An interview with Tom Lutz
Tom Lutz is both a horseman and financing expert. For over 25 years he has specialized in equestrian real estate financing in Fairfield, Litchfield and New Haven Counties in Connecticut. He lives on a horse farm and enjoys riding and driving his warmbloods and thoroughbreds.
Tom, would you say it is more difficult to finance a horse farm than a normal residential property?
In any market, financing a horse farm can be a bit more awkward than a standard single family home, particularly if the home has substantial acreage and amenities such as a stable, tractor barn, indoor rings or extensive turn outs. Most lenders abide by guidelines set forth by mortgage giants Fannie Mae and Freddie Mac so that the loans can be sold, and place and emphasize the comparable sales when reviewing an appraisal to determine value. If other horse farms that have recently sold are unavailable to use as comps, appraisers are forced to use standard residential homes and make adjustments to try and end up with an apples to apples comparison to determine the fair market value. For example, a horse person places a great value on a nice stable with heated tack room and hot and cold water with good fencing and suitable turn outs. A standard appraisal report classifies this as an improved outbuilding and excess acreage and gives it far less value than the cost to build it.
In large part it breaks down to risk factors to the secondary market investors. If the horse farm is ever foreclosed on and bank owned, it becomes far more difficult to sell with a much more limited market share of prospective buyers than a standard 4 bedroom colonial in a quiet neighborhood. The bank or investor is forced to sell any unique properties at a more reduced price to be able to sell them therefore increasing their chances for a more substantial financial loss.
There is so much more that makes up a desirable horse farm than the standard measurements of square feet of living space. How difficult is getting a bank-accepted appraisal that understands the uniqueness of a fine horse property?
If the lender has the ability to “portfolio” the loan and can give the appraiser some leeway to make adjustments outside of the normal guidelines or use sales from outside of the area, in most cases values can be established that work for everyone involved in the transaction. However, if that is not the case and strict appraisal guidelines with standard adjustments apply it can present a problem. One thing to keep in mind is that if the buyer is not seeking maximum financing and understands the difficulties in finding good comparable sales, they may choose to go forward with the purchase even though the appraiser is unable to justify the proposed purchase price.
As we all know, building a quality horse farm is very expensive. In a bank's eyes, does having horse facilities actually add any value to a property?
If you are in an area where horse farms are prevalent, chances are the local banks will appreciate the values and work with you even if it means putting the loan into the banks portfolio. However, most of the larger national banks and mortgage lenders tend to stay with the secondary market guidelines and do not appreciate horse properties and therefore may be unable to finance your purchase. If you are fortunate to have a “private banking” type of relationship with a bank or investment firm, in many cases special consideration may be given due to the substantial investments held with the firm and they will work with you to accommodate your loan request.
What do you do if there are no "comp" sales of similar farms, just residential homes?
In that case, the appraiser will give you minimal credit for the outbuildings and improvements. If the value of the home justifies the value you are seeking, you may be fine. I have seen many transactions where even with minimal value given to the equine related amenities the size and quality of the home itself is enough to justify the value. However, if the home is minimal and the seller is placing a great deal of the value in the fact that it is a great “horse property”, this can present a problem.
If the buyer or seller does not agree with the appraisal, what options do they have?
The clients (prospective purchasers or borrowers) can request that the appraisal be reviewed by the lender particularly if there were errors made or it is felt that other homes/properties that should have been considered, were not used as comparable sales when doing the appraisal report. It is important to work with your real estate professional to present factual information and other comparable sales and specific reasons you are contesting the value, not just basing it on your emotions. It may also be used to give the buyers and sellers the ability to renegotiate the purchase price or introduce sales concessions to make the transaction equitable to all parties involved.
If you could tell prospective horse farm buyers one thing, what would it be?
That they are purchasing a property that may be appreciated by and limited to a small part of the real estate market in general and be willing to accept that in advance and balance it with the enjoyment they will have living in and using the property.
If you could tell prospective horse farm sellers one thing, what would it be?
Work with a real estate professional who can help you do your homework to establish an appropriate value, find and know the other farms that have been sold or are available and be willing to know that it may take some time and finding the right buyer to appreciate what you have and be willing to pay for it. Also make sure to do all the normal things real estate professionals suggest to present your property in the best possible way when listing it.