Raw Land Loan Rates 2020
The COVID-19 epidemic has had a devastating effect on many lives and certain parts of the economy. While many businesses, especially in the brick and mortar retail sector, the restaurant category and the services industry have taken big hits, the demand for raw land and larger acreages has seen a significant spike. This is due in part to the political unrest of the upcoming election but also due to the historically low land loan interest rates — particularly raw land loan rates in Alabama — we are currently seeing. To find out what is happening in the land loan market and what we might expect for the rest of 2020, we caught up with Brandon Simpson, Assistant Vice President from First South Farm Credit for his insight and a current rate update.
“It’s really been surprising, how despite everything that is going on, the demand for land financing has been extremely high during 2020 and we have had more opportunities to finance land for people,” Simpson said.
Simpson believes that there are two large variables that help determine an individuals land loan rate in Alabama, and those are the length of terms and quality of credit.
“Generally speaking the longer the terms, the higher the rates and the shorter the terms, the lower the rates,” Simpson pointed out. “It’s kind of the same thing with credit risk in that a lower credit risk may provide an opportunity for a lower rate and a higher credit risk will likely result in a higher interest rate.”
In terms of land financing there are a number of variables that come into play, and while there isn’t a “typical” term land loan, Simpson shed some light as to what is available to buyers.
“One of the biggest benefits of the farm credit system at First South is our ability to provide long terms at fixed rates, not just short-term balloon type notes and we’re seeing a lot of people because rates are so low when doing 15- and 20-year contracts,” Simpson said. “People have peace of mind knowing that they aren’t going to have to deal with rates adjusting five years down the road and are locking in for longer periods of time. If I had to give buyers a ballpark range of interest rates today it would be in the high three to mid four percent depending on the terms and the credit.”
The increased demand for raw land loans can affect how long the processing and turnaround time required to close the land deal may take. Simpson said that a good rule of thumb is approximately 30 days depending upon the availability of attorneys, title companies and appraisers. It also depends on whether a buyer is pre-approved.
“Once a customer gives us their financial information, typically depending on how complex the credit is within one to three business days we try to give that customer a pre-approval answer on whether or not we can do business,” Simpson pointed out. “At that point we start dealing with appraisals, title companies and the ball kind of goes in their court and once that job is done, we are ready to set a closing.”
According to Simpson, being pre-approved simply entails stopping into a First South office and providing some basic information, such as tax returns, pay stubs, driver’s license, sometimes bank statements and some other data in order to tailor a program for the customer and issue a pre-approval letter.
It’s worth noting that on some of the smaller raw land loans closing can take place within two weeks. If the borrower has a good credit score and W-2 to qualify, First South may be able to handle the value assessment internally and reduce the time it takes to prepare the loan for closing.
Simpson pointed out that as part of the farm credit system, First South is a member owned cooperative with 9,000 members in 44 branches in Alabama, Mississippi and Louisiana. As a successful Financial Cooperative, a portion of First South’s profits are paid back to the shareholders (which are the borrowers) in the form of a dividend check, referred to as a “patronage refund”. That refund effectively lowers the cost of borrowing.
“In 2020, based on our 2019 profits, First South distributed $19.3 million back to our borrowers,” Simpson said. “While it depends on each individual member’s situation, that may be close to a percent reduction in the stated interest rate.”
What does Simpson think the future of raw land loan interest rates in Alabama will be?
“From what we have seen so far this year I personally believe that current land loan rates are pretty much going to remain stable and flat through the election. Now what happens after the election, I have no earthly idea,” Simpson said.
Brandon Simpson – Assistant Vice President
First South Farm Credit