbles are very hard to predict without the benefit of hindsight, and it’s even harder to get the timing right. Many investors went broke shorting the subprime market. Right idea, wrong time. At this point, the jury is still out on whether farmland is currently in a bubble, but hopefully the four potential drivers of an overheated land market will help you decide for yourself as this chapter of the land story unfolds.

The title of this article is an oversimplification of the decision process for the type of land loan you should get…but you’ve read this far, so at least it got your attention. When I say your loan should be “long-term”, I mean the interest rate should be fixed for multiple years (usually 10+). There are some situations where you wouldn’t necessarily need a long-term fixed rate ― for instance, if you’re not planning to own the land for many years, or you’re planning to come into a big pile of money and pay off your loan early (wouldn’t that be nice!). But, my usual recommendation to clients is to match their interest rate with the time horizon of your investment. So, if you intend to keep your new land purchase in the family for years to come, it just makes sense to consider a long-term fixed rate loan. Here’s why.

Whether you like it or not, when you decide how long you want to fix the interest rate of a loan, you are speculating on interest rates. If you plan to own a tract of land for 30+ years, but you only fix your interest rate for three years, you are taking a risk that rates will be significantly higher in three years…potentially so high that you couldn’t afford your land purchase anymore.

However, you are also taking a “position” on interest rates if you lock in your rate for the full term of the loan, because rates may fall and you would be paying an above-market interest rate. But, this scenario is much better than the first since you can refinance to the now lower rates. Some cost will likely be involved to do this, but you would only refinance if the new rate were low enough to offset any fees you had to pay. (Personally, I would rather pay some fees to get my rate lowered than lose sleep at night wondering whether interest rates are going to skyrocket and hit me in the wallet.)

Long story short, if you’re planning to hold on to your land purchase for the long-term, I recommend you lock in your interest rate for the long term as well. Shameless marketing plug in 3, 2, 1….one of the few lenders that offers long-term rates on land is Farm Credit.

In case you’re not convinced yet, let’s look at where interest rates are today compared to historical levels. The chart below shows data on some widely followed interest rates.

Unless you’ve been living under a rock the last few years, you know interest rates are currently very low. But, the chart above puts this in perspective when you see that Prime is more than 6% lower than the average over the last 34 years. How would like the interest rate on your land loan to jump 6% higher? Or worse yet, consider what your rate would be if Prime hit 21.5% like it did in 1980, and your short-term fixed rate expired and the bank reset to current market rates. Like my fourth-grade teacher Mrs. Davis used to tell us: “A word to the wise is sufficient.” I can’t tell you when rates will go up, but I can tell you it will happen, so please consult with your lender or trusted advisor to make sure you choose the interest rate product that is right for you.

You’ve certainly heard about (or experienced) the reduction in available credit for land purchases. There is still ample money available for higher-quality loans—loans with large down payments, consistent and adequate repayment sources, reasonable amortizations with frequent payments, etc.  But the more questionable loans that were easy to get three or four years ago are no more—those with little money down, repayment dependent on capital gains, long repayment terms with interest-only payments, limited or nonexistent loan conditions, and so on.

So, the question becomes, if I’m in the market for a land loan and I know conditions are tighter today, what can I do to increase my chances of approval?  Here are a few ideas for you to consider:

Set Reasonable Expectations
If  you meet with your lender and tell them you’re looking for a loan on a tract of timberland and you want to put down 5%, pay only interest for two years, and that you plan to pay for the land by selling another tract you own, not only will you probably get turned down for the loan, but you will make it very difficult to cut any other deal with that lender.

Even though you may be willing to accept terms that are less liberal, you have put it into the lender’s mind that you’re just like the folks he lost (or is currently losing) money on.  Start the process knowing that you will not get a loan with terms like those available in 2006.

Prepare a Professional Financial Information Package
You will need to provide financial information to get a loan, so why not go ahead and prepare this before you start making the rounds talking to lenders?  At a minimum, gather the following:

• Three years of tax returns (including schedules);
• Personal financial statement / balance sheet (you can find templates online);
• Verification of liquid assets (cash, stocks, mutual funds, etc.);  and,
• Business information (if you own a business, provide the same information mentioned above on your company).

Your lender may eventually ask for some additional documents, but having this information ready up front in the application process will show you are on top of your finances and are a serious loan prospect.  Also, having this information together early in the process will make it easier for you to shop for the best rate and terms, as your lender will need some idea of your financial profile to give you the best quote they can offer.

Pull a Credit Report
You can do this for free at www.annualcreditreport.com.  If there is something incorrect on your report, the site has instructions on how to request that it be corrected.  If you have any judgments, collections, significant delinquencies, or other issues, go ahead and bring these up with your lender early on in the process.  They will find out about it eventually, so it’s best to get it out there and explain what happened.  Believe it or not, lenders are human, too, and we don’t like getting surprised.

Gather Information About The Land
You may not have identified your dream tract yet, and that’s all right.  I encourage you to start your conversation with your lender early, even before you settle on a specific property.

But, if you have identified a tract you like, bring as much information as possible with you when you meet with the lender.  When prices on land—regardless of quality—were increasing year after year, many folks quit paying attention to all the details that are very important to a successful land transaction (whether as an owner or lender).  That ship has now sailed, so your lender will be very interested in the characteristics of your tract that drive value and marketability (e.g., road frontage, water sources, income-generating potential, easements, soil types, neighborhood, structures on the property, timber volumes, and so on).  Start your “sales pitch” from the first meeting to make sure your lender is comfortable committing money to the property you’ve chosen.

Financing is definitely still available for land purchases, so start the conversation with your lender early and follow these tips to make your transaction a successful one.

Everybody in the land business seems to be talking about financing and the lack of it for land transactions. It’s obvious this is a big problem in our industry, however in talking to a broker last week I found an even bigger problem that the banks and government have created. The greater problem than not having money to loan is the banks inability to sell a distressed asset. The banks are in a broken system that cannot be fixed in the near future.

The conversation I had with the broker started off with this question. “What do I do when I have given my client (a bank) an offer for more than their property is worth and they still will not accept the offer?”  My answer was to get all the comparable sales that you can and convince them that you are correct in your value analysis and that there is no way they can sell it for more than the presented offer. The broker said, “I have done that!” Well what happened? “They agreed with my evaluation of the property.”  So what’s the problem?  ”The bank told me they can’t afford to take the offer.”

This conversation was very alarming. How are we ever going to get through this mess if we can’t sell the current inventory that are so called “deals” or short sales? These types of bank owned properties will help establish a bottom and set comps for the rest of the industry to baseline dirt values. What’s more alarming than the banks inability to sell is the FDIC is still allowing them to conduct business in this fashion. When do they think things are going to better? Will the bank recover next year and values return to 2006 prices? If that’s their business model, I wish someone will put a padlock on their door yesterday! To let these banks continue to operate this way and control such a significant part of our industry is pure stupidity.

Until banks fail or raise more capital (fail is the more likely option), be prepared to continue a flat real estate market. I would like to give a big “thank you” to the FDIC and the banks for keeping us floundering around for the last 3 years. I look forward to you guys keeping this incredible mess going. Thanks again!

Most land and farm transactions I work with are cash transactions. This is not to say that I work with only the independently wealthy. The majority of people that pay cash for a property have recently sold some other type of investment and are simply moving that investment into another investment that works better for them.

Many investors prefer the cash method as it is the most hassle-free and gives the buyer a negotiating advantage. The general thought is that a cash offer is stronger and that because the terms of the offer are stronger, the investor can offer a lower buying price. The seller perceives that they are dealing with a financially-able potential buyer and will usually give them more consideration. If the seller happens to be time-motivated in selling his property, cash makes an impression as well. Generally, a cash buyer can perform on a contract much quicker than one who needs to borrow money. Time is money, and it is never more true than in negotiating a real estate transaction. Of late, buyers that must borrow funds to close a transaction have taken anywhere from 15-45 days longer to close than transactions that were made with cash. A cash offer is a definitive statement from the buyer that says, “I want the property at this price and I can buy it.” Many times today, buyers want a property at a given price, but cannot close on it due to financial difficulties. Informed sellers are aware of this, so a cash offer gets their attention.

The LandThink Summit 2010 — September 30 at the Gwinnett Center in Duluth, Georgia — will address the good, the bad and the ugly in today’s land business.

Consider three recent items:

Jim Rinehart, president of R&A Investment Forestry which concentrates on managing and advising institutional investments in timberland, wrote in “U.S. Timberland post-recession: Is it the same asset?” (April, 2010) that timberland will continue to be a steady asset, but one that is likely to produce lower returns with higher risk than seen during the last 15 years or so. He thinks timberland as measured by the NCREIF Timberland Index has actually declined 15-20 percent in value, but the bulk of that decline has been masked by low transaction volume and the valuation process.

Conor Dougherty and Sara Murray report in the September 17, 2010 Wall Street Journal (“Lost Decade for Family Income”) that inflation-adjusted income of the median U.S. household fell 4.8 percent between 2000 and 2009. In the 2007 to 2009 period alone, median household income fell 4.2 percent. Recent declines follow a “long period in which incomes stagnated even through the recovery of 2003-2007.” Second-home sales, land purchases and residential real estate have been clobbered by middle-class income stagnation coupled with unemployment, underemployment and tightened lending standards.

P.J. Huffstutter in the September 19, 2010 Los Angeles Times (“Investors seeing farmland as safer bet than stocks”) reports that institutional investors and wealthy individuals are putting money into farm operations of all types because returns have outperformed stocks and the risks inherent in farming seem safer than those in equities.

But Michael Swanson of Wells Fargo’s Agricultural Industries Group warns that the combination of super-low interest rates and high crop prices have inflated land values, and a 1980s-type farm crash might reoccur as a result.

Is land a buy-now opportunity, a long-term neither-here-nor-there investment or a place to make respectable, though not, spectacular returns?

Find out this Thursday at the LandThink Summit.

Here are two samples of what conference participants will hear.

Barry Gittleman, vice-president for land and strategy at John Wieland Homes and Neighborhoods, believes that distressed land presents a “huge opportunity” for investors.

He says: “In reality, 2009 and 2010 will probably be the best years during our lifetime to purchase a home of any type, if you take the time to do your homework and make sure you get a great deal.”

He would put his own money in bank-owned developed lots in Atlanta, “the closer to in-town, the better. There are lots being sold for less than the cost of development in some places, so the raw land is essentially free in those deals….  Other opportunities include raw land or developed lots in any city where I expect a strong economy in 5-10 years in locations or submarkets where I think they will be building new homes in 5-10 years. I would include parts of Raleigh and Charlotte on that list. And I would stay away from non-residential land, which I don’t think has bottomed yet.”

Brooks Mendell, founder of Forisk, advises small timberland investors to analyze a purchase in the following way:

“The recipe for analyzing timberland investments is straightforward, though it requires discipline and patience.  First, understand the local wood market.  Timber markets are uniquely local.  The same timberland property in two different baskets will have two different values.  In understanding the local basket, this goes beyond knowing all of the wood outlets into which you might sell trees.  It includes knowing in advance how you will access these markets.  Will you work through a forestry consultant?  If so, who?  Will you work directly with loggers?  If so, who?

Second, question your forest data.  In forestry, we have a somewhat bizarre relationship to data as compared to data for other assets such as bonds, equities or even commercial real estate.  In forestry, everything is a sample.  A forest cruise, which estimates the volume and value of the standing forest on a given property, is a sample of what’s out there.  If we use data from the US Forest Service, it’s based on samples.  If we use a timber pricing service, whether public or private, all reported prices are based on samples, not all transactions.  So ask questions about the data.

Third, …know what’s knowable.  In evaluating the value to you, the investor, you want to nail down, to the extent possible, what’s left over each year after revenues are generated and bills paid. That means being specific about what exactly will the property taxes be for THIS property, what are the annual management costs for THIS property, and what are the fees paid to consultants, accountants and lawyers to acquire and manage THIS property.  Plus, fully explore the revenue potential for the timberland property, above and beyond forestry.  Cell towers?  Mineral rights?  Kaolin?  Hunting?  Spiritual retreats?

We recommend to investors that they become familiar with their local markets first, and then patiently seek and evaluate timberland investment opportunities.  This approach leads to building solid models with tested assumptions for buying properties.  Then, when the numbers look good, move fast.”

Dan Hatfield, national president of the Realtors Land Institute, will discuss current and future legislation that will impact the land market. Craig King, president and CEO of  J.P. King Auction Company, will describe how auctions have changed the land market. Jason Denton, vice-president of corporate lending at AgSouth Farm Credit, will talk about financing of timber and land investments. And Harry Mehre, of Jones Lang LaSalle, Tom Margo of AFM Land Sales and Brooks Mendell will form a timberland-investment panel.

Curtis Seltzer will face the question: Land Investing: Now or Later? He refuses to disclose his answer in advance of the Summit. I know because I asked.

For more information including the agenda, speakers, program and attending, visit the LandThink Summit website at GetLandSmart.com.

Spring is coiling, but not yet sprung. Spring brings buyers into the countryside. That’s how it usually works, anyway.

Land buyers and sellers need to give some thought to the odd financial environment that exists. Here are a few items to consider:

Interest rates. Advertised rates for a 30-year, fixed-rate mortgage are very low right now, in the 4s and 5s. Getting a 30-year, fixed-rate mortgage in the 4s and 5s right now is very hard.

Loans being made for farms and unimproved land are in the 6s and 7s, depending on the amount of cash the buyer fronts and the term.

The lack of feasible credit and the interest rates that are actually available are hindering sales in rural real estate. The market tends to be limited to cash buyers.

Refinancing property at the advertised rates is largely wishful thinking.

The Washington Post carried a story in mid-February (“Refinancing unavailable for many borrowers” by Dina ElBoghdady and Renae Merle) that reported  “…millions of homeowners…[can] not qualify for the best rates.” The decline in property values has made refinancing difficult, along with tightened standards and a general lender disinterest in any but the safest and most readily resold mortgages. On March 3, 2010, Nick Timiraos reported in the Wall Street Journal that while the Federal Reserve has pushed mortgage rates to 50-year lows, “millions of U.S. homeowners haven’t benefited from that because they can’t — or won’t — refinance.”

I don’t see interest rates and credit availability improving in the near future. The Fed is committed to raising interest rates to control inflation. Two years from now, buyers of farms and land may be working with interest rates in the 8s and 9s. This will put pressure on sellers to lower prices and help with the financing.

Getting into a fixed-rate, long-term mortgage for rural property today is likely to be better than waiting…if you can.

Taxes. If you are “rich,” in the way President Obama defines the word, you will be paying higher taxes in the future. His proposal is to let the Bush-era tax cuts expire for this group.

For couples earning more than $250,000 a year, the proposals involve raising the top income rates of 33 and 35 percent to 36 and 39.6 percent; adopting an additional 0.9 percent Medicare payroll tax; imposing a 2.9 percent Medicare tax on investment income; phasing out personal exemptions; and reducing itemized deductions.

For wealthy land investors, the heavy hit will be the rise in the capital gains rate. Under the Administration’s proposals, the 2011 top rate on capital gains would be 20 percent rather than the current 15 percent.

Another idea is to limit itemized deductions to 28 percent for wealthy couples. Such taxpayers could no longer deduct against their higher-than-28-percent rates, but only against 28 percent. This increases their tax burden. This proposal would also cover deductions for mortgage interest.

Mortgage interest deductibility has been on many tax-reform hit lists. It doesn’t seem to be in the Obama works. Tax breaks for conservation easements, second homes and rental income do not seem to be in the cross hairs. Obama’s proposals assume keeping a federal estate tax at a $3.5 million exemption per person and a top rate of 45 percent on taxable estates. I’ve not heard that the 1031-exchange rule is in jeopardy.

If you are not in the top income brackets, many of the proposed tax increases should miss you. Accordingly, a land buyer who is below the top capital-gains rate should be in the same position in the coming years as he is today. But who really knows?

It’s difficult to say how “tax reform” will net out for a particular individual, since the specifics are still up in the air and circumstances change for each individual over time. The best we can do in this situation is to push every investment decision through a current tax-impact filter. Clearly, wealthier investors will be paying more taxes, but those not in those brackets may not see much change in their burdens.

Property taxes. You have to assume that local property taxes will rise as state budgets reduce expenditures.

The relationship between selling prices and property-tax burden is not always straight forward. Where taxes are high in Michigan, prices for timberland are still far too high in my opinion. In New York, another high-tax state, selling prices are high compared with the past, but low compared with other states—this is the pattern that you might expect. In certain low-tax southern states, prices are still high historically—another pattern that might be expected.

Buyers should run projected property tax hunches through their investment analysis. Fortunately, land-use and timber-stewardship tax breaks can take some of the sting out of property taxes on land and farms.

Employment and the overall economy. I’m with the group that believes we will stagger along with high unemployment, high underemployment, discouraged workers (who no longer seek employment) and a long-term thinning of the economic middle class. If this is true, some number of land and second-home buyers will not come back or come back weaker (looking for 25 acres rather than 100).

But the high end is still likely to be in the game. Robert Frank in the February 13-14, 2010 Wall Street Journal reported that unemployment among individuals earning more than $150,000 a year was only three percent in 4Q 2009, compared with an overall rate of about 10 percent. I’m not saying that the recession has spared the upper-middle and wealthier classes. I’m only saying that it has disproportionately landed on those in the middle and below. Wealthier individuals and institutional investors will still be in the farm and land markets, but they may scale themselves back a bit and be unwilling to pay the prices that were tacked up in 2007-2008.

Demand for most agricultural products is likely to be strong enough going forward. Demand for stumpage and wood products will take a longer time to come back and regain the prices of five or six years ago.

All of these financial factors — interest rates, fixed-rate mortgages, capital gains rates, property taxes and macro-economic trends — need to be considered before buying rural real estate. They are part of a buyer’s due diligence.

Taken together, they appear to net out as a more financially onerous environment than we have today. That, I think, puts pressure on sellers to lower their prices, both now and in the future.

Lenders are uniformly willing to offer adjustable-rate mortgages (ARMs), even though long-term, fixed-rate mortgages are so obviously more sensible from the borrower’s perspective. Sorry, the lender says, we can’t do a 30-year fixed, but we’ll be happy to work out an ARM.

ARMs, of course, should be more profitable to a lender over 15 to 30 years when long-term fixed-rate mortgages are hypothetically available today at 4.75 to 5 percent  with a couple of points. From that starting rate, there’s little chance that a new ARM will adjust down; it only has room to move up. ARMs are, generally speaking, less risky and more profitable from the lender’s point of view.

I recently approached five lenders for a rural refinance. I specifically requested information on their 30-year, fixed-rate products. Each responded with information on their ARMs.

The other side of this credit lock down is that lenders have tightened lending standards during the last 18 months, and some are still tightening. That’s certainly understandable given where mortgage standards were in 2007, but the reversal has swung too far. Today, lenders seem to be looking for ways to not make fixed-rate mortgage loans. I’m not arguing that subprime lending should rear its ugly head again. I am arguing that lenders have overcorrected. Too many stories have emerged across the country of qualified borrowers getting shot down.

Most lenders seem to be willing to provide mortgages right now for rural property only in very specific circumstances.

They want a cookie-cutter profile for both the property and the borrower. They want most of the value in the house and as little as possible in the land. Twenty percent down, or more. Low appraisal values. Loan-to-value of 80 percent or less. Guaranteed borrower wage income for life and beyond. Self-employed borrowers are not welcomed. Credit score of 700+. The mortgage must be saleable; few want to carry a loan they originate. And so on.

Land loans are often similarly handicapped, as are commercial and industrial (C&I) loans. Most lenders want as much cash in on land loans as they can get out of the borrowers. It often doesn’t matter what the property presents as annual cash income or merchantable timber value.

I was surprised at how uncompetitive my Farm Credit Coop was on my refinance. They quoted a 30-year fixed at 7.65 percent about six weeks ago. The member-owned, non-profit community credit union I belong to sells exclusively to an investor who has no taste for anything outside the lines of utmost conventionality. They quoted nothing fixed, only adjustable.

I anticipated reluctance, but not near total unresponsiveness. For that reason, I gave the five candidates every scrap of information and documentation they needed before applying, before asking for a Good Faith Estimate. I dug out comparables. I sent tax returns, gross income for 1-11/2009, photocopies of every account (savings, IRAs, credit cards, etc.), credit scores/reports, debtstatements for vehicles, farmowner’s insurance coverages and on and on. My wife, incidentally, is a real-estate lawyer who has worked for years with every one of these lenders. We’ve not been late on a mortgage payment in 26 years.

To every generalization, I’m sure exceptions exist. But it requires a lot of work and persistence on the borrower’s part to find the exception these days.

Some lenders understand rural land; some don’t, and don’t care to learn the market.

Rural residences tend to be idiosyncratic in that they often involve more land than the “maximum” of nine acres that banks want.

They also come with farm-related improvements around the house that are valued for property taxes at a huge discount to their fair market values. I have $200,000 in barns and farm buildings valued at replacement cost, which our county values for taxes at $7,500. It’s a great tax break, but it works against a borrower trying to show his property’s fair market value.

Most farms and rural residences appear to have held their values better than metro housing and, particularly, condos. The arbitrary penalties that many lenders are now imposing on the rural real-estate market don’t make financial or economic sense, at least to me.

And perhaps I’ve missed it. But I don’t hear rural representatives making any noise inWashington. Maybe my hearing isn’t what it used to be, but I think it’s still good enough to hear someone calling for balance and common sense.

Today, every Joe Schmo like me has to protect himself from his fellow Americans by becoming learned about our country’s health-insurance plans, home-insurance plans, credit cards, auto buying, house buying, mortgage debt, consumer goods, medical issues, macro-economic drivers of the economy, derivatives of derivatives, global warming/cooling/staying the same, the IRS code and layer after layer of complexity in our laws, regulations and how we do business that few of us fully understand them.

I am, therefore, a sucker for books written by any insider who shows me how an opaque system actually works, how the unlearned are routinely shorn of both their money and faith and, finally, how ol’ Joe might not level the playing field but at least understand how it’s tipped against him.

Several real-estate writers have deconstructed the mortgage and refinancing processes from a consumer’s perspective. Robert Irwin’s, Tips & Traps When Mortgage Hunting (McGraw-Hill, 1992) and Julie Garton-Good’s, All About Mortgages: Insider Tips to Finance or Refinance Your Home, 2^nd ed. (Dearborn, 1999) are two that I have on my shelf. I’ve now added Carolyn Warren’s, Homebuyers Beware: Who’s Ripping You Off Now?—What You Must Know About The New Rules of Mortgage and Credit (FT Press, 2010; www.mortgagehelper.com and www.AskCarolynWarren.com) as a current and useful addition. I have also followed Jack Guttentag for many years, at www.mtgprofessor.com.

Warren takes the position that the mortgage finance business is staffed with both decent individuals as well as others who routinely take advantage of their customers and add profit to their work through concealment and lies.  She cites numerous personal anecdotes to support her opinions. She wants borrowers to learn how to tell the difference and flow toward the decent folks.

For 12 years, Warren worked in mortgage lending, both the retail and wholesale sides. She worked for Full Spectrum Lending/Countrywide Home Loans, Ameriquest, Green Tree Financial/Conseco and First Franklin. She now works as a broker/banker, writes and operates two websites.

Borrowers need to understand that they are shopping among lenders who usually want to make as much money on the loan as they can without driving the customer to the next lender. Borrowers want the cheapest loan with the best terms; lenders want to give loans that work for them.

Each lender has a minimum amount of yield that it requires on each loan. The yield is determined by each lender’s particular combination of offered interest rate, terms, fees, points and charges. It’s difficult for a borrower to get four apples on the comparison table at one time, though comparing total loan costs is one approach to making a decision rather than just looking at interest rates.

Mortgage brokers are often able to offer the best deals to the extent that they are networked in to a number of wholesale, competing lenders. But a borrower may find a broker motivated to get the borrower into the best deal for the broker that the borrower will accept.

Credit unions are non-profits that work for their members. Warren says that she could, as a motivated broker, beat credit unions 99 percent of the time. Credit unions should be absolutely transparent and forthright with borrowers. Banks and mortgage brokers are only as good as their corporate cultures and individual loan officers; they may or may not be transparent and forthright.

She urges borrowers not to shop for rates among lenders as their first step into the soup. She suggests, instead, to shop for a loan officer by asking candidates for a Good Faith Estimate (GFE) after giving each your price range, amount you can put down and your credit score. You will get a written document that shows how each lender structures the costs to the borrower within an approximation of the interest rate you will get. The borrower should then choose a loan officer (and institution), she writes.

I agree that shopping for the lowest rate among lenders as the first-cut selection criterion is a waste of time, because rates change within each day and some lenders will quote low rates that they won’t deliver.

I’ve had reasonable loan-shopping success with a little different approach. I put together a “most-likely” set of lenders—credit union, two brokers and a bank or two. I prepare a package of material with all of the documents they need to get a complete picture of my finances and who I am. A borrower needs to do this sooner or later, so why not sooner?

Among other items, I include my two most recent 1040s, net worth document, recent statements from banks, credit cards, brokerages, current W2s, credit score and so on. I write a detailed letter spelling out what I want to buy, what type of loan I want, projected cash flow and explanations of anything that is hard to document, quirky or adverse. I try to give each lender all the information they need to make a loan decision without asking them to commit to a loan just then.

On a refinancing, I give an estimated FMV value of the property along with information on current loans, less-than-obvious assets and liabilities in the property and explanation of why I’m refinancing, possible cash flow from the property, plans, expectations and so forth. I do not include a current appraisal, because my chosen lender will require that I pay for one done for his institution. No need to pay twice.  I also try to refresh my recollection of the vocabulary, concepts, tax considerations and tricks in the process, all of which I tend to forget as soon as possible.

I ask in return a GFE from each prospect. That gives me paper to compare and books like Warren’s to ferret out the total cost to me of each GFE. I, too, look for reasonable chemistry in a loan officer. A personal connection always makes the process easier.

Warren’s book helps a borrower understand this cloudy process. At issue in this tug-of-war between lender and borrower is money out of the latter’s pocket, upfront and over time. The simple rule in this complex world is: The more you know, the better deal you’ll get.

Know about a par rate? A Yield Spread Premium? The new GFE form?

Read Warren’s book. You will save its $19.99 cost many times over if you apply its information to your own circumstances.