What lenders look for in a land appraisal

Land loans get more scrutiny than almost any other real estate loan. Land doesn't produce income on its own, it can be slow to sell, and its value can move quickly with interest rates and the development cycle. So when a lender reviews a land appraisal, they're reading it closely.

This article covers what lenders look for, and it's also useful for borrowers who want to understand why the process works the way it does.

1. The lender orders the appraisal

Federally regulated lenders, including banks and most credit unions, are required to keep appraisers independent from the loan's outcome. In practice, that means the lender (or an appraisal management company acting for it) engages the appraiser directly. A report the borrower ordered generally can't be used for the loan, even if it's excellent.

If you're a borrower, the best move is to tell your loan officer early which appraisers you'd like considered and let the lender engage one. If you need an appraisal for your own decision-making before you apply, that's fine, but know that the lender may need its own.

A lender can sometimes use an appraisal prepared for a different lender, but only after reviewing it and confirming it meets its standards. Ask before assuming.

2. The right scope, property, and rights

Underwriters first check that the report answers the right question:

• The lender is named as the client or an intended user
• The intended use is stated as lending or financing
• The property is correctly identified: every parcel, the right acreage, and any excluded areas
• The property rights are correct, usually fee simple, and any leases, easements, or restrictions are accounted for
• The report meets the lender's engagement instructions and regulatory standards, not just USPAP

3. Highest and best use

For land, this is where underwriters spend the most time. Is the appraiser valuing the property as farmland, a future subdivision, an industrial site, or a rural homesite? The answer determines which sales are comparable and, often, how much the land is worth.

Lenders are skeptical of reports that assume a more valuable use without showing it's legally permitted, physically possible, financially feasible, and likely to happen in a reasonable time. A parcel zoned for agriculture next to a city boundary may have development potential, but a lender will want to see the analysis that supports it, not a sentence.

Lenders are skeptical of reports that assume a more valuable use without showing it's likely to happen.

4. As is, prospective, and bulk values

Construction and development loans often need several values in one report:

• As is: the land in its current state, on the date of inspection.
• Prospective, upon entitlement or completion: what the property will be worth when approvals are in hand, or when site work is finished.
• Bulk value: for a subdivision, what a single buyer would pay for all of the lots at once. This is lower than the sum of the individual lot prices, because a bulk buyer must carry and market the lots over time and needs a profit for doing so.

Regulators have long required lenders financing tract development to rely on a value that accounts for that absorption period, not simply the lots' retail prices added together.

5. Exposure time and marketability

Every appraisal states an exposure time: how long the property would have been on the market before a sale at the appraised value on the effective date. For land, this can be much longer than for homes, sometimes 12 to 24 months or more for large or unusual parcels.

Lenders care because exposure time tells them how quickly they could recover their money if they had to foreclose and sell. A report that states a 90-day exposure time for a remote 300-acre parcel with few sales will draw questions.

6. Loan-to-value limits for land

Federal interagency lending guidelines set supervisory loan-to-value limits that most banks build into their credit policies. For land, they are notably conservative:

Individual lenders often set stricter limits. Farm Credit System lenders and USDA programs have their own standards.

Because the loan amount depends directly on the appraised value, a well-supported value, even if it's a little lower than hoped, is far better for a borrower than a high number that the lender's review appraiser cuts later.

7. What review appraisers flag

Most land appraisals are read by a lender's review appraiser before the loan closes. Common issues that send a report back:

• Comparable sales that weren't verified, or that are far away or old without explanation
• Large or unexplained adjustments, especially for size and location
• An unsupported highest and best use conclusion
• Missing discussion of access, utilities, flood zone, or fire hazard
• No discussion of listings and pending sales that contradict the conclusion
• An exposure time that doesn't match the market evidence

We write reports expecting them to be reviewed. The sales are verified, the adjustments are explained, and the conclusion follows from the evidence, which is what gets a loan through underwriting without rounds of revisions.

This article is general information about appraisal practice, not legal, tax, or investment advice. Rules change, and every property is different. Talk to your attorney or tax advisor about your situation.