Thinking about purchasing rural property?
Whether you are interested in productive agricultural land, a hunting ranch or a country home, do your homework before you make an offer. Buying rural real estate is different than buying urban or commercial property.
If you are unfamiliar with land in your target area, property values or the legal documents involved, seek help from competent legal and rural real estate professionals.
But do your own research too. To avoid potentially costly mistakes when investing in rural property, Farm Credit—the nation’s oldest and most experienced rural financing organization—suggests that buyers consider the following factors.
1-Determine the Right Location
Before choosing a location, decide what you want to do with your land. Soil type, water availability, topography and other features largely dictate land use. Having a goal for your property will help you decide on the features you need to look for and, thus, where to look.
2-Research the Market
Find an experienced local Realtor who knows the marketplace and ask the Realtor for recent comparable sales in the area. Check with the county appraisal district for the valuation on properties you’re considering. And review the local multiple-listing service.
“Remember, 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.
3-Look for Improvements
Barns, fences, hunting cabins and other improvements can be expensive to build. If they already exist on the property, factor that into your purchase price. Most counties require permits for installing septic systems and wells. Before buying a tract without existing water and sewage systems, get estimates from local contractors and ask neighbors about typical well depth and septic system requirements for the local soil conditions. Keep in mind, too, that some areas are serviced by rural water systems, especially areas where it’s hard to find good water
at a reasonable depth.
4-Check Into Infrastructure
Rural properties don’t have city water or sewer service and may have limited or no access to electric, phone, cable television and high-speed Internet services. If you plan to build a home on the property, ask about road maintenance, trash pickup and school bus routes.
5-Know Your Surroundings
Pay attention to land use and restrictions, or the lack thereof, on neighboring tracts. Does the property front a noisy road or a proposed highway? Is commercial development allowed on neighboring tracts? These factors may not bother you now, but they could impact resale potential.
6-Investigate Environmental Regulations
Identify possible environmental issues before closing the deal. Endangered species regulations or the presence of wetlands can limit your land-use options. You could be required to preserve habitat and prohibited from clearing brush or adding buildings.
In addition, the presence of hazardous substances may create liability for title holders. Federal law holds landowners accountable for cleaning up environmental contamination, even when it occurred before they owned the property.
7-Understand Property Rights
Property rights issues encompass everything from verifying ownership to identifying easements and land use restrictions. Because they specify the potential legal use of the land, available property rights may be more important than the property’s physical features.
8-Learn About Mineral Rights
Mineral ownership can be important, especially when less than half of the minerals will transfer with the ownership. Mineral owners dominate over surface owners. This means that a mineral owner, or the lessee, can enter the property to extract minerals without obtaining the landowner’s permission. Furthermore, if the current owner has executed a lease with a producer, that lease remains in force, even if the minerals transfer with the surface.
9-Consider Lease Provisions
Initially, an existing grazing or farming lease may seem insignificant. However, lease provisions may affect the purchase process when they specify a right-of-first-refusal. If a property has a right-of-first-refusal lease, find out if the tenant is interested in buying the land, before you spend time pursuing a deal.
10-Take Advantage of Property Tax Relief
Every state offers agricultural property tax relief, which aims to lower the taxable value of productive agricultural land and reduce the taxes on that land. Ask your local tax assessor 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. Some commercial lenders may require the buyer to rescind the exemption before making a rural home loan—but Farm Credit does not.
The appraisal method used to determine taxes can affect price negotiations. In Texas, if the current owner has been taxed under the Texas open-space provision, the liability for a potential rollback tax passes to the new owner. Open-space treatment depends on establishing a record of past and continuing land use for agriculture or timber production. Providing wildlife habitat qualifies as an agricultural use under certain conditions. When the land receives open-space treatment, property tax liability depends on agricultural-use value rather than market value.
11-Know Codes and Restrictions
Some land titles contain restrictive covenants that constrain use. Sometimes called deed restrictions, they typically attempt to ensure a minimum level of land use. For example, covenants may prevent the property from being subdivided or may require an owner to build a home with a specified minimum floor area. Most problems with restrictive covenants occur when a buyer is uninformed about the restrictions.
12-Be Wary of Undivided Interests
Difficulties can arise when several individuals own undivided interests. For instance, it can complicate the negotiation process when not all owners wish to sell. Purchasing such property may present a negotiating challenge.
13-Shop Insurance Rates
Some 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.
14-Set a Realistic Budget
Budget for ongoing costs for maintenance and improvements such as fencing, ponds, outbuildings, landscaping and general repairs. If improvements are needed, 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.
15-Use Local Experts
When buying rural property, use local experts. Local Realtors know the market, comparable sales and history of area properties. Local lenders like Farm Credit understand the nuances of rural financing and can structure loans specifically for rural property-owners. A local lender also may have beneficial relationships with ag accountants, land managers and others who can help after you’ve purchased the property.
“Lenders in the Farm Credit System know about buying rural land. We live and breathe it every day,” says Justin Wiethorn, senior regional president of Lone Star Ag Credit. “And because we also know the area and the people in our communities, we can be a strong resource for our customers when they’re purchasing land. This is where we can make the difference between a good buying experience and a great experience.”
Written for Land.com
Farm Credit Bank of Texas gratefully acknowledges the input of Dr. Charles Gilliland, research economist with the Texas A&M University Real Estate Center, in the preparation of this article.