What is ag exemption?
What is the best way to finance land?
What kind of loan terms should I expect on a land loan?
Can I write off the interest on a construction loan if I build a weekend home or cabin on my land?
Once I own land, how much will it cost me?
What about credit scores on land loans?
How much closing cost will I have on a land purchase?
I have purchased a home before, but not land. What’s the difference?
I thought banks weren’t lending on real estate?
What about utilities on rural land?
Should I invest in land?
It is not really an exemption but rather a special use valuation for a tract of land. If a landowner makes certain uses of their land such as hay production, livestock, managing wildlife or leasing for hunting, they may apply to have their land taxed at its agricultural productivity value rather than its market value. Qualified uses include pasture land, mixed timber, native pasture, hunting lease and wildlife management.
Minimum acreage requirements for the various uses range from 3 acres for goats and sheep to 20 acres minimum for cattle. The net effect to a landowner engaging their land in one of the qualified agricultural uses would be a substantial reduction in their property tax bill.
What is the best way to finance land?
The best rates and lowest down payments will be found with community banks and rural land lenders local to the property. Large metropolitan banks do not lend on rural land. That is not their market for loaning money. Buying rural property requires a lender that understands land and has a history of those type transactions.
Rural land lenders and community banks fund land purchases in their area and surrounding counties because they know land values and the demand and trends of land in their own backyard. That comfort and level of safety for a bank translates into low rates and down payments and longer payoff terms.
We can put you in contact with the lenders we use on a regular basis for rural land purchases.
What kind of loan terms should I expect on a land loan?
For the banks I use for land purchases, interest rates are in the range of mid-6% to low-7%. Loan terms range from one to 30 years. Down payments of 15 to 20%. All offer programs to purchase land on a shorter term note, add a home, cabin or barn construction loan down the road, and wrap them together on a single 30 year, fixed rate note. There are many land lenders out there, but I use a select few- three- because of the above rates and terms they offer and their ability to structure a loan based on the individual land buyer’s plans.
Can I write off the interest on a construction loan if I build a weekend home or cabin on my land?
Yes. The IRS says “a qualified residence includes the principal residence of the taxpayer AND one other residence (i.e. vacation home) that is not rented out at any time during the tax year..” (US Master Tax Guide) and defines that “a home can be a house, condominium, mobile home, boat or similar property. It must provide basic living accommodations including sleeping space, toilet and cooking facilities” (IRS Schedule 1040 A & B).
Of course, talk with your accountant for specifics regarding your situation.
Once I own land, how much will it cost me?
If you own acreage, and are not in a rural subdivision, your continuing costs are basically your loan payment (if you financed the land) and your annual property taxes.
What about credit scores on land loans?
Of the three banks I use most frequently, two have average minimum credit scores of around 670 and the third has no credit score requirements.
How much closing cost will I have on a land purchase?
Typical closing costs for the buyer:
Land appraisal- $350-$450;
If borrowing to purchase the property- any fees associated with creating the loan such as processing fees and loan and deed of trust documents (in contrast to mortgage brokers, land lenders don’t tend to have points on
their loans) *
Escrow fee- approx. $200; (title co fee for transacting the deal)
Mortgagee title policy-$100; (protects the bank and their interest)
Recording fees- approx. $60-90; (file documents with the county),
and a portion of the property taxes pro rated to the date of closing.
As an example: on a recent $230,000 land transaction in which the buyer financed the land purchase, total closing costs for the buyer were $791.00.
Aside from the down payment on a purchase loan, buyer closing costs remain basically the same regardless of property purchase price. The two highest expenses on a land closing are the (main) title policy and the survey. These two expenses are frequently paid by the seller, but are completely negotiable between buyer and seller.
One thing about real estate – every aspect of price, closing expenses, etc, is negotiable. There are no concrete rules as to what expenses each party pays for.
* In these examples, any down payment, if financing, is not considered a closing cost.
I have purchased a home before, but not land. What’s the difference?
Land transactions require no home inspection, no insurance binders, no termite inspections, no HOA dues. The Texas Real Estate Commission Farm & Ranch sales contract is 9 pages long – if there is no livable structure on the property and no realtors involved, 3 of those pages don’t even apply. Land closings take about 30 minutes: 15 minutes to sign, and 15 minutes to chat about the weather while the closer makes copies of what you just signed. Simple.
I thought banks weren’t lending on real estate?
Bank of America, Chase, Wells Fargo, Citibank and big metro banks lend on urban homes, cars, boats and commercial property because that is their market and their comfort zone (banks have comfort zones). These large banks do not lend on rural land primarily because it is out of their territory (geographically and in the type loans they make) – but then that’s why you want rural land in the first place – to get out of town. Rural land lenders and community banks never stopped lending on land even through 2008-2009, because that is their territory and their comfort zone. These banks understand land values and continue to aggressively lend for land purchases due to the safety of rural land as collateral for their loan.
What about utilities on rural land?
For property located outside city limits, water and electric services are provided by utility districts and coops. Water wells are possible in some areas – but owning ground does not guarantee the ability to have a well. Sewer on rural property is handled by septic system –either lateral line systems or the newer aerobic systems. Propane gas, with a buried or above ground tank, can handle any gas needs for appliances, grills, or Heat-A/C systems. Private water filtration systems are becoming more prevalent for landowners with a lake or larger pond if access to potable water is unavailable or would be cost prohibitive to install.
The availability of water service (primarily) and electric service (secondarily) has a large impact on the market value of a piece of land.
Should I invest in land?
While I can’t tell you if you should invest in land, I can tell you why I do:
Land as an investment has an additional aspect to it in that you can enjoy it.
While owning stocks and mutual funds is very enjoyable when increasing in value (or at least holding your money together) my kids have never said “Hey Dad, can we play with your Dell Computer stock certificates?” They have asked to go fishing, build a campfire for smores, shoot BB guns or camp out on that investment. Our friends want to go canoeing, watch deer, cook out or hunt dove on that investment.
If you are not happy with your returns on a stock or fund, you have two options: 1) get over it, 2) sell it. Owning land, you can build, improve, divide, hunt on it, lease it or farm it – you can remodel your investment. All this spending by our government will cause inflation. Commodities, gold and land have always been the assets to own in inflationary periods.
The cliché is true- land is a finite commodity
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