Land loans and home mortgages are normally similar, but land buyers often require longer terms and more flexible repayment schedules. This is especially true if the income earned from the land, such as the sale of agricultural crops, is the primary source of loan repayment. A lender that specializes in making loans for real estate is most likely to offer flexible financing. 

It may be possible to negotiate more flexible repayment options with a private lender. However, buyers typically can choose from more products and options when they borrow from traditional lending institutions.

Commercial banks, mortgage companies, insurance companies, private lenders (owner financing) and Farm Credit lending co-ops are all sources of financing for rural real estate. Some are more active in financing certain types of real estate, such as working farms, than other types. Farm Credit institutions finance the entire spectrum of rural real estate, from recreational property and part-time agricultural operations to country homes. 

Both variable-rate and fixed-rate loans are available for rural real estate loans. Each type of mortgage offers advantages, depending on the customer’s situation and market conditions.

Buyers wanting to take advantage of low interest-rate markets often choose variable-rate mortgage loans, which are held by the lender and not sold to other financing institutions. Variable-rate loans are generally more desirable for shorter terms. Farm Credit financing institutions offer Prime- or LIBOR-based floating rates for up to 15 years.

Fixed-rate loans up to 30 years are often preferred in a rising interest-rate market, but many rural lenders do not offer fixed rate terms, especially for land loans.

Choose a lender who is knowledgeable and experienced in financing rural real estate. An experienced rural lender can offer advice on agricultural-use tax exemptions, environmental factors and insurance sources that an out-of-state lender might not. A local lender will be familiar with land values and comparable real estate sales prices in the area.

Farm Credit loan officers typically have extensive education and experience in agricultural financing, banking, business and/or mortgage lending. In most cases, they live in the community, often grew up in an agricultural or rural area, and have a good understanding of local land values. Some loan officers are also certified rural real estate appraisers.

No, it is a network of privately owned cooperatives.

Yes, Farm Credit is regulated by the Farm Credit Administration, an independent federal agency, whose board members are appointed by the President of the United States. For more information, visit www.fca.gov.

The Farm Credit System is a nationwide network of cooperatively owned banks and lending cooperatives established by Congress in 1916 to provide agricultural producers and rural America with a reliable source of credit at reasonable cost.

When Farm Credit cooperatives do well, they typically share their earnings with their borrower-stockholders in the form of patronage payments or dividends. These payments can have the effect of significantly reducing a customer's overall cost of borrowing.

Farm Credit co-ops are owned by their borrowers, who also are co-op stockholders. The stockholders elect the board of directors who set policy and oversee management of the association. This ownership structure assures that a Farm Credit institution is accountable to its customer-stockholders, and decisions are made in the best interest of the customers.

Why more people are riding a “new wave” in business formation

By Mike Odom

In one memorable episode of the classic television series Perry Mason, a man was accused of murdering his business partner to collect the insurance money. Of course, Perry got him off by convincing the dead man’s wife to confess to the killing because she thought he was about to divorce her.

In Perry’s world, it was usually the unfortunate business partner who met his end under clouds of suspicion. In the business world, however, it is the traditional partnership that is disappearing under mysterious circumstances. And based on the evidence available, the rise of the Limited Liability Company, or LLC, has emerged as a strong suspect in the case.

Origins of the LLC

Although Florida was the second state in the nation to authorize the formation of LLCs, one law professor said the state’s first attempt in 1982 was sorely lacking. It wasn’t until a second attempt in the ‘90s that Florida finally passed a law that generated considerable interest among the business community.

“Florida had an LLC statue for years, but no one used it,” said Barbara Ann Banoff, who teaches corporate finance and securities regulation at Florida State University College of Law. “With the new statue, it went gangbusters.”

The numbers back her assertion.

In 1995, there were nearly twice as many partnerships as LLCs, according to the Secretary of State’s Web site. However, in 2004, more than 100,000 LLCs were formed compared to only 4,806 partnerships. Over 10 years, LLC flings increased by 7,094 percent, while the number of partnership flings grew only by 85 percent.

Why Choose an LLC?

The LLC is a significant innovation and alternative to the five traditional ways of organizing a business as a sole proprietorship, general partnership, limited partnership, C corporation or S corporation.

A hybrid of the corporation and partnership, an LLC is an attractive choice for new business wanting the limited liability protections of a corporation with the tax advantages and management flexibility of a partnership.

“It gives you the best of both worlds of a corporation’s limited liability and a partnership’s tax advantages,” said John Panyko, a Pensacola attorney board-certified in tax law. 

Who Should Consider an LLC?

One of the drawbacks of the 1982 statute was the restrictions it placed on who could form an LLC. Those restrictions were removed in the new law. Now a single person can establish an LLC.

Many experts recommend the LLC form for an active business with a limited number of owners or investors and recommend the form for groups fewer than 35 members.

“With two or three people or so, most of the LLCs we see out there are for real estate,” said Hal Major, an accountant with Saltmarsh, Cleaveland and Gund in Pensacola.

 Legal and Tax Benefits of an LLC

Like a corporation, an LLC insulates its members from a number of potential legal liabilities. For example, it protects its owners from business torts, debts and court judgements against the business. 

Members are still subject to liability, such as certain misconduct or torts outside the business purpose, but primarily the only risk an owner has is his own capital investment in the LLC.

One of the reasons that few LLCs were formed under the original statute was the uncertainty about how LLCs would be treated by the IRS. That uncertainty was put to the test on January 1, 1997, when the IRS ruled that they would be taxed as partnerships.

Under the current statute, an LLC can also elect how it wants to be taxed, but most LLCs choose to be taxed as partnerships.

“Because of the pass-through tax aspect of the partnership, you avoid the double taxation on distribution of the property as you do with corporations,” said R. Malone Camp, an Orlando attorney with a master of laws in taxation. “You avoid the corporate tax headache.”

Management Benefits

An LLC also provides considerable flexibility in planning for how it is to be governed. Almost any management structure can be devised, so long as it is clearly set out in an operating agreement.

Two important considerations are buy-out provisions and what to do if a member dies.

“You really need to plan for future events,” Banof said. “Setting up an LLC is a complicated deal, and you need to think about it carefully and consult competent counsel. I do not think this is any area for a do-it-yourselfer.”

Other Considerations

The consensus among many experts is that there are not many disadvantages to an LLC for a small group of owners, small start-up businesses and partnerships thinking about becoming an LLC.

One downside is that LLC members bear some taxes that a corporation does not. For examples, distributions to members are subject to self-employment income tax, said Kramer Litvak, a Pensacola attorney. But he cited the many benefits of an LLC, including the additional flexibility in estate planning.

“Usually these benefits outweigh having to pay the self-employment tax,” he said.

Conclusion

Although an LLC is quickly and inexpensively formed in Florida, at the department of state Web site (http:// sunbiz.org), it can also be a thorny endeavor with many traps for the unwary. The real expense might come later in serious management problems and unforeseen litigation costs.

“For real estate business, the LLC is the entity of choice,” Litvak said. “It’s not that expensive to get these things done well at the beginning.”

As for traditional partnerships, it looks as though they have gone the way of the classic television series: still seen, but far less frequently these days.

Mike Odom is a freelance writer in Northwest Florida. Freelance writer Steve McClellan also contributed to this report.

NOTE: This article is not intended to substitute personalized legal advice from an attorney licensed to practice in Florida.

As a landowner, you face liability risk from all sides.

• You must comply with state and federal regulations on water, air and ground pollution, along with laws protecting endangered species.
• If you hire workers, your liability extends to their injuries or deaths and to unfair labor practices.
• You risk prosecution for harming historic sites such as cemeteries.
• Moreover, special rules apply to equestrian and pick-your-own operations.

But research shows that landowners are most concerned about liability relating to trespassers and hunters on their property. Before you build a giant wall around your place, take heart — you may be more protected than you realize: In recent decades, all 50 states have enacted laws limiting landowner liability. Plus, you can take steps to help protect yourself.

Liability Depends on Classification

Judon Fambrough is an attorney and senior lecturer at the Real Estate Center of Texas A&M University. “According to case law, a landowner’s liability, or responsibility, for anyone entering the property depends on the legal classification of the person at the time of the injury,” he says. While state laws differ, most rely on these classifications:

• Invitees, including fee-paying hunters. You must protect them by keeping your property safe and warning them of dangerous conditions that a reasonable inspection would reveal.
• Licensees, including nonpaying hunters with permission. You have a duty to warn them of known dangerous conditions or make the place safe, but no inspection is required.
• Trespassers, including hunters not given permission. You owe trespassers little legal duty.
• Trespassing children unaccompanied by an adult. You have greater responsibility to children under the Attractive Nuisance Doctrine.

Trespassers Have Fewer Rights

As Fambrough explains, landowners owe the highest degree of care to invitees. “Invitees, under Texas case law, are viewed as economic guests if they pay a fee to enter,” he says. “This includes hunters and nature tourists paying for the privilege to enter the property.”

You owe much less to a trespasser, he adds. “Basically, the landowner must refrain from injuring the trespasser intentionally, maliciously or through gross negligence. This rule applies to all people, whether or not they are citizens of the U.S.” Generally, warning trespassers of a condition that can cause serious bodily harm relieves you of liability.

Avoid an Armed Confrontation

“The law prohibits the landowner from willfully or wantonly injuring a trespasser except in self-defense or when protecting property,” Fambrough stated in his report, “The Texas Deer License,” revised in 2007. Trespassing counts as a misdemeanor. In Texas, a trespasser carrying a firearm faces higher fines and longer possible jail time.

Gee Ogletree, a Jackson, Miss.–based attorney with Adams and Reese LLP, specializes in real estate and forestry law and has conducted workshops on liability in Alabama, Louisiana, Mississippi and Texas. He strongly advises against facing trespassers with a firearm.

“You have a right to defend yourself and your property using appropriate force commensurate with the threat, but I never advise people to perform a citizen’s arrest,” he says. “You don’t want to hold people at gunpoint. If they’re hunters, they probably have guns themselves. It’s best to calmly ask people to unload their weapons and leave, report it to the authorities, and then prosecute.”

Use Common Sense to Protect Property

As Ogletree says, it all boils down to responsible behavior and common sense. You can’t stretch a cable to stop someone who drives a boat across your stream, for example, and you should not allow pesticide or herbicide sprayers to mix chemicals or dump empty containers on your property.

Ogletree and Fambrough agree that firefighters and emergency medical services personnel performing official duties are not considered trespassers. The same typically applies to government and utility workers.

Attractive Nuisance Laws protect trespassing children in many states. An attractive nuisance exists when the child is too young to appreciate a dangerous condition, or if you knew about a dangerous condition that children may frequent. You must also balance the cost of eliminating the condition against the probability of injury.

The Standard for Recreational Guests

According to Fambrough, Texas sets the standard for protecting landowners from liability related to hunters. Under Chapter 75 of the Texas Civil Practices and Remedies Code, the degree of care owed an invitee on agricultural land for recreation is no greater than the duty owed a trespasser.

However, when landowners charge these guests a high entry fee, the statute limits the amount that can be charged and still retain liability protection, unless landowners purchase minimum amounts of liability insurance.

“Basically, protection is lost whenever landowners charge all recreational guests, on an annual basis, a total of more than 20 times the amount of property taxes levied on the premises last year,” Fambrough says. “If they exceed this limit, then the landowners owe the recreational guests who pay to enter the same duty owed an invitee, not the duty owed a trespasser. However, if the landowners have the statutory required minimum amounts of insurance, then they preserve the protection. This insurance policy limits the landowner’s liability to the face value of the policy, regardless of whether the landowner charges an entry fee.” Required minimum insurance amounts are:

• $500,000 for each person,
• $1 million for each single occurrence for bodily injury or death
• $100,000 for each single occurrence for property damaged or destroyed.

Fambrough provides an example. “Suppose the property tax levied on the premises used for recreational purposes in 2006 was $5,000,” he says. “The landowner would not necessarily need the insurance unless he or she charges all recreational guests in 2007 in excess of $100,000. However, landowners may want to purchase the insurance, even though they charge less, to cap liability in the event of a lawsuit.”

Waiver-of-Liability Agreements

In addition, as a landowner, you may want to obtain a waiver-of-liability agreement from each hunter and recreational guest before they enter the property to forestall potential lawsuits. The waiver can protect you from negligent conduct and/or conditions, but it won’t protect you from conduct or conditions that are caused intentionally, maliciously or through gross negligence, Fambrough says.

For more information on rules that apply to submerged property and for poaching, discharging firearms across property lines and hunting near cities, see Fambrough’s “The Texas Deer Lease,” listed below, under “For More Information.”

State Law Protection

Now you know how to protect yourself from liability when it comes to trespassers and hunters. But if you are sued for liability, will your state’s laws protect you?

In 1965, the Council of State Governments drafted model recreation-use legislation. Since then, according to a 2002 article in the Journal of Soil and Water Conservation, all 50 states have adopted laws protecting landowners from liability.

Ronald A. Kaiser, a professor at Texas A&M University, co-authored the article, titled “Rural Landowner Liability for Recreational Injuries.” “The myth and perception of landowner liability appears to be greater than the actual liability risks,” the article stated. “State recreation-use statutes provide significant liability protection for landowners.”

The article tallied success rates of recreational injury lawsuits against landowners in appellate courts. In the Tenth Farm Credit District’s five states, Louisiana stands out — only New York reports more successful litigation against private landowners. Most cases in Alabama and Louisiana related to swimming, reflecting a national trend in landowner liability. Hunting provides little exposure for landowners, the article states — nationally, only 15 cases involved hunting accidents, and seven of those occurred in Louisiana.

How Does Your State Rank?

The article broke down landowner liability law by state. Of the five states in the Tenth District, only Alabama and Texas protect landowners who charge fees. Still, Alabama was one of 10 states accounting for a large share of private landowner litigation. The article indicated that Texas protections seem to be working — Texas reported only two cases against private landowners.

But Fambrough warns of a possible threat. In 2006, a girl drowned while tubing on the Blanco River in central Texas. She was sucked into a culvert hidden by high water. Earlier, several people nearly drowned at the same location. The state gave no warning, and the parents sued the state for wrongful death, alleging gross negligence for failing to warn. Even though Chapter 75 covers the state as well as private landowners, the Texas Supreme Court allowed the case to go to trial.

“It remains to be seen what impact this decision will have on closing gates to fee-paying hunters and recreational guests,” Fambrough says. In the meantime, he suggests that you widen language in your waiver to include “Contractual Assumption of the Risk.”

While few cases against landowners succeed, you may not want to take any chances. “State statutes put fee-paying guests on the same level as trespassers, but they don’t protect you from everything,” Ogletree says, pointing especially to laws relating to children. “The degree of protection varies from state to state, and counsel should advise landowners as to whether their state law adequately protects them and what steps they need to take. No law provides absolute immunity.”

Ogletree offers his bottom line: “I don’t let anyone come on my property with-out a written agreement. Not even neighbors or Boy Scouts, and I was an Eagle Scout. You’ve got to be a businessperson,” he says.

Take These Steps to Help Prevent Liability

1. Inspect your property and eliminate obvious hazards such as sharp-edged equipment and deteriorated buildings. Fill in old wells. Fence off and post warning signs on hazards that can’t be eliminated, such as a pond or rock quarry. When guests arrive, secure ill-tempered animals. Provide fee-paying guests with a list of hazards and ask them to sign a paper saying they have reviewed the warnings.
2. Post “No Trespassing” signs at gates and along fence lines. Timber growers commonly mark trees with paint to indicate private property boundaries. Rules vary by state, but in Texas, special paint marks must be placed on forestland every 100 feet, and signs must be posted every 1,000 feet on all other land.
3. When confronting trespassers, calmly ask them to leave and then call local law enforcement. Avoid brandishing a firearm or other threatening behavior. Keep a record of who trespassed when, and what happened.
4. Join organizations of landowners, such as farm or forest landowner groups. State organizations often keep members informed on liability issues, and many provide liability insurance.
5. Get to know guests before inviting them. Focus the burden of liability on guests by asking them to sign lease agreements or permission cards including rules of conduct. Some landowners prohibit alcohol, unsupervised children and entering certain areas. Also require guests to sign a release waiving you from liability, and be sure the waiver complies with state law.
6. Require sportsmen to purchase and provide proof of liability insurance. Hunting clubs often obtain insurance for their members, and landowners can usually be listed as insured parties. Also consider purchasing your own Owners’, Landlords’ and Tenants’ Policy.
7. If you regularly lease your land, consider forming a legal entity, such as a limited liability company, to protect your assets.

Editor’s note: This article is for information only; it is not a substitute for legal counsel.

Article by Nancy Jorgensen
Published in Landscapes, a Tenth Farm Credit District publication

Country-Home Loans

What to Know BEFORE You Buy

A home in the country, far away from traffic jams, noisy neighbors and crime, is the dream of more than a few city folks. But buying and financing a country dream home is much different than buying a home in the city. Before making that move, take time to research how country-home loans are made.

Today's Buyers

Farm Credit lenders have been making rural-home loans for nearly a century. In the past, rural-home customers primarily were full-time farm and ranch families who lived and worked on the same land. But nowadays, the typical customer may have little or no farming experience.

"A major factor driving the country-home market is technology," says Tim Knesek, senior vice president of Capital Farm Credit in La Grange. "Technology has allowed people to telecommute, and that makes an hour-long drive into Houston more palatable.

"These are usually two-career families who have good jobs and the income to build large homes," he says. "They want their children to enjoy a small-town environment and schools, while they work from home part-time and are close enough to drive into the city part-time."

Not City Subdivisions

Because many country-home buyers have not grown up in the country, they are not always aware of the nuances of buying in the country. Unlike urban residential developments, rural acreage sometimes may have limited access to community water and sewer systems. Sometimes amenities like high-speed Internet or cable service are more limited, or costly to acquire.

"On a house in town, buyers are used to being on water and sewer systems, and in areas with restrictions," says Knesek. "But outside the city limits, owners should be aware of needed infrastructure costs like water wells, sewer systems and electrical connections."

Maintaining Ag Exemptions

Most likely, the property will have an existing ag-use tax exemption, which significantly lowers the owner's tax bill. First-time country-home buyers often are not familiar with the requirements for maintaining an ag exemption, and commercial lenders sometimes require the buyer to rescind the exemption before making a rural-home loan.

Not so at Farm Credit. "As soon as we finish at the closing table, we encourage our customers to go directly to the Appraisal District office and find out what they need to do to keep that exemption in place," says Joe Hayman, chief operating officer for Texas AgFinance in Robstown.

Check on Insurance

Farm Credit lenders say another common surprise for country-home customers is the difficulty in securing homeowner's insurance. "Customers naturally assume that their current insurance carrier will automatically pick up coverage on their new home, but that is not always the case," says Hayman, noting that many insurance companies won't underwrite policies outside the city limits. "Farm Credit has been doing these loans for so long, we can help customers find insurers who do write rural policies."

Financing Options Abound

Today's country-home buyers have a dizzying array of financing options, thanks to the secondary market's entrance into rural-home lending. "The secondary market totally changed the housing market for us, by giving us greater flexibility and options," says Hayman. "We now have more tools in the loan officers' toolbox and are more likely to meet the needs of virtually any applicant." Today, Farm Credit lenders offer:

• Variable-Rate Loans. Customers wanting to take advantage of low interest-rate markets can choose variable-rate mortgage loans, with Prime- or LIBOR-based floating rates for up to 15 years. These loans are ideal for moderately priced homes in rural areas with populations of less than 2,500. Because these loans are kept in Farm Credit's in-house portfolio, these customers can receive the benefits of their cooperative ownership in the association. These benefits include:

Patronage Dividend Payments. "We are a co-op, and our borrowers purchase stock and are paid dividends," says Penny Hall, assistant vice president of real estate services with AgTexas Farm Credit Services in Fort Worth, whose association routinely has paid dividends for years. Like AgTexas, Capital Farm Credit says its patronage payments make the association very competitive. "On average, our patronage dividend program has reduced our borrowers' cost of money by approximately one-half percent," says Capital's Knesek. "Of course, the dividend payment isn't guaranteed to occur every year, but I can guarantee that the mortgage company or bank down the street won't pay one."

Funds Held Accounts. On loans kept on the association's books, borrowers can benefit from a Funds Held Account in which deposits earn interest and can be used to pay loan installments or withdrawn for other purposes.

• Fixed-Rate Loans. Fixed-rate loans continue to be the most popular with home buyers. "On acreage property, most mortgage companies can only finance up to 10 acres," notes Hall. "We can do the acreage and the home in one loan, which saves the customer closing costs - and they only have to make one payment."

  Farm Credit associations can lend up to 95 percent of appraised value on 30-year fixed-rate loans, which are then sold to secondary market lenders like Fannie Mae and Farmer Mac. There are no loan minimums and no restrictions on locations within city limits.

• Construction Loans. One-time closing options enable borrowers to close on the permanent loan at the same time the construction loan is closed. Once the home is complete, the customer can opt to reprice the loan to take advantage of declining rates, or refinance it into a fixed-rate loan.

• Repricing. Farm Credit offers unique repricing services not typically found elsewhere. If market conditions are favorable, for a small fee a customer may reprice a loan to receive a lower rate and lower payment. "To reduce payments on a commercial lender's loan, they usually would have to pay for completely refinancing the loan. Repricing is a huge financial benefit for our customers," says Knesek.

The Difference: Knowledgeable Service

In today's highly competitive mortgage-lending market, all lenders offer fairly similar products. That means the key to competitive advantage becomes the lender's knowledge and service.

"When deciding on a lender, what it really comes down to is who you trust to know what they're doing," says Hayman. "We've been doing this since 1917 and we know how to make home loans outside the city limits better than anyone. Underwriters in New Jersey or L.A. aren't used to seeing those properties; we are. Actually, most of us own one ourselves."

For more information about country-home loans, contact your local Federal Land Bank Association or Agricultural Credit Association.

Story by Sue Durio
Published in Landscapes, a Farm Credit Bank of Texas publication

Second Homes

The New Investment Option

If you are considering buying a vacation retreat or second home, you are not alone. A study last year by the National Association of Realtors (NAR) revealed a record 2.82 million second-home sales in 2004, up 16.3 percent from 2003. In fact, nearly a fourth of all homes purchased last year were for investment, and another 13 percent were for vacation homes.

What's Fueling the Interest?

Since the September 11, 2001, terrorist attacks, more Americans have turned to vacation retreats as safe, quiet alternatives to resorts and crowded tourist destinations. However, according to the Texas A&M Real Estate Center, the number of second homes was rising even before 9/11. Center statistics also show that vacation homes totaled 5.5 million in 1990 and 6.4 million in 2000, and could reach 9.8 million in the next five years.

The most frequently cited reason for purchasing a second home is to diversify portfolio investments, however. Low interest rates mean more people can afford second homes and, with second-home selling prices up 27 percent since 1999, they are an attractive alternative to lackluster returns on stock and other investments.

Who's Buying?

The typical second-home buyer is a baby boomer, 55 years old, with a household income of $71,000, according to the NAR survey. "Because the typical second-home buyer is a baby boomer, it's likely over the next decade that second-home sales will remain relatively high," notes David Lereah, NAR's chief economist. "The boomers are still in their peak earning years and have both the wherewithal and the desire to purchase vacation homes and investment properties."

Lifestyle/Country Living Purchasers

Farm Credit lenders say demand is strong for country getaways, and that buyers typically fall into one of two broad categories. "Offices close to population areas are experiencing high demand from 'lifestyle/country living' purchasers," notes Robert Echols, senior vice president with Heritage Land Bank, ACA in Greenville, Texas. "These buyers typically are looking for a tract of land located close enough to their workplace that they could eventually commute to work. While their ultimate goal is to get out of the city and enjoy a country lifestyle, the transitioning period often puts them in the 'second homeowner' category."

Many build a barn, shop or structure with small living quarters, which over time is expanded into a permanent dwelling or converted to a guesthouse or party room after the permanent home is completed.

Recreational Land Buyer

The other common type of buyer is one looking for recreational tracts that can serve as weekend getaways. "These are usually more remotely located, with hunting and fishing as big drawing cards," Echols says. "These tracts typically are not within drive-time for work commutes, and are usually larger tracts than the lifestyle purchases."

Tax Incentives

Some second homeowners can reduce their income taxes by renting out their vacation home. Tax treatment varies, depending on the number of days the property is rented and the number of days of personal use. "Potential purchasers should consult with their accountant or tax preparer on the tax advantages of paying cash or financing the purchase, and on the deductions from regular income that can be charged off," recommends Echols.

Financing Options

Just as the market for second homes is strong, so is the market for second-home financing. "The vast majority of these types of borrowers are financially strong, with good proven income streams," notes Echols. Farm Credit lenders are able to successfully serve the second-home-buying market with competitive rates, flexible terms and patronage dividends.

"Day in and day out, Farm Credit can offer the most flexible packages with the terms, structure and conditions that are a perfect fit for second-home borrowers' needs. By capitalizing on the patronage refund and dividends being paid by Farm Credit lenders, we are usually able to beat any commercial lender's package," Echols says.

Other financing options include owner financing, home equity loans, cash and IRS 1031 tax-free exchanges. "Many times these purchases are made by multiple buyers, such as family partnerships or a group of friends. By pooling their resources, they can acquire a larger tract of land than would be possible individually," notes Echols.

Farm Credit financing for second homes is based in large part on the financial strength of the customer. Another important factor is how the property will be managed: owner-operated, custom-farmed or leased out. Interest rates and loan terms typically are similar to those for other Farm Credit mortgage loans.

When considering the best lender for your second-home purchase, don't overlook the importance of convenience and local knowledge. "Local lenders are more familiar with the area, have greater knowledge of land values and local farming and ranching customs, and know local operators who can look after the property in the owners' absence," says Echols. "Purchasers should weigh all those factors, along with the financing package itself, to select the best lender for their situation."

Article by Sue Durio

Published in Landscapes, a Farm Credit Bank of Texas publication

Get the Credit You Deserve:
What to know before you apply for a loan

When it comes to financing your dream property in the country, the better prepared and informed you are, the easier the process will be. In the credit world, what you don't know can hurt you. Realizing what a loan officer looks for, and understanding how credit decisions are made, can help ensure you get the credit you deserve long before you need it.

Get Organized

Many loans today - especially smaller loans - require less paperwork than in the past. Nonetheless, some financial records typically still are required to verify a borrower's ability to repay a loan. This is particularly true if you are self-employed or have changed jobs recently.

A borrower can dramatically speed up the loan application process by gathering some commonly requested financial records before the loan interview. Things to bring include:

• Three to five years' tax returns if you are self-employed or have had an employment change. "The tax returns help us understand the sources of income, as well as trends in income," notes Jessie Purvis, senior vice president/chief administrative officer with the Federal Land Bank Association of South Mississippi.
  A balance sheet showing assets and liabilities. "You don't need a CPA to do this. Usually between the loan officer and the applicant, we can get pretty close," says Purvis.
• Salary verification, especially if the applicant has recently changed jobs or has been promoted.
• The property's legal description and a copy of the purchase agreement, if you're buying real estate.

Know the Score

In recent years, lenders increasingly have turned to credit scores to make faster - and sometimes on-the-spot - loan approval decisions, especially on smaller loans. Even on larger loans, an applicant's credit report and credit score are factored in with additional detailed credit analyses to determine an applicant's creditworthiness. Because credit score can impact everything from getting the best rate on a car loan to qualifying for a mortgage or line of credit, it's critical that consumers maintain the highest credit score they can. According to the Federal Trade Commission Web site, www.ftc.gov, your credit score is determined by several factors in your credit report:

• Payment History - Any negative information, such as missed payments, may remain on your report for seven years. Bankruptcy may remain for 10 years.
• Outstanding Debt - While it is important to have some credit cards, too many cards or lines of credit have a negative effect on your score.
• Length-of-Credit History - Credit-scoring models value a long credit track record. Good repayment performance with the same lenders over long periods of time has a positive influence on your score.
• New Credit Applications - "Many department stores offer purchase discounts if you apply for their credit card, and while you may save a few dollars on that purchase, applying for too many credit cards can negatively impact your credit score," notes Tim McDonald, senior vice president/chief credit officer, Great Plains Ag Credit, Amarillo.

The Five Cs

The "Five Cs of Credit" are the basic factors upon which lenders base loan decisions. They are:

1. Character - the borrower's honesty and integrity. "Character is ranked at the top of the list, because weakness in this credit factor generally can't be compensated for with other credit factors, no matter how well the loan is collateralized or capitalized," notes McDonald. To assess an applicant's character, lenders look to business and personal references and credit reports, among other variables.
2. Capacity - the applicant's financial capacity to repay the loan. A general rule of thumb is for this to exceed a 1.1:1 capacity ratio. In other words, after all living expenses and taxes are covered, lenders look for at least $1.10 of income for every $1.00 of debt that must be paid each year.
3. Capital - the applicant's liquidity and solvency. "The lender must be sure that the applicant has enough equity in his or her assets to secure operating loans and to take care of unexpected circumstances," says Purvis. While the percentage of owner equity varies based on the nature of the loan, in general 50 percent owner equity is a good target. To determine owner equity, divide your net worth (assets minus liabilities) by your total assets.
4. Collateral - the physical property that will minimize the lender's risk in the event of default. In the 1980s, many collateral-based lenders got "burned" by the fickle nature of fluctuating land values. That's why Farm Credit lenders place collateral toward the bottom of the credit criteria list. "The last thing any Farm Credit lender wants to do is take back a piece of collateral," says McDonald. "We put the emphasis on the character factor, because the single most important factor in repaying that loan is the individual."
5. Conditions - the conditions for granting and repaying the loan. Farm Credit's specialized lending experience enables loan officers to structure loan packages uniquely tailored to rural borrowers. "Many of our customers don't have a typical monthly paycheck," says Purvis. "We often have more loan choices available than commercial banks have, and can structure virtually any loan arrangement from monthly to semi-annual or annual payments - or we can split loans so they mature at different times to fit the customer's stream of income."

Loan officers agree, the best advice to loan applicants is this: Place a high priority on maintaining a strong credit rating, keep good records and look for a lender with flexible loan offerings that can adapt to your unique situation.

Clean Up Your Act

A clean credit report can mean the difference between getting a loan or not. To make sure your credit report is healthy, loan officers make these recommendations to customers:

• Get a copy of your credit report. By June 30, 2005, consumers in the five-state Tenth District territory - Alabama, Louisiana, Mississippi, New Mexico and Texas - will be able to obtain a free copy of their credit report once every 12 months through the three nationwide consumer reporting companies, Equifax, Experian and TransUnion. By Sept. 30, 2005, consumers in all 50 states will have access to their credit reports at no charge. To order your free report, visit their central Web site at www.annualcreditreport.com or call 1-877-322-8228.
• Cancel dormant credit card accounts. Once a credit card balance is fully paid off and you don't intend to use the card again, cancel it first by phone and then follow up by certified mail. Request a return receipt. After a month or two, check your credit report to be sure it shows the account "closed at customer's request."
• Clear up mistakes. If you spot mistakes on your credit report, send a certified letter, return receipt requested, to the reporting agency with copies of documentation as support. The agency has 30 days to investigate the issue.

Published in Landscapes, a Farm Credit Bank of Texas publication

A 10-Step Checklist for Buying Rural Property

Buyers are flocking to rural recreational and investment property more than ever. What's behind the feverish land-buying activity?

Low interest rates, for one. In addition, says Texas A&M University's Dr. Charles Gilliland, "a general lack of lucrative investment alternatives makes the decision to acquire land less costly than when stocks are booming." It seems even high oil prices and the threat of interest-rate hikes have done little in recent months to slow the enthusiasm for land across the South.

That enthusiasm is translating into higher prices. The price of an acre of rural Texas soared 16 percent last year, rising from $1,097 in 2003 to $1,274 per acre in 2004, according to the Texas A&M Real Estate Center. That price surge is the largest single-year percentage increase since 1974.

Recreation Drives Up Land Values

"The farming is pretty much status quo in this area, and we're seeing buyers of recreational land becoming the main drivers of land values," says Jeff Lott, senior vice president of credit operations for the FLBA of South Alabama. "We have buyers from surrounding states, particularly Florida, who are looking to relocate to an area where they can have a larger acreage base."

In this hot market, the key to making smart property purchase decisions is to buy based on facts and information, not emotion.

1. Research the market.

Because prices are rising, some sellers purposely overprice their property hoping to catch the upward trend. "Remember that the listing prices are simply what people are asking for the properties. These prices don't always reflect what properties are selling for," advises Tim Knesek, senior vice president of Capital Farm Credit in La Grange, Texas.
Find an experienced local Realtor who knows the marketplace. Ask your Realtor for recent comparable sales in the area before making an offer. Check with the county appraisal district for their valuation on properties being considered. And review the local multiple listing service.

2. Check into infrastructure.

Rural properties don't have city water and sewer service and may have limited or no access to electric, phone, cable television and high-speed Internet services. Ask about road maintenance, trash pickup and school bus routes.

3. Look for improvements.

Don't underestimate the value of existing barns, camp houses and other improvements already on the property, which can be very expensive to build new. Most counties require permits for installing septic systems and wells. Before buying a tract without water and sewer in place, get estimates from local contractors and talk to neighbors to find out typical well depth and septic systems required for the local soil conditions.

4. Know codes and restrictions.

If you purchase rural property with the intent to subdivide, check county subdivision laws and possible extended territorial jurisdictions of surrounding municipalities that may govern the area. Check for any restrictions on the property you are considering. Take the time to consider how the restrictions could affect you and how they could be viewed by future buyers.

5. Take advantage of property tax advantages.

Every state offers some type of agricultural property tax relief. All are geared at lowering the taxable value of agricultural production land, and reducing the property taxes on that land. Check with your local tax assessor to determine if your potential purchase may qualify for a tax credit, special appraisal or direct exemption. If it has existing ag-use tax exemptions, learn the steps for maintaining those exemptions. Beware that some commercial lenders require the buyer to rescind the exemption before making a rural home loan: not so at Farm Credit.

6. Shop insurance rates.

Many insurance carriers will not write homeowner's coverage outside the city limits. Farm Credit lenders and local Realtors can recommend insurers who offer rural property insurance.

7. Know your surroundings.

Pay attention to the land use and restrictions, or the lack thereof, on neighboring tracts. Is there an intensive livestock operation next door? Does the property front a noisy highway, or proposed highway? Is commercial development allowed on neighboring tracts?
"If you buy a piece of property and discover later that there is a nuisance next door, it can give you real problems when you try to sell it later," says Lott, in South Alabama.

8. Investigate environmental factors.

Two primary potential environmental concerns are the presence of endangered species, and environmental contamination from actions of previous landowners. "Areas designated for endangered species can be very restrictive in the use of your property," notes Knesek, potentially impacting your ability to clear brush, add buildings and fully enjoy your property.

Lott agrees. "You might think there is a lot of timber value on the property, but if an endangered species has been identified there, such as the Red Hill Salamander that resides in some areas of South Alabama, you may not be able to harvest the timber."

In addition, federal law holds landowners accountable for cleaning up environmental contamination, even when it occurred before they owned the property. Buyers can get some protection from liability for environmental clean-up costs by taking steps to determine any environmental hazards before the purchase.

9. Set a realistic budget.

In addition to the initial purchase price, plan on ongoing costs for maintenance and improvements like fencing, ponds, outbuildings, new appliances, landscaping, furnishings and general repairs. "Be prepared for the cash needs for the property after your purchase," says Knesek. "Owning rural property is usually not a spectator sport."

It's best to plan ahead if improvements are needed. "If the property you buy is not as improved as you'd like it, consider what it's going to cost you to make the improvements you envision. Also, consider real estate taxes, upkeep of roads and planting game plots. All of those things can be costly," Lott says.

10. Use local experts.

When it comes to buying and financing rural property, go local whenever possible. Local Realtors know the market, comparable sales and history of area properties. Local lenders like Farm Credit understand the nuances of rural lending and structure loan programs specifically for rural property owners. "We can review all the considerations with them and help them protect themselves," says Ed Nelson, vice president and branch manager of the FLBA of South Alabama office in Montgomery. "From referring them to lawyers or putting them in contact with someone who can help them manage their timber, we've got a lot of beneficial relationships that they won't get if they go elsewhere."

In addition, "many Farm Credit lenders grew up in, or have lived in, the areas in which they have worked for years, and that level of local knowledge can be invaluable to a buyer," says Knesek. "Our goal is to not only save our customers money with competitive interest rates, but to offer advice and input that allows them to make decisions that will help them avoid potentially costly mistakes in their land investments."

Article by Sue Durio
Published in Landscapes, a Farm Credit Bank of Texas publication