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Purchasing agricultural land can represent one of the most significant decisions made by a farm operation. Oftentimes, equity in farmland is used for collateral when financing additional farm real estate or other capital expenses. Collateral is one of the five credit factors lenders evaluate when considering a loan request and must be sufficient to cover the loan amount.

Your lender relies on licensed appraisers to provide accurate values on collateral so they can make underwriting decisions. Land values are determined by a real estate appraisal which compares a subject property to comparable sales in the local area or region. The appraiser may use several methods to estimate market value including a cost, income or sales comparison approach. Each approach uses information from analyzed sales in the market. A value is estimated from the most appropriate method for the type of property. Appraisals will include a description, uses and characteristics of the property which may impact productivity and income from the property.

Missouri pastureland has generally seen an increase in value up to five percent over the past year. Land values in southern Missouri have been fairly stable to slightly increasing due to cattle and livestock profitability and non-farm influences for recreational or residential uses. From a volatility standpoint, this may not be bad news as there does appear to be some greater stability when looking at these trends; however the current drought and recent movement in cattle prices could significantly impact these areas.

When buying real estate it is not only important to consider the current economic environment and trends, but also to identify how the purchase fits into your overall financial, operational and personal goals. A lender will look at your business plan and goals when evaluating the purchase decision. Additionally, you should be aware of collateral and the other four credit factors a lender will consider during the loan approval process. Character is determined by prior repayment history and production and financial management. Capital position is a picture of your overall debt structure and financial progress. Capacity reflects the ability to repay debt base. Conditions refer to the length of the loan, repayment frequency and lending levels. These factors along with your goals are evaluated collectively to support a loan approval.

While collateral is only one piece of a credit decision, it is essential to an overall picture. A lender relies on it to manage their risk. You depend on it to support overall financial health and safety.

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